With the promulgation of the PRC Labour Law and the PRC Law on Mediation and Arbitration of Labour Disputes, both effective since 2008, Chinese courts have seen an unprecedented increase in labour disputes over the years. There is an estimated 300,000 new cases just for the period between 2010 to 2012.

The difficulty of resolving these disputes by the Chinese courts is heightened by the increasing complexities of the claims which are made worse by the lack of applicable and clear legislation. It is likely that these are some of the considerations that led the 30 th session of the Standing Committee of the National People's Congress to issue the Amendments to the PRC Labour Law (Amendments) on 28 December 2012, which amendments were to take effect from 1 July 2013. The main purpose of the Amendments was to address the concerns arising from the trend of Chinese companies using employees seconded from labour agencies (as opposed to hiring their own employees). The use of seconded employees, who do not have direct contractual employment relationships with the Chinese companies, is preferable as a way of avoiding increased labour costs and other statutory restrictions imposed on companies pursuant to the PRC Labour Contract Law. The Amendments seek to plug this “loophole” by reiterating that Chinese companies shall directly hire their employees as the primary means of employment in China. Further, the rights of seconded employees are specifically protected by:

  • the authorities exerting greater control and supervision over the operations of labour agencies that second employees to companies;
  • defining the positions that require seconded employees, and prescribing the proportion of seconded employees in any company;
  • adopting the principle of paying the same remuneration and benefits to the seconded employees for the same type of work performed by the employees directly hired by the company.

While the Amendments do not have retrospective effect on secondment contracts that were signed before the Amendments, they require the immediate implementation of the principle of paying the same remuneration and benefits to seconded employees for the same type of work performed by hired employees.

The Amendments apply to foreign invested enterprises (not representative offices) as these are Chinese legal entities under Chinese laws.

Around the same time, the PRC Supreme Court also issued its interpretation on several issues related to labour dispute cases (Interpretation) that became effective from 1 February 2013. The Interpretation addressed important issues relating to labour disputes heard in courts over the years, such as the following:

  • Calculation for the period of service when an employee is transferred from one company to another for reasons not attributable to the employee: Where the original employer does not pay severance upon the transfer, the years of service accumulated by the employee with the original employer shall be consolidated with the period of service with the new employer in the calculation of the severance pay.
  • Restrictive covenants: (1) Where the employee has signed a noncompetition agreement that does not specify the amount of compensation, and the employee abides by the non-compete obligations after its termination, the compensation payable to the employee shall be calculated based on 30% of the employee’s average monthly salary for 12 months prior to the termination. (2) Where the employee has signed a non-competition agreement that specifies the amount of compensation, and the employer fails to pay the compensation for three months, the employee may apply to court to remove the non-compete obligations. (3) The employer may terminate the non-competion agreement during the agreed period of non-competition, upon which the employee is entitled to claim for an additional three months’ compensation from the employer.
  • Notification of trade unions of early termination of any employee: This is necessary for the termination to have legal effect.
  • Employment of foreign nationals: The Chinese courts shall have jurisdiction to hear disputes involving foreign employees only if the foreigners are holders of valid work permits in China.
  • Validity of verbal modification of labour contract terms: Where parties fail to make changes to the labour contract in writing, but parties have in fact performed the contract on modified terms for more than one month, neither party may claim the modified contract to be invalid on the grounds that the modified terms are not in writing.

With the latest position as explained in the Interpretation, it is advisable for Chinese companies to revisit the labour contracts signed with their employees to ensure compliance with the Interpretation.