Employment Law in China

It is important to remember than China is a jurisidiction which favours the employee in nearly every scenario.

The following are the most important details for expats to be cognisant of.

Article 12 of the 2008 China Labor Contract Law provided for three types of employment contracts, as follows:

  • fixed-term labor contracts;
  • open-term labor contracts; and,
  • specific-task labor contract, which set the completion of specific tasks as the term to end the contract.

In China, hiring full-time employees means each one must execute a written employment contract with the employer. It is a provision of the law and failure to comply comes with corresponding penalties and sanctions, including the following:

  • fines to be imposed on companies with full-time employees having no written employment contract;
  • an employee working for one month in a company without an employment contract will legally compel the employer to pay the concerned employee to double his monthly wage. In some cities, it is less than one month;
  • if an employee reaches one year without an employment contract, the employer automatically enters an open-term employment with the concerned employee where the latter must be retained by the employer until the age of retirement; and,
  • upon the employee’s completion of the probation period, termination will be difficult in the absence of a written contract term on termination. Termination is even more difficult to apply to employees who have open-contract terms.

Given the foregoing China employment law provisions, it is vital that an employer spell out each and every aspect of the employment terms it wants to have with the employee.

There are no “employment at will” policies in China where companies may terminate an employee for any reason. Ignorance of these employment laws will not be accepted as an excuse by the Chinese government.

China’s enforcement of its 2008 Labor Contract Law clearly shows the importance it gives to employment contracts.

In fact, it is essentially prohibited in the country to have full-time employees without each having a written contract. The written employment contract serves as the basis for the employment agreements.

However, labor contracts in China are unlike in other countries, eg the United States, where companies, particularly private ones, may include whatever they deem suitable in the employment contract.

In China, there are mandatory provisions that must be included in the contract.

In 2013, a new Judicial Interpretation on Applicable Laws in Terms of Trial and on Labor Disputes Cases was enforced to allow for an even more effective implementation of the labor regulations. This 2013 regulation serves to improve the 2008 Labor Contract Law and seeks to address the confusing and vague provisions of the law.

The 2013 law is the 4th interpretation of the China labor contract law, which only shows how complex these employment regulations have become.

Based on the foundational labor laws, as well as the 2013 regulation, the following compulsory information and provisions must be included in the employment contract:

  • Name, address, and ID number of the employee;
  • Company’s name and address;
  • Company’s legal representative;
  • Compensation/remuneration;
  • Term, time frame or probation period (whichever is applicable);
  • Employment/job description;
  • Employment location;
  • Work condition, ie protection against occupation hazards and safety measures employed;
  • Provisions on working hours, leaves and rest;
  • Social insurance terms; and,
  • Others that may be required by China’s dynamic labor laws.

The inclusion of the aforementioned elements in the employment contract protects both the employee and the employer.

To ensure the drafting of an employment contract that completely complies with the labor laws, it is necessary to acquire the services of a lawyer or a legal expert that is deeply knowledgeable about the complex labor laws of China.

Grounds for Termination of Employment

The employment laws in China protect laborers in general. This is one reason termination of employees in China is far from being an easy task.

There are several grounds by which employers can legally and summarily dismiss or terminate employees without compensation and there are terminations which require the employer to provide severance pay.

Under Articles 39, 40 and 44 of the 2008 Employment Contract Law, an employer may not dismiss an employee unless it is due to any of the following limited statutory grounds for termination:

  • Failure to measure up to standards provided upon recruitment during the probationary period;
  • Severe misconduct;
  • Serious dereliction of duties or participation in corrupt acts causing the employer damages;
  • Due to criminal acts outside work;
  • The use of coercion, deception or position by the employee to cause the employer to execute the contract of employment or modify the same;
  • If an employee suffers injury or illness and after the medical treatment leave expires, is unable to do original work;
  • Work incompetence despite training or change of position;
  • Employer bankruptcy;
  • Revocation of employer’s license, voluntary liquidation or was ordered to close down;
  • Employee dies, or is declared missing or dead by the court;
  • Expiry of the employment contract;
  • The employee started to receive his basic retirement pension as provided by Chinese law; and,
  • The contract may no longer be performed due to a major change to the objective circumstances by which the contract of employment was executed, where the employee failed to reach an agreement.

If the reason for the termination is not included in the aforementioned grounds, then the employer must negotiate with the employee about termination and may only do so once consent is provided by the employee.

Statutory Severance – Entitlement and Computation

Some of the grounds for termination allow an employer to dismiss an employee without compensation.

However, as provided by the 2008 Employment Contract Law, if the employee was terminated under any of the following reasons, then the employer must provide him with severance pay:

  • Employee resignation due to the infringement of his employment rights by the employer;
  • Expiration of the contract of employment;
  • The employer and employee mutually agreed on the dismissal, with the former initiating the dismissal;
  • The termination was due to the bankruptcy of the employer;
  • Unilateral termination of the employee by the employer unless for cause, eg severe misconduct;
  • The termination was due to the revocation of employer’s license, voluntary liquidation or was ordered to close down;

The 2008 China Employment Contract Law also provides how much severance pay must be paid. Two ways to compute for severance are provided, as follows:

  • one month’s salary for every year of service for services more than six months (Services with a duration of six months to one year will be considered one year) and 2) half month’s salary for service duration of less than six months.

The employee’s one month salary is computed based on the average monthly salary within 12 months before termination. However, the amount of severance is capped at three times the local employees’ average monthly salary.

It is important to note for expats in Shanghai, the courts have found that expats are not entitled to the statutory severance, only the severance which is specifically refered to in their contracts.