China: China Watch: China´s Draft Labor Contract Law

Last Updated: 26 June 2007
Article by Meg Utterback

The spotlight has been turned on China’s labor practices. A recent report by an international alliance of trade unions and nongovernmental organizations has accused four manufacturers of Beijing Olympics products of engaging in unfair labor practices, namely, using underage workers and underpaid workers, and providing poor working conditions. The report was followed by news coverage of the rescue of slave workers in brick kilns and mines in Henan and Shanxi provinces. The Standing Committee of the National People’s Congress (SCNPC) is slated to review the nation’s most recent version of the PRC Labor Contract Law from June 24—29. The increased media attention may be sufficient to push the hand of lawmakers in Beijing.

One year ago, Thelen published its analysis of the then-new draft labor contract law. In this article we revisit the key features of the law, and update you on the proposed changes to the law and how they may affect business in China.

Third Draft of the Proposed Law

On April 27, 2007, the third draft of the proposed law was submitted to the SCNPCfor review. In general,proposed legislation is presented in draft form to the public for comment three times before a final version is adopted by the NPCor its Standing Committee. The third draft has not been made available for public comment. Our comments below are based on SCNPC Web site information and our review of the second draft of the law. After review of the proposed law, the SCNPC proposed five main changes to the draft:

  1. Clarify the amount of severance to be paid to terminated employees;
  2. Require the use of written labor contracts;
  3. Add language concerning contractual rights of female employees;
  4. Limit the labor union input into company policy; and
  5. Expand the circumstances permitting an employer to lay-off employees.

The SCNPC also emphasized the issue of occupational disease, specifically, the need to alert workers of the risk of occupational disease and to take preventive measures. We expect more comments or approval after June 29, 2007.

Severance Pay

The second draft of the law identified five situations requiring an employer to make severance payments, but made no recommendation concerning the method of calculating the amount to be paid. The five scenarios requiring severance are:

  1. An employer terminates the labor contract for cause, such as the employee is not competent to perform the job;
  2. An employee terminates the labor contract for legal reasons, such as the employer fails to pay the employee’s salary or benefits;
  3. The employer will restructure according to the PRC Enterprise Bankruptcy Law, or the employer will dissolve, cease to do business, declare bankruptcy, lose its business license, or be forced to close for other reasons;
  4. An employer terminates the labor contract and reaches mutual agreement with the employee regarding the termination; or
  5. The employer allows a fixed-term labor contract and declines to renew.

The SCNPC has suggested the following additions:

  • The amount of severance should be tied to length of service: one month’s salary for each year of employment with a 12-year maximum. (Employment durations of less than one year shall be rounded up to one year.)
  • If an employee’s salary is three times greater than the average salary in the preceding 12 months of the municipality where the office is located (or municipalities in the even t of multiple locations) ("municipality average"), then the employee shall be paid three times the municipality average.

One month of salary for every year of service is the current standard under the PRC Labor Contract Law. The average wage remains relatively low in China, so this provision presents limited risk to most foreign companies doing business in China. In fact, the municipal average may help lower the amount owed to long-tenured, high-paid employees. However, the circumstances for severance payments have been expanded, meaning that more employees may be entitled to severance under the proposed law than under the current law. Accordingly, companies are likely to face increased employment costs.

Written Labor Contracts

The second draft of the law identified three principles concerning the establishment of an employment relationship:

  1. A written labor contract is required for establishment of an employment relationship;
  2. The commencement date of an employment relationship is established from the employee’s first day on the job; and
  3. If an employment relationship has already been established, but a written labor contract has not yet been executed, then alabor contract must be executed within one month of the employee’s first day on the job.

The SCNPC clarified one additional point in this regard. It suggested that—in the event an employee signs a labor contract prior to the start date of his employment—the employee’s start date shall be the actual date the employee begins work, as opposed to the date the labor contract was executed. This date is important for purposes of calculating such time periods as the probationary period and the period for calculation of severance.

As we stated in our earlier article, the main concern under the new draft continues to be the effective abolition of fixed-term contracts. Under the draft, a fixed-term contract that expires creates a severance obligation, where none currently exists. Thus, an employer’s ability to allow a problem employee to leave at the end of the contract term without paying severance will no longer be an option. The down-side for business is increased costs in terminating employees and less flexibility in labor contracting.

Rights of Female Employees

The SCNPC proposed a special, and rather obscure, provision concerning the rights of female workers:

The employee and the employer may establish a special collective labor contract to protect female employees’ interests.

This statement appears in the collective bargaining section of the draft law, but does not elaborate the specific interests at stake. We assume that the SCNPC intended to protect women’s rights relating to pregnancy and maternity leave, but no further details have been provided.

Role of Unions

The proposal regarding female employees’ interests is in line with the increased role of labor unions under the draft law. Commentators on the draft had voiced the concern that allowing the unions to "approve" company rules, including handbooks, would give the unions too much control over company policy. The SCNPC seems to have listened to those comments and removed the approval requirement in favor of a requirement that management and the union discuss policies that may directly affect the rights of the workers. However, the second draft granted more power to the unions to protect the interest of the employees. The SCNPC provided in the second draft that the Union can bring the disputes to arbitration or litigation if the union and the employer have disputes under the collective labor contracts.

Lay-offs

In the second draft of the law, four grounds for lay-offs were identified:

  1. Bankruptcy-related reorganization;
  2. Serious difficulties in the operation;
  3. Relocation to minimize pollution; and
  4. Changes to the objective circumstances of the company.

Lay-offs in these circumstances can only take place if an enterprise needs to lay-off either 20 or more employees, or fewer than 20 employees, if the number of laid-off workers accounts for ten percent of the total number of employees. In addition, the employer must consult with the labor union, listen to the opinions of the employees or the Union, and report the intent to lay-off employees to the labor authorities.

In the third draft of the law, the SCNPC has proposed that additional circumstances justifying a lay-off be added:

  • When the enterprise transfers production to another location;
  • When a technical innovation results in the need for fewer workers; or
  • When operational methods are adjusted, reducing the needed number of employees.

While the broader range of lay-off bases improves the position of the employer, some of the ambiguities in the draft may still be problematic, particularly if the local labor bureau does not agree that the claimed basis for the lay-off is within the law. Deciding when there has been a change in objective circumstances, or what constitutes "significant difficulties," may not be clear. Also, the transfer of production to another location may not be appealing to the local authorities, whose cooperation must be sought to limit exposure in the event of a lay-off.

Non-Compete

The second draft deleted the consideration amount requirement, geographic limitation, and the cap on liquidated damages paid by the employee to the employer in the event of breach of contract. The second draft leaves these issues to the mutual decision of the employer and the employee in the labor contract. At the same time, the second draft continues to set a maximum period of non-competition post-employment at two years. In addition, the second draft provided that only senior management, senior technical personnel, and other employees with access to the business secrets of the employer may be subjected to a non-compete provision.

Probationary Periods

Traditionally, probationary periods have been based on contract term. Given the change in the prevalence of fixed contracts, restructuring of the probationary periods is to be expected. However, the SCNPC has not asked for any clarification of the probationary periods proposed in the draft law, namely,

  • No more than one month for a labor contract of less than one-year;
  • No more than two months for a labor contract of more than one-year, but less than three-years; and
  • No more than six months for more than three-year fixed-term or unfixed-term labor contracts.

Summary

If the SCNPC acts on the draft this month, it will likely be effective in early 2008. In its current form the law is likely to increase the cost of doing business in China. Larger companies will feel the need to have human resources capability in-country. Severance payments, non-compete payments, and the decrease in probationary period length will all increase the employer’s labor costs. The undefined role of the labor union may complicate the relationship with management. The ambiguities for justifying a lay-off may also result in increased costs to the employer. If Beijing decides that this is an appropriate time to send the message internationally that the PRC takes labor conditions seriously, we may have a new law approved within the month. For now, we are still waiting for the other shoe to drop.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions