On September 18, the PRC State Council promulgated the long-awaited Regulations on the Implementation of the Employment Contract Law of the PRC, the Regulations), which went into effect on the same day. The Regulations aim to clarify some aspects of the Employment Contract Law of the PRC (the ECL).

A Permanent Employment Contract is not an “Iron Rice Bowl”

If a company enters into a permanent employment contract with an employee (i.e., an employment contract without a fixed term), it does not mean the employee cannot be fired. In June 2007, some read the ECL as a guarantee of an employee’s permanent job security, but the Regulations clarify that employers and employees may terminate permanent employment contracts, fixed-term employment contracts, and task-based employment contracts.

In accordance with the ECL, the Regulations specify 14 situations under which an employer may terminate an employment contract. An employer may terminate a contract if the employee uses coercion or fraud, materially breaches the employer’s code of conduct, or is derelict of duty, causing substantial damages to the employer. The Regulations also specify 13 situations under which an employee may terminate an employment contract. An employee may terminate an employment contract if the employer fails to provide proper employment protection, fails to contribute to the employee’s social security account, neglects to pay the full compensation in a timely manner, uses fraud, or coerces the employee to enter the contract while the employee is under duress.

Double Monetary Compensations in Unlawful Cancellation or Termination of Contract

Under the Regulations, if an employer cancels or terminates an employment contract in violation of the ECL, the employer is not required to pay further monetary damages if it has previously paid appropriate monetary compensations in accordance with the ECL. Under the ECL, if an employer lawfully cancels or terminates an employment contract, or if an employee terminates an employment contract due to the fault of the employer, the employer must pay monetary compensations calculated in accordance with the ECL. If the cancellation or termination of employment is unlawful, the amount of monetary compensation doubles.

Employment Staffing Agencies

In China, some employers hire through employment staffing agencies in order to avoid certain obligations as employers, including their obligation to provide the employees with certain benefits since employment contracts in these cases are only between the employment staffing agencies and the employees. To address this problem, the ECL provides that employment staffing agencies are considered employers within the meaning of the ECL and must fulfill their obligations to the employees that they send to receiving entities.

The Regulations further specify that a receiving entity must assume its responsibilities as specified under Article 62 of the ECL, such as providing the employee with overtime pay, performance bonuses and other appropriate benefits. According to the ECL, the staffing agencies and receiving entities must reach agreements on how to pay the compensations and contribute to the social security fund. Under the Regulations, employment staffing agencies may not hire part-time employees, and employers may not place employees within its own company through selfestablished staffing agencies. In addition, an employment staffing agency must pay monetary compensations to an employee in accordance with the ECL if the agency unlawfully dissolves or terminates an employment contract.

Other Observations

The Regulations also provide that if an employee is transferred to a new employer for non-personal reasons, the time he or she has worked for the former employer should be consolidated into the time he or she works for the new employer. If the former employer has already paid monetary compensations to the employee for the time he or she worked with him, the new employer will not include the time the employee worked for the former employer when calculating the monetary compensation to be made to the employee during the dissolution or termination of their employment contract. Therefore, employers should carefully consider their employment policies during their merger and acquisition processes and internal management procedures