A number of laws and regulations have been promulgated in the past few years to introduce a series of changes to the existing PRC Labour Law, among which the key legislations are the PRC Labour Contract Law effective on 1 January 2008 and its detailed implementing regulations effective on 18 September 2008 ("Laws"). Generally speaking, the Laws are comparatively tilted towards the employees and they tend to impose more obligations on the part of the employers to protect the interests of the employees. With the implementation of the Laws, many enterprises, especially those established by foreign investors with relatively little PRC law background, have started to experience a heavier burden from a human resources perspective and become aware of the increasing necessity for exercising extra care and adopting appropriate measures or adjustments to adapt to the current legislative changes.

This article reviews the recent key PRC legislative changes on employment regime and proposes certain proactive approaches to enable employers to better position themselves to deal with the potential challenges and to minimise  their exposure to the potential risks of employment disputes.

1.                  Written Employment Contract with Mandatory Provisions Required

The Laws have strengthened the requirements of employment contracts both in form and substance. The Laws compulsorily require that an employer should enter into written employment contracts with its employees, subject to certain exceptions (e.g. employees hired on part time basis). The Laws also require that certain mandatory provisions such as basic terms and conditions concerning the information about the employer and the employee, employment term, job description, working place, working hours, remuneration, social securities etc. be included in an employment contract. Where the mandatory provisions are missing, the employer may be requested by the Chinese authorities to rectify and may also be required to indemnify the employee if damages to the employee are caused.

Failure to properly conclude a written employment contract, for reasons not attributable to the employee, may be a costly mistake to an employer as the Laws provide detailed remedies to the employee under such circumstance. In summary, in the event that an employer fails to conclude a written contract with an employee for a period of more than one month but less than one year, twice such employee’s monthly salary should be paid to the employee per month as penalty within that period; and in the event that the period lasts over one year, the employer would be deemed to have entered into an open-ended employment contract (i.e. an employment contract with no definite expiration date and thus will not be terminated automatically by effusion of time upon expiry) with the employee.

2.                  Necessity of a Well-drafted Employee Handbook

Whilst an employer is not legally required to have an employee handbook in place, it would be prudent to set down a clear, legitimate and consistent internal company policy especially concerning sensitive issues where employment disputes may easily arise such as overtime payment claims procedures, disciplinary actions imposed against certain misconducts, the internal dispute settlement mechanism etc. in the form of an employee handbook, not only for human resources administration purposes but also, more importantly, for preventing or resolving employment disputes.

If an employer has a well-drafted employee handbook which explicitly specifies the rules and policies that its employees should comply with and that certain misconducts constituting serious violation may result in dismissal, it will be easier for the employer to justify a legitimate dismissal on the grounds that the employee has seriously violated the employer’s policy by adducing the employee handbook as evidence in case of disputes, although each case will at the end of the day be tried on its own merits.

In formulating or amending an employee handbook where certain material matters that have a direct bearing on the employees’ immediate interests will be affected, it is important to make sure that the prescribed procedures under the Laws (e.g. consultation with the labour union) are followed.  

3.                  Employment Term and Probation Period to be Thoroughly Considered

Conclusion of employment contracts with a longer employment term are encouraged by the Laws which aim at securing a more stable employment relation by clamping down on the use of casual or short-term contracts. In particular, a fixed-term employment contract should be converted into an open-ended employment contract if the employer and the employee have concluded a fixed-term employment contract on two consecutive occasions unless the employee requests to have a fixed-term employment contract. An open-ended employment contract may be more difficult and costly to be terminated by the employer as it will not be terminated upon the expiry of the employment term and the employer will need to rely on other statutory grounds of termination. Therefore, in determining the length of the employment term for a particular employee, due and overall consideration should be given by taking into account the long-term employment strategy, the business needs of the employer as well as such employee’s performance, competency and potential.

According to the Laws, the probation period is subject to the statutory maximum length ranging from 1 month to 6 months which should be determined in accordance with the length of the employment term. During the probation period, an employer may summarily dismiss an employee without severance payment if such employee is proved not to meet the recruitment requirements. It is important that an employer determines the length of the probation period and the employment term with great caution in order to comply with the Laws.

4.                  Non-compete Obligations

Non-compete protection of an employer is available under the Laws which provide that senior management employees, senior technical employees and other employees who have access to the confidential information of an employer may be restrained from engaging in any competing business during the non-compete period. Pursuant to the Laws, the non-compete period commencing from the termination of the employment contract should not exceed 2 years whereas the scope of the restricted activities and geographic regions are for the employee and employer to negotiate.

Unlike the restrictive covenants in other jurisdictions, in China, in consideration of imposing the non-compete obligations, economic compensation is required for such obligations to be enforceable. Such economic compensation should be paid by the employer to the employee on a monthly basis after the termination of employment. The Laws have not provided a specific amount or calculation formula for the economic compensation which seems to be negotiable by the employer and employee. In this regard, some local regulations have provided a more detailed guidance to fill the gap and employers should pay attention to the local regulations where applicable.

5.                  Limited Statutory Grounds of Termination

Unlike the case in some Western jurisdictions where an employee may be dismissed at-will without cause with or without notice, the concept of “at-will employee” does not exist in China. The Laws provide greater security to the employees by not allowing them to be laid off abruptly without legitimate grounds. In China, an employer may only terminate the employment relationship on any of the following grounds prescribed by the Laws: (1) mutual agreement  (where the employer and the employee reach agreement on termination); (2) summary dismissal (where the employee has committed fraud, dishonesty or other gross misconduct etc.); (3) termination by notice with statutory causes (where termination could be undertaken subject to certain statutory causes by serving one month’s prior notice or paying one month’s salary in lieu of notice); and (4) economic redundancy (where the number of employees to be laid off is more than 20 people or 10% of the total workforce of the employer subject to certain statutory causes).  Whether notice period and severance payment are required depends on which termination ground is involved.

Given the sensitive nature of dismissal in China, before initiating the termination, an employer should make sure that it has a legitimate reason for doing so which is based on the actual facts and could be substantiated by adequate evidence preferably documented in writing. Otherwise, the employer will likely open itself to arbitration and/or litigation for wrongful termination and considerable layoff costs may be incurred. If the dismissed employee’s claim for wrongful termination is upheld by the authority, the employer may be required to continue to perform the employment contract if so requested by the employee or pay twice the statutory severance payment to the employees as damages.

6.                  Calculation of Severance Payment

In China, an employer is required to make severance payment to an employee for termination based on certain statutory grounds (e.g. mutual agreement, termination by notice with statutory causes etc.). The general position under the Laws is that the amount of severance payment should be calculated based on the number of years an employee has worked for an employer, subject to the prescribed circumstances where there may be a cap on the amount and the years of service for the purpose of calculating the severance payment. In a summary, one month’s salary is payable for each year (including any period of more than 6 months) of service whereas half a month’s salary is payable for a period of less than 6 months.

As the PRC Labour Contract Law with the new provisions relating to the severance payment came into effect on 1 January 2008, complexity may exist in terminating an employment contract commenced before 1 January 2008 pursuant to the Laws. Due attention should be paid to the calculation of severance payment for such transition period under the Laws.  It is advisable to seek professional advice and in determining the severance payment to ensure the amount complies with the legal requirements to avoid potential disputes with the employee.

7.                  Termination Procedure to be Taken Care of

The Laws introduce more formal procedures for the termination of employment that call for strengthened human resources management mechanisms such as better record filing and documentation maintenance etc. An employer is obligated to duly attend to the relevant formalities after the termination of the employment relationship in a timely manner, e.g. to issue to the employee a proof indicating the termination of the employment contract and to transfer the files and social security accounts for the employee within 15 days after the termination. The written employment contract is also required to be duly kept and maintained as the employer’s records for at least 2 years after termination.

8.                  Increasing Employment Disputes to Cope With

In the past, an arbitration fee is required if an employment dispute is referred to arbitration. However, application for employment arbitration is now free of charge after the implementation of the PRC Law on Mediation and Arbitration of Labour Disputes. Given the low cost of instituting legal proceedings against an employer, it has been reported that the number of employment arbitrations has substantially increased mainly because the employees may easily file a claim if they are dissatisfied with the acts of their employers even without a due cause for the claim or sufficient supporting evidence. On the other hand, a heavier burden of proof is placed on the employer to provide the arbitration tribunal with the relevant evidence that should be in its possession, such as the employee’s profile, payroll records, information concerning the payment of the social securities etc., failing which may result in unfavourable outcome of the case. The aforesaid legislative changes place significant extra demand on a well-established internal human resources management system of an employer. Chances of the employer’s position being upheld by the authorities may be increased if adequate documentation kept and maintained in good record could be adduced as evidence to substantiate the defence, e.g. attendance record, performance assessment report, official written record of the employee’s misconduct.

9.                  Local Legislation and Practice

Although a more clear and detailed guideline on the employment regime has been provided under the State-level legislation, there still remain some ambiguous areas that need to be further elaborated or clarified. Some local authorities have therefore issued local regulations further interpreting these ambiguities according to their local practices to fill the gap. Whilst such practice is helpful in solving various practical issues, it, at the same time, may result in inconsistencies in the enforcement of the Laws in different localities in China.  It is not uncommon to get inconsistent or even conflicting responses to the same issue from different local authorities. Therefore, employers, especially those multinational enterprises with presence in more than one locality in China, should note that the employment issues they encounter may need to be separately addressed subject to the local regulations, local practices and the local government authorities’ positions which may differ from one locality to another.

Conclusion

As a consequence of the more employee protective employment policy currently adopted in China, an employer should have a better awareness of their implications and the risks associated and protect itself from any potential arbitration and litigation by taking due care in hiring and dismissing its employees and maintaining the employment relationship to make sure that they are in full compliance with the statutory requirements under the relevant laws and regulations at both the State and the local levels, the local practice and the employer’s internal policy. If comprehensive and effective human resources management and record filing systems are established by the employer to maintain adequate documentary proof as to the reasonableness of its action, the employer may be in a better position to deal with the legal proceedings and may be more likely to get a favourable outcome when an employment dispute is triggered. In case of doubt, it is advisable that legal advice be sought in order to prevent employment disputes from arising, or to resolve any employment disputes already arisen in a timely manner to minimise any impacts on the business operation, the employment relationship and the morale within the company.