Deacons
  August 21, 2006 - Hong Kong

China: The PRC Labour Contract Law

The Standing Committee of the National People's Congress made public China's draft law on "The PRC Labour Contract Law" on 20 March 2006, with a view to collecting opinions thereon from relevant departments and the public, for further amendments to be made to this draft law. The PRC Labour Contract Law is intended to be promulgated pursuant to the PRC Labour Law, and sets out to clarify certain ambiguities to give employees better protection. Outlined below are certain key issues covered under the draft law: 1. Concept of an employment relationship: Employment relationship is defined, to hopefully eliminate disputes over the existence or not of an employment relationship. 2. Form of a labour contract: In general, the employer and employee are expected to enter into a labour contract in writing. The labour contract is required to contain certain basic information pertaining to the employer and employee, and cover basic terms and conditions pertaining to contract duration and termination conditions, job specifications, work venue, working hours, leave entitlement, remuneration, etc. 3. Probation period: The employer may set a probation period, once only, and only where the job position is intended for a period of no less than three months. The probation period may not exceed the stipulated maximum determined in accordance with the job nature: maximum probation period of one month for a non-technical job; two months for a technical job; and six months for a senior, professional technical position. It is quite obvious that this is intended to make it impossible for an employer to unduly delay commencement of a normal employment relationship with an employee by setting unreasonably long or multiple probationary periods. 4. Validity and revocation of a labour contract: A labour contract which comes about through deceit, threat, or wherein material misunderstanding exists, or which is otherwise devoid of fairness or contrary to the prospective employee's real intention, may be held an invalid contract by the relevant authority upon application by the affected party. However, any such application for revocation of contract must be made within one year of knowing (or should have known) the ground of revocation, otherwise, such right of revocation of contract is lost. 5. Performance and termination of labour contract: These aspects are clarified to primarily (i) require performance in accordance with the terms of the contract save where exempted under special circumstances; (ii) stipulate circumstances under which the employer and employee may terminate the contract; and (iii) deal with payment of economic compensation or severance pay by the employer to the employee upon termination of contract. 6. Payment of severance pay: Where severance pay is payable (such as where contract is not renewed upon its expiration), the applicable amount is determined with reference to the duration of service rendered by the employee. Basically an amount equivalent to one month's salary for each year of service, and a half month salary for a six-month service period or less. A service period of more than six months but less than one year is treated as one year for purposes of calculating the severance pay. The severance pay is subject to a reduction of 10% thereof for every five years of continuous employment, and this is obviously intended to encourage employers to offer long term continuous labour contracts rather than multiple short-term labour contracts to prospective employees. 7. Non-Compete Clause: A non-compete clause may be imposed only upon employees who have gained commercial secrets of the employer. The non-compete clause may cover a period of no more than two (2) years counting from the termination of the labour contract. Economic compensation of a minimum amount equal to the employee's last drawn annual salary is payable to he employee upon termination of the labour contract, failing such payment, the non-compete clause would not be enforced by the PRC court. The geographic scope of the non-compete clause is limited to those areas where the employer is subject to competition. The penalty payment which the employee may be required to pay for failure to observe non-competition is capped at three times the amount of economic compensation paid to him by the employer in respect thereof. 8. Full-time training provided free of charge: Employers who provide employees with full-time training free of charge for six months or longer may agree on a minimum term of service with the employee. If the employee fails to complete the agreed term of service, the employer may require the employee to pay a penalty sum equivalent to (but not exceeding) the amount of training cost yet to be amortised with reference to the remaining term of service.