On 18 September 2008, the State Council of the People’s Republic of China (PRC) released the PRC Labour Contract Law Implementation Rules.

Following the publication of a draft version in July, there has been widespread speculation that these Rules might be used to address what PRC employers have perceived as excesses in the ‘employee-friendly’ regime recently introduced by the Labour Contract Law.

In fact, the Implementation Rules’ main implication is to clarify certain ambiguities arising from the drafting of the Labour Contract Law (see below). There has been no liberalisation of the rules on the termination of employment by employers, nor has any flexibility been introduced in the treatment of senior managers or other high-income employees. The message is that, for now, the PRC government is comfortable with the general approach to labour regulation under the Labour Contract Law.

Dealing with ongoing uncertainties

There are still important gaps and uncertainties in the law and a PRC employer’s best bet to minimise disputes and improve its outcomes in these areas is to proactively adopt a systematic and disciplined approach to documenting, monitoring and communicating about its employment arrangements.

PRC labour regulations set out prescriptive standards or rules, many of which place the onus on the employer to self-regulate by entering into written labour contracts with all employees and establishing in-house ‘labour rules and regulations’. These requirements are supported by a range of monetary penalties, many of which are payable to individual employees as ‘compensation’ rather than to the labour authorities as a fine. This may be intended to encourage sweatshop employees to take action against unscrupulous employers; however, it also creates incentives for overzealous employees to target employers (perhaps especially foreign invested businesses) that are caught in the gulf between ‘law’ and ‘practice’.

Employers can best protect themselves by building up a sound employment infrastructure to demonstrate compliance with PRC labour laws: putting in place clear, flexible and unambiguous workplace rules and regulations that reflect how the business actually operates; ensuring that up-to-date labour contracts are signed and kept current for all employees; establishing and communicating complete and accurate position descriptions so that each employee’s duties and position within the business are clear; properly controlling and documenting overtime; and maintaining accurate salary records.

Continuing areas of uncertainty

The following are examples of issues that have arisen under the Labour Contract Law and remain unresolved following the issue of the Implementation Rules; we continue to work with clients to develop solutions that make sense in the PRC workplace.

  • Employers have the right to terminate employment in the case of ‘a major change in the objective circumstances relied upon at the time of conclusion of the labour contract’. While this would clearly cover an employer’s ceasing to carry on business, it is not clear whether redundancies in the face of a business slowdown or other changes in the market, for example, would be covered.
  • The Implementation Rules state that, if an employee is transferred from one employer to another for the employer’s reasons, if the original employer pays severance pay for the period of service up to the transfer, then the new employer will not be liable for severance pay for the same period. While obvious in itself, this highlights the uncertainty over the circumstances (eg corporate restructurings, transfers of a business) in which the new employer could find itself liable for a period of service before the start of the new employment relationship.
  • The Labour Contract Law does not operate retrospectively, so businesses must consider how to deal with long-serving employees who have accrued rights from previous years. 
  • The Labour Contract Law is not clear about which types of employees can be subject to confidentiality and non-compete obligations, nor does it specify the amount of separate ‘non-compete’ compensation without which the non-compete clause would be invalid. 
  • In some areas (such as overtime pay or the employee’s termination rights), employers may find that the ‘one size fits all’ approach, which does not permit different treatment for executive and managerial level employees, to be a problem. The challenge is to find practical solutions that allow for the effective deployment of such personnel without incurring undue risk of liability. 
  • The scope of an employer’s duties to prevent discrimination in the workplace – this is a new area in China and there is as yet little guidance on the standards to which employers will be held.

Substantive clarifications under the Implementation Rules 

Of the 38 articles in the Implementation Rules, some add substantive new detail to existing provisions of the Labour Contract Law and others are explanatory in nature. These examples may be of interest:

  • the Implementation Rules provide further detail about each employing unit’s record-keeping obligations and impose fines of between RMB2,000 and RMB20,000 for breach; 
  • the Implementation Rules clarify that a labour contract automatically ends when an employee reaches legal retirement age; 
  • the Labour Contract Law permits an employing unit and employee to enter into an arrangement under which an employee is required to repay a portion of the training expenses if he does not serve out a minimum service period. The Implementation Rules clarify the scope of the term ‘training costs’. They also provide for circumstances under which, if the employment terminates before the agreed service period, the employer can recover the training costs; 
  • an employer may terminate the employment of an employee who refuses to sign a labour contract in certain circumstances; and
  • an employee who has not signed a labour contract with an employer after one year of service is deemed to have entered into an open-ended labour contract.