On June 29, 2007, China's National People's Congress promulgated the Law of the People's Republic of China on Employment Contract ("Employment Contract Law"). (For a more in-depth summary of the Employment Contract Law, please click here.) With the stated aim of enhancing worker protection across its expanding economy, the Employment Contract Law will become effective January 1, 2008.
Composed of eight chapters and 98 articles, the Employment Contract Law touches upon a broad spectrum of issues related to employment contracts, many of which were not addressed in existing laws, or which are addressed in greater depth in the Employment Contract Law. Among those items covered are the creation of the employment relationship, the role of labor unions, and the formation, amendment, expiration and termination of employment contracts between employers and employees. Importantly, the newly promulgated Employment Contract Law is not simply a legal framework applicable only to Chinese domestic employers, but rather it is applicable to all employers in China, including foreign investment enterprises ("FIEs").
Although certain employment relationships can exist without an employment contract, the most prominent feature of the Employment Contract Law is its mandate that the terms of most employment relationships ultimately be in the form of an employment contract. For example, if no written employment contract was executed at the time of the establishment of an employment relationship, a written employment contract must be signed and executed within one month after the date on which the employee starts working for the employer. Stiff penalties may attach if an employer fails to do so. If an employer's failure to conclude a written employment contract with an employee lasts for more than one month, but less than one year after the date on which the employee starts work, the employer shall pay the employee at a rate of twice the employee's monthly salary. If the failure to conclude a written employment contract exceeds one year from the date on which the employee begins working, the parties shall be deemed to have concluded an open-ended employment contract.
Under the Employment Contract Law, an employee may be subject to non-competition restrictions upon the termination of an employment relationship. The non-competition period shall not exceed two years, and the employer must pay financial compensation to the employee on a monthly basis.
Moreover, the Employment Contract Law requires that an employer provide severance pay in many circumstances when an employee is terminated. The amount of severance is generally calculated as one month's wages per year of employment.
As with any new legislation, the practical effect of the Employment Contract Law will only be better understood in the months and possibly years to come. It is, however, certain that the new Employment Contract Law limits the discretion available to employers and creates a new element within the Chinese regulatory framework. Thus, it is prudent for any entity operating in China, including FIEs, to review its employment policies to ensure compliance with the Employment Contract Law.