China’s employment rules are changing as quickly as the Chinese landscape.  With a Labor Code only a few years old, there are major issues to be addressed, and the tax and other costs of employing personnel in China undergo frequent adjustments.  While China is a unitary legal system, there are great variations among provinces and self-governing cities.  Prior recent posts have addressed many of these emerging issues, including minimum wage levels, add-ons to employee compensation.  The following is a summary of developments in the first half of 2011 that affect Chinese employers, and will be of particular interest to US companies with Chinese operations. 

  1. Criminal liability – A Criminal Law amendment effective May 1 makes employers that fail to pay wages subject to imprisonment.  The law singles out employers that withhold wages through asset transfers, off-record transactions and simply refusing to make required payments, and where the employers do not comply with labor bureau orders.  They can be subject to fines ranging from RMB 10,000 to 50,000, and individuals can be sent to prison for up to 3 years (7 years if the failure is “serious”). Potentially liable individuals include investors, board chairs, general managers and other persons “directly responsible” for failing to pay wages.  The amended law should force US companies with Chinese operations to exercise care in appointing directors and officers for the Chinese entities.  How this Law will be interpreted in tandem with the relatively new Bankruptcy Law is an open question.  If, for example, a Chinese operation becomes insolvent, may it stop paying wages owed to employees under written agreements but avoid the potential criminal implications under the amended Criminal Law?  Can a fired employee use the law to have the company and responsible individuals indicted for failing to pay wages?  The amendment creates uncertainty and will be unsettling to westerners.
  2. Union Preparation Fees – Effective January 1, employers in Beijing that do not have an enterprise union are required to pay “union preparation fees,” according to a notice of the Beijing Local Tax Bureau and Beijing Branch of the all-China Federation of Trade Unions.  The fee is 2% of total payroll (equal to what enterprise unions receive from employers).  Payments should be made quarterly (the first was due April 15), with penalties accruing on unpaid amounts.  This move by a self-governing city may prompt other provinces and cities to adopt similar measures.  Jiangsu Province and a few other jurisdictions impose similar union preparation fees.
  3. Pension and unemployment mandates – Shenzhen issued draft amendments to pension and unemployment insurance rules, which are expected to become effective on July 1.  The changes will include:
    • Increase in employer contributions to 13% (from 11% for Shenzhen hukou employees)
    • Extension of a right of employees to challenge the base used by employers to calculate contributions
    • A grace period through July 1, 2013 to fund required contributions
    • Reduction in the contribution base from average local salary to minimum local monthly salary, with an increase to 2% for employer contributions (from 0.4%), with reductions possible in some cases to 1.2%
    • Requirement that employers make lump sum payments of 200% of unemployment benefits and take responsibility for stated medical expenses for employers that did not have unemployment insurance.
  4. Social Security and Expats – According to a May 31 China Daily report, China will require all foreign workers to enter its social security system, starting July 1.  This would align China with the practices of many countries, which treat foreign workers the same as nationals in having to pay into the social security system for employees.  The new policy will require pay-in for foreign workers who spent more than six months working in the PRC.  China, however, has only two totalization agreements that would avoid payment of such amounts (so far only with South Korea and Germany).  The impact on US companies that send US individual taxpayers to work in China will be to increase the cost of doing this.  US employers have certain choices in this regard, including a shift to dual employment (discussed in a prior post) to comply with other recent changes in China’s approach to taxation of non-Chinese nationals doing work in China.  Failure to pay required amounts will result in fines of 1-3 times the amount of unpaid fees.  For expats who work in China for an extended time, they should understand their rights to receive pension amounts or to have their entitlements available for their heirs.
  5. Outsourced employees – Chongqing, one of China’s largest (and self-governing) cities, has draft rules that would try to limit the number of employees of a company that are outsourced or “dispatched.”  The draft rules would force employers to file a labor bureau report if more than 30% of its employees are “dispatched,” meaning generally that they are under the direct supervision of the company but are compensated by a third party (e.g., an employee leasing company).  The draft rules provide that a company may not employ more than half its employees by dispatch.  “Temporary, auxiliary or substitute” positions are exempt from the rules, which provide a definition of what this category means.
  6. Maternity leave – The State Council has proposed amending all-country regulations to provide that female employees have the right to 98 days for maternity leave (up from 90), and require salary to be at least what the employee received during pregnancy and at least the average salary of the employer for the past year.
  7. Minimum monthly wages – A prior post surveyed minimum wages throughout China, which vary greatly.  Shanghai announced an increase effective April 1 from RMB 1,120 to RMB 1,280 as the minimum monthly salary, net of social insurance and housing fund contributions that employers must pay.  This is the new high for minimum wages in China, and represents a 14% increase in the wake of a 17% increase a year ago.
  8. Foreign employment – Effective May 1, Guangdong Province issued Interim Rules on Management and Service of Foreigners.  The purpose is to divide foreign employees into “encouraged” and “restricted categories.  For encouraged positions, employers can be exempted from application fees, while for restricted positions, failure to follow correct application procedures can result in fines of RMB 1-3,000 (e.g., for hiring foreign teachers).
  9. Employment contracts – A ruling of the Shanghai Huangpu People’s District Court addressed the question of what happens at the end of a second fixed term.  General understanding has been that an employer can employ someone for 2 fixed terms before the relationship becoming one of open term, requiring substantial cause before termination is possible.  The employee in the case had signed two 1-year fixed agreements with Lloyd’s Register Group.  Towards the end of the second period, the company informed her that it would not renew the agreement.  After losing in arbitration, the employee prevailed in the District Court, which found no basis under the Chinese Labor Code to support termination when the second term expired.  The result was that she was entitled to an open-term contract. 

The result is consistent with the national Labor Code, but different from prevailing practices in Beijing and some other major cities, where employers have believed that they have two fixed-term contract periods before an open-term agreement would be required of them.  If followed, the December 2010 decision from a Shanghai District Court would mean that companies have only a single fixed term to decide whether to employ a worker thereafter, and once that occurs, the new agreement will be for an open-term, meaning that termination will require a substantial showing of cause.