Key Points: 

  • Events leading to contract dissolution clarified
  • Methodology for calculating compensation on dismissal clarified
  • Events leading to employee penalties clarified

On September 18, 2008 the State Council promulgated the Regulations on the Implementation of the Labor Contract Law of the People’s Republic of China (the “Rules”) which complement the Labor Contract Law (the “LCL”) that went into effect on January 1, 2008. The Rules focus on employment contracts, the related issues of contract termination/dissolution and compensation, and labor dispatch contracts. As there are no major substantive revisions in the Rules, the overall reaction of the business community has been positive if not rather muted.

First, the Rules emphasize an important revision introduced by the LCL, that all employers must execute written employment contracts with their employees. If an employee fails to sign a written employment contract within one month of the commencement of employment, then the employer is required to terminate the employment relationship and dismiss the employee. While agreed salary must be paid for services up to the date of termination, the Rules expressly exclude economic compensation. However, if after one month, but less than one year, an employer has failed to conclude a written employment contract with an employee, then the employee becomes entitled to receive double pay. If after one month, but less than one year, an employee fails to sign a written employment contract, then the employer must dismiss the employee and pay economic compensation. However, the rate is capped at three times the local area monthly average salary as published by the local or municipal government; the maximum number of years considered is 12.

If after one year, an employer has still failed to conclude a written employment contract, then the employer is required to immediately sign a contract and to pay double the employee’s salary or wages from the end of the first month anniversary to the end of the first year anniversary of the commencement of the employment relationship.

The Rules elaborate on protection for employees who are transferred to another employer, not by their choice. In this situation, the period of work service considered is compounded for the purposes of calculating any compensation due for dismissal (if due). This provision is aimed at employment transfers during mergers and acquisitions.

On probation, the salary/wages payable during the probation period cannot be less than 80 percent of the salary/wages stated in the employment contract during the probation period or 80 percent of the minimum salary/wages payable for the position following expiration of the probation period. In no event can the minimum wage applicable to the employer’s district be ignored With regard to open-ended employment contracts, it will be recalled that the LCL outlines several circumstances in which an open-ended employment contract must be concluded. The Rules clarify one such circumstance, that an open-ended contract should be signed where the employer implements a labor contract system for the first time or a state-owned enterprise rehires workers following restructuring provided the employee has been employed with the employer continuously for more than 10 years and is less than 10 years from retiring.

The dissolution and termination of employment contracts is one of the most important aspects of the LCL, consuming 14 articles of the law. The Rules neatly summarize the various events and circumstances that allow an employee and an employer to terminate an employment contract. Once the employment relationship is terminated, the employer must issue a Termination Certificate detailing the nature of the employment, the employment term and confirmation of termination. The Rules clarify a number of points regarding termination:

  1. If the employer terminates under Article 40 LCL, then the employee must receive 30 days notice or one month’s salary. The Rules now clarify that the additional month’s salary will be calculated based on the salary paid in the preceding month, as opposed to an average monthly salary over the previous twelve months which is sometimes argued.
  2. Often, an employer will terminate an employment contract due to an employee’s occupational injury. In such case, the Rules confirm that the employer must pay economic compensation (per Article 47 LCL) plus medical treatment subsidies and employment subsidies based on China’s occupation injury insurance program.
  3. Article 47 LCL details the methodology for calculating compensation payable to employees. Compensation is based on the number of years of service with the employer, at the rate of one month's wages for each full year employed.1 The Rules clarify: ”one month’s wages” refers to the “monthly wages that the employee deserves,” this being inclusive of the hourly wage plus other earnings derived from the employer such as bonuses, allowances and subsidies.
  4. Penalties payable the employee must pay. The Rules confirm that where an employer terminates an employment contract due to the fault of the employee, the employee is required to pay a penalty to their former employer. The Rules mention five such circumstances where this rule applies, termination due to (i) employee’s serious violation of employer’s rules; (ii) employee’s serious neglect of duty or engaging in malpractice for personal gain, and causing “severe damage” to the employer; (iii) employee entering into an employment contract with a third party resulting in the employee’s inability to complete work assignments, or where work assignments are not completed despite the matter being brought to the employee’s attention; (iv) the use of coercion or deception by the employee that causes an employer to execute an employment contract or to revise an existing contract; and (v) the employee being pursued for criminal liability.

Chapter IV of the Rules contains special provisions regarding labor dispatching, emphasizing the duty of employer’s to comply with their obligations as set forth at Article 62 LCL; these are obligations relating to working conditions, the payment of overtime, training and wage adjustment. The Rules provide that where employers violate LCL provisions relating to dispatched employees, fines of between RMB1,000 and RMB5,000 per employee can be imposed.

The Rules are a welcome supplement to the LCL. Collectively, the LCL and the Rules serve to emphasize the important role that employment contracts can, and do, play in today’s China. Especially welcome is the clarification of the events and circumstances that can lead to termination and dismissal, combined with the provisions detailing the compensation calculation methodology – these clarifications yield greater certainties and will certainly help reduce unnecessary labor disputes.