Written contract mandatory

The new Law restates that written employment contracts with full-time employees are mandatory, but this obligation is now complemented by harsh consequences for defaulting employers. Employers who fail to do so within one month of the employment starting date must pay double salary to their employees. If no written contract is signed within one year of the employment starting date, the employment contract will be deemed to be open-ended. Written employment contracts signed before and valid since 1 January 2008 will remain valid after the Law comes into effect. This transitional rule does not distinguish between fixed-term and open-ended contracts.

Placement agencies

he new Law introduces specific provisions governing placement agencies, which second their employees to foreign companies under a service agreement. The agency’s obligations (as the true employer) are generally reiterated in the service agreement. It is common for foreign companies to enter into a supplemental agreement directly with the Chinese staff.

Under the new Law, employment contracts between the placement agency and its employees must have a fixed-term of at least two years. As a result, placement agencies will probably insist on seconding staff to their clients for a minimum term of two years. The Law prevents companies and placement agencies from entering into consecutive short-term services agreements for a continuous service period. The Law is silent as to whether representative offices are now allowed to hire employees directly (rather than through a placement agency).

Shorter probation periods

The Law links probation periods to the term of the employment contract as follows:

  • for contracts with a term of less than one year, the probation period cannot exceed one month;
  • for contracts with a term of one to three years, the probation period cannot exceed two months; and
  • for contracts with a term of more than three years or open-ended contracts, the probation period cannot exceed six months.
  • In addition, the employee’s salary during the probation period cannot be less than 80 per cent of the salary paid after the probation period, and cannot be less than the local mandatory minimum wage.

Fixed-term and open-ended contracts

Employees seeking the renewal of a contract with an employer may be entitled to open-ended contracts in some circumstances, for example:

  • f the employee has worked for the same employer for 10 consecutive years; or
  • if the employee has already completed two fixed-term contracts and the second contract is to be renewed. However, the two fixed-term employment contracts must have been signed after 1 January 2008 for this rule to apply.

Part time employment

The Law introduces basic rules on part time employment, which is capped at four hours per day and 24 hours per week for the same employer. No written contract is required, probation periods are prohibited and no compensation is payable on termination, but part-time employees can concurrently hold more than one part-time job.

Company Rules

“Company rules and important matters with a direct impact on the rights and interests of employees” must be discussed and negotiated with (but not necessarily approved by) the employee representative congress or all the employees. Rules that are unilaterally issued by the company are void, and summary dismissals based on breaches of company rules that have not been discussed with the union are invalid.


New rules on mass lay-offs are introduced. In a clear departure from prior regulations, a company being “on the verge of insolvency” will no longer be an admissible circumstance for an employer to reduce workforce. In order to implement a redundancy plan, a company must undergo restructuring procedures under Chapter VIII of the PRC Enterprise Insolvency Law (which came into force on 1 June 2007). Under the Law, the redundancy plan must concern at least 20 employees or 10 per cent of the workforce. The employer may implement a redundancy plan in any of the following circumstances:

  • the enterprise undergoes restructuring under the Enterprise Insolvency Law;
  • the enterprise experiences “serious difficulties in production or business operations”;
  • the enterprise changes production, introduces a major technological innovation or revises its business plan; or
  • a major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts renders the contract impossible to perform.

The Law also introduces a new requirement whereby, to the extent possible and in the following order of priority, the following employees must be retained:

  • those with longer seniority with the company;
  • those with fixed-term employment contracts; and
  • those who are the only ones in their families to be employed and whose families have an elderly person or a minor for whom they need to provide.

In addition, if an employer that has reduced its workforce hires again within six months, it must give notice to the persons dismissed and, all things being equal, hire them on a preferential basis.


The Law confirms the existing requirement that the employer notifies the labour union before unilaterally terminating an employment contract. PRC People’s Courts have ruled that foreign-invested enterprises that have not established labour unions must notify the union at the next higher level. The employer must provide the union with a reason for the early termination. The Law requires an employer terminating an employment contract during the probation period also to explain the reasons to the employee.

Severance payment

Perhaps one of the most noticeable features of the Law is the obligation made to the employer to compensate the employee when a fixed-term contract is not renewed. This rule is subject to an exception: no severance is due if the employee turns down an offer to renew the contract at equal or better terms.

The Law slightly modifies the compensation calculation formula. Essentially, the rule whereby an employee is entitled to one month’s salary for each year of service remains intact. However, an employee with less than six months is now only entitled to half a month’s salary (as opposed to a month’s salary under prior rules). Monthly salary means the average monthly salary of the employee in the twelve months immediately before the termination of the employment contract. The new Law caps the compensation to be paid for lawful dismissal of employees whose monthly salary exceeds three times the city average salary, in which case the employee is entitled to three times the local average salary for each year of service (up to a maximum of twelve years).

The Law clarifies that the compensation to be paid by the Employer for unlawful dismissal amounts to twice the severance payable for lawful dismissal.

Non-competition provisions

The permissible duration of non-competition obligations is reduced from the current three years to two years. The applicable scope of non-competition obligations is limited to senior management, senior technical staff and other employees “with knowledge of company secrets”. Other employees cannot be subject to non-competition obligations. In addition, the scope, territory and term of the non-competition restriction must now be described in the employment contract; however, the validity of the non-competition restriction is not subject to any test under the Law. The corresponding compensation due by the employer can now be paid on a monthly basis (instead of in a lump sum) during the non-competition period.

Finally, the Law clarifies that the employee may be required to pay liquidated damages in limited but important circumstances (such as breach of non-competition obligations) and to reimburse certain training expenses.

It is expected that implementing regulations will be issued to provide additional guidance before the Law takes effect on 1 January 2007. In addition, local authorities may also issue local regulations.