After more than 2 years of consultation and redrafting, the Standing Committee of the National People’s Congress finally passed the new PRC Labour Contract Law (the "New Law") on 29 June 2007. The New Law will take effect on 1 January 2008 and is widely regarded as more "employee friendly" and "socialistic". It worries employers in China because of changes made to the employers’ obligations and employees’ rights including the strengthening of collective rights through various organizations.
Some of the key amendments in the New Law are highlighted as follows :-
Under the current law, a probationary period may be agreed upon in a labour contract and the maximum probation must not exceed 6 months. The New Law now specifies a maximum probation period depending on the contract term :-
it must not exceed 1 month if the term of the labour contract is between 3 months and less than 1 year;
it must not exceed 2 months if the term is between 1 year and under 3 years;
if the term of a labour contract is 3 years or more or for an indefinite term, the probation period must not exceed 6 months. If the term of a labour contract is less than 3 months, there shall be no probation period. The parties can only agree to one probation period i.e. repeat contract with new probation period will not be allowed.
Furthermore, the New Law stipulates that an employer may terminate a labour contract during the probation period only if the employee cannot meet the recruitment requirements or is seriously in breach of the employer’s internal policies or is unable to continue to work due to sickness or injury or unable to carry out his duties despite training or change of job scope. Employers are required to inform the employees of the reasons for dismissal during the probation period.
Under the New Law, employers are required to enter into written labour contracts with new employees within one month of the commencement of the employment. Failing which, the employers will have to pay twice the amount of the payable remuneration to the employees as salary. Existing labour contracts will be grandfathered and employers do not need to execute new contracts for existing employees at the beginning of next year.
If no written labour contract is signed within one year of commencement of work, an open term contract is deemed to have been entered into.
As of 1 January 2008, employers will have to pay severance compensation to employees if their contracts are not renewed after expiration unless it is the employees who do not wish to extend the terms of their contracts and the employers have offered no worse terms of employment than those in the previous contracts. The severance compensation will be calculated on the basis of the length of service (i.e. one month's salary for every year of service).
The New Law clarifies that a non-competition provision applies to senior managerial staff, senior technical staff and other staff with confidential responsibilities. It also shortens the maximum period of a non-competition provision from the current 3 years to 2 years. For the non-competition obligations to be enforceable, employers have to provide a monthly compensation to employees during the non-compete period.
Company Rules / Employment Handbook
The New Law contains amendments for mandatory consultations with employees regarding company’s internal rules or policies. It provides that provisions including working hours, rest and leave, work safety or issues directly involving the personal interest of employees have to be agreed by the labour union or all the employees. Employers are also required to inform the labour union in advance in the event of a unilateral termination of a labour contract. These amendments may have serious consequences to employers as dismissal based on non-agreed internal rules or policies may be unlawful. Employers may also have difficulties implementing the consultative process as the New Law does not provide adequate details on how the consultative process is to be carried out.
If you have any question about the New Law or employment law issues in Hong Kong or mainland China, experienced lawyers in our Employment Department will be happy to assist you.
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