The Employment Contract Law (ECL) that became effective on
January 1, 2008, has some employers scrambling to enter new
employment contracts by January 31, and requires immediate
attention to avoid double-wage penalties, preserve non-compete
obligations, avoid undesired non-fixed term contract
obligations and other unintended and potentially costly
consequences. Heightened contracting requirements, restrictions
on termination, increased severance obligations and other
changes will likely result in increased HR administration
costs. The ECL's passage should serve as a reminder to
U.S. companies that the "at will" employment concept
does not extend to the PRC.
Important changes under the ECL include:
Signed, Written Contracts. Formal contracts
required for all employees (excluding part-timers) within one
month of employment (or by January 31 in the case of
employees hired before January 1) and in certain other
prescribed circumstances, including upon concluding a
non-fixed term contract at the expiration of the first
renewal term of any fixed-term contract as now required by
Non-Compete Provisions Limited. Post-employment
covenants limited to two years. Payment of monthly economic
consideration required during non-compete period.
Fixed-Term Contracts. Severance required on
non-renewal of fixed-term contracts. Upon expiration of the
first renewal term of a fixed-term contract, the employer
must provide a non-fixed term employment contract.
Non-Fixed Term Contracts. Employers must provide
non-fixed term contracts in the following circumstances:
before entering into the required non-fixed term contract
upon expiration of the second term of any fixed-term
contract, as mentioned above; upon renewal of an employee
with 10 years of service; in restructuring where an employee
has 10 years of consecutive service and is less than 10 years
from retirement; and where a written employment contract is
not concluded with an employee within one year of
Employer Rules and Regulations. Upon
establishing or changing employer rules or regulations
affecting the immediate interests of employees (wages, hours,
holiday, etc.), such rules and regulations shall be discussed
by an employee representative congress and all the employees
and the union/employee representative must be consulted.
Reductions in Force. Layoffs of 20 or more
employees or 10 percent of the workforce require a pre-layoff
explanation to union or all employees and a report to the
Labor Administrative Department. Certain employees receive
retention preferences. During the six months following a
reduction, terminated employees receive notice and preference
in any rehiring.
Terminations. Specific rules address probation
periods, notice requirements and severance pay. Employer
terminations may require pre-notification of cause to the
union. The union has the right to rectify unlawful
termination. Unlawful termination may entitle the employee to
reinstatement with back pay or twice the statutory severance
Severance Calculations. In most circumstances,
severance is required at the rate of one month's
wages per year of service. Calculation of the monthly wage
rate is capped at three times the average wage of employees
in the region.
Order to Pay. The employee may apply to a court
for an order to pay if the employer falls into arrears with
the payment of labor compensation or fails to make payment in
Other ECL rules apply to collective contracts, labor
dispatching contracts, part-time employment, and the
employee's obligation to reimburse the employer for
vocational expenses upon termination in certain cases.
U.S. companies with employees in the PRC should consider the
Inventory fixed-term contracts set to expire in the next
Calendar expiration dates of fixed term contracts and
Review employment contracts, labor management rules and
regulations, employee handbooks, etc. for compliance with the
ECL on content.
Review employment policies to determine whether necessary
revisions require consultation with union or employee
Inventory non-compete agreements for compliance with the
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.
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