Employment law in China underwent a major reform on 1 January 2008 following the adoption of the Chinese Employment Contract Law (ECL). Together with the existing Chinese Labour Law of 1994, the ECL applies to all foreign nationals, with some limited exceptions.

Given the significant and growing importance of China in the world markets, HR managers and teams are becoming increasingly involved with the issues concerning Chinese employment law.

Wragge & Co's employment experts have set out a summary of some of the most significant legal issues in China from an employment perspective and the how changes introduced by the ECL are affecting HR managers.

What forms the basis of the employment relationship in China?

The employment relationship is formed on the date when the employee starts work. Written employment contracts are mandatory for full-time employees, although this requirement is often not complied with in practise. There are a number of mandatory requirements which apply to the employment relationship regardless of the terms of the contract. These include the minimum wage (which varies depending on locality), restrictions on working time, holiday entitlement (which applies after the first year) and health and safety requirements.

To encourage more employers to formalise their arrangements, the Chinese Employment Contract Law (ECL) has introduced penalties for failure to enter into a written employment contract.

What restrictions are there on an employer's ability to dismiss an employee and what remedies are available to dismissed employees?

Employees can only be dismissed on one of the grounds permitted by statute, and termination on any other ground is unfair. There is no qualifying period of employment for an employee to bring a claim for unfair dismissal.

Permissible grounds for summary dismissal include misconduct, capability or where a criminal offence has been committed by the employee (whether or not it impacts on employment). Severance pay for employees dismissed for good cause is on average one month's salary for each year of service. The ECL has capped severance pay at 12 months' salary.

The main remedy for unfair dismissal is reinstatement and the ECL provides that an unfairly dismissed employee can require reinstatement. If the employee does not wish to be reinstated, or if reinstatement is not possible, the employer must pay damages equal to double the severance pay the employee would receive if the dismissal was lawful.

The employer must give written notice to the union before unilaterally dismissing an employee.

What protection against discrimination exists and what are the remedies for breach?

The principle of anti-discrimination (discrimination on the ground of race, ethnicity, sex, disability, religion, migrant worker or infectious disease status) and the principle of 'equal pay for equal work' are set out clearly in Chinese labour law. China has also ratified the International Labour Organisation's Discrimination (Employment and Occupation) Convention. However, such principles are not well enforced in practice. One reason may be the current lack of clearly specified rules on remedies and liabilities. 

What role do trade unions and work councils play?

Employers in China are obliged by law to recognise trade unions for the purposes of collective bargaining and there is a statutory framework which specifies what collective agreements should cover.

Companies considering a restructure or other major changes are obliged to consult with the union and the employees, generally through an employee representative congress. But unions and employees do not have a right of veto over business decisions unless they directly affect employees' rights. However, where the issue under consideration directly affects employees' rights (e.g. salary or working conditions) then a union representative or an employee representative must attend any meeting where those issues are discussed and the employer must obtain the agreement of the union before implementing any decision.

What protection is available to employees of an outsourced business?

Prior to the 1 January, there were no specific rules relating to changes of employer. The ECL has introduced new rules which apply where there is a change of employer and so will, in theory, apply in an outsourcing situation. It remains to be seen how the new rules will be applied, but the principle behind the new rules is that changes of the employing company, whether internal (change of name, representatives, shareholders etc) or external (mergers, demergers etc) do not affect the performance of existing employment contracts.

What are the obligations on an employer in the redundancy process?

Employees in China can only implement redundancies on very restricted grounds – generally only where the business is in serious financial difficulties.

The ECL has widened the range of circumstances in which collective dismissals are possible. These include where the business changes its products, makes technological changes or adjusts its methods of operation. It has also defined what is meant by a 'collective dismissal' i.e. dismissals of 20 or more employees or more than 10% of the workforce.

In addition, under the changes introduced by the ECL, specific categories of employees have priority to be retained in a 'collective' redundancy situation. These include employees with contracts for an indefinite term or long term fixed contracts and employees who are the sole earners in a family which includes dependent children or the elderly.