China: Maintaining A Flexible Workforce In China – Is It Possible?

An overview of employment contract arrangements under PRC law
Last Updated: 12 July 2017
Article by Richard Bell

It is no great secret that China's Labour Laws are "employee friendly".  At the present time, labour laws are very much drafted with a view to protecting the employee rather than promoting flexibility in the labour market.  The influence of unions, security of employment for certain categories of employees and limited rights for employers to terminate employees are all features of the current system.  In addition, many commentators note that the labour tribunal is pro-employee which makes any dismissal of employees, whether for cause or for restructuring purposes, difficult without having to pay compensation.  This is turn can make it difficult for businesses operating in China to achieve efficiencies.

The Chinese government has been aware of these concerns for some time and, to its credit, has taken steps to address them. Several National People's Congress deputies have submitted motions proposing to make amendment to the current labour laws by increasing forms of employment and making the employment more flexible to protect the employers' lawful rights and interests. For example, at the end of 2016, Ministry of Human Resources and Social Security (MHRSS) noted in a report that:

"...during implementation of the PRC Labour Contract Law, there are issues arising from purpose of legislation, non-fixed term labour contract, economic compensation and so on, the next step will be conducting a comprehensive assessment on context of non-fixed term labour contract and then giving advice on amendment of Labour Contract law on the basis of the result of the assessment."

The MHRSS followed some well publicized remarks from the Chinese Finance Minister Lou Jiwei in 2015 and 2016 where he stated that the interests of employers are not sufficiently protected under current labour laws and that national policy favoring long-term labour contracts is not suitable for many businesses. He noted that the current labour law create an inflexible labour market and that wages had risen at a rate which has now effectively overtaken employee productivity. As a result, this has effected China's competitiveness and weakened the interests of employees. Mr. Lou further suggested that government policy should be adjusted to increase the flexibility of labour markets, and that the Labour Contract Law should seek to strike a balance between employers and employees.

While the Chinese Government now appears to be thinking seriously about labour market reform, it may be some time before there are any tangible changes to the Labour Contract Law and the employment regime in general.

In the interim, how can employers use the current forms of employment wisely and benefit themselves?  In our experience, there are two ways this can be achieved:

  1. Through effective use of labour dispatch agencies; and
  2. Structuring employment contracts to avoid the trap of employment for an indefinite period.

In this article we consider each of these measures and discuss their pros and cons.  We also consider the effectiveness of probation periods in China.

Labour Dispatch

Labour dispatch was adopted as a statutory employment form in Labour Contract Law (2008) and was improved and perfected by Interim Provisions on Labour Dispatch effected on 1 March 2014.

Under the labour dispatch system, Company A will enter into a supply contract with a labour dispatch agency.  The labour dispatch agency in turn enters into an employment contract with the employee and then "dispatches" that employee to Company A.  Accordingly, Company A is not obliged to undertake the legal liabilities of an employer (such as signing written labour contract, buying social insurance, paying severance payment etc).  Company A also avoids the risks associated with signing employment contracts of indefinite duration (see our comments below).  As the contract between the employee and the labour dispatch agency is usually on a short term basis, Company A can return the employee to the dispatch agency at the end of that term.

However, the labour dispatch system is not without its difficulties. First and foremost, labour dispatch arrangements come at a cost as the employer must pay a fee to the labour dispatch agency.  Secondly, labour dispatch arrangements are subject to a number of laws and regulations which restrict their use to provisional, auxiliary or substitute work1.  Thirdly, labour dispatch agencies must have an appropriate license from the relevant authorities.  Many companies operating in the market as labour dispatch agencies are not properly licensed and employers who source employees from such companies may risk investigation and censure.  Finally, the use of a dispatch agency will not necessarily insulate the employer from liability.  If an employees' rights and interests are prejudiced during the dispatch period, there is risk that the dispatch company and the employer shall bear joint liability.

Categories of Employment Contracts in China

The Labour Contract Law recognizes four types of employment contracts:

  1. Open ended contracts;
  2. Fixed term contracts;
  3. Contracts for specific tasks; and
  4. Part time contracts.

Open Ended Contracts

Open ended contracts have no fixed duration and remain in force until either the employee retires or is dismissed.

Typically, open ended contracts are not popular with private sector employers as they are difficult to terminate unless the employee falls into the categories set out in Article 19 of Regulation on the Implementation of the Employment Contract Law of the People's Republic of China, such as where the employee has committed a breach of the employer's internal rules and regulations, is incapacitated due to a non-work related injury or illness, or has committed a crime and so on. 

Employees under open ended contracts also enjoy certain protections in a economic redundancy situation.  This can be a problem for employers as these employees are often the very ones it wants to make redundant in order to introduce efficiencies into the business.

As a result, open ended contracts do not provide much flexibility for the employer.

Fixed Term Contracts

Fixed term employment contracts are the most popular form of employment contract in China as they enable the employer to dispense with the services of the employee at the end of the fixed term, a luxury employers do not have with open ended contracts.  Fixed terms vary between employers, but contract durations of between 1 – 3 years are most common.

An important point to note in relation to fixed term contracts is that, under the Labour Contract Law, the contract will be converted to an open ended contract if the employee:

  1. has completed of two fixed terms;
  2. has been employed for a period of 10 consecutive years.

In addition, if the employer fails to sign a written labour contract with an employee after the lapse of one full year from the date when the employee begins to work, it shall also be deemed that the employer and the employee have concluded an open ended contract.

Where the sourcing of employees through a labour dispatch agency is not practical or desirable, fixed term employment contracts provide the best alternative for employers wanting to maintain some control over their workforce.

Contracts for specific tasks

Contracts for specific tasks are used where the work comprises:

  1. a single task such as development of specific software or technology;
  2. a specific project;
  3. seasonal work such as cotton picking / tea-leaf picking etc.;
  4. other short time or temporary work needed employment.

As it is often difficult for employers to anticipate the exact term of a contract for a specific task, the term of the contract is determined from the date the specific task begins to the date the task is completed.

A contract for a specific task is the only employment arrangement where the employer is allowed to set a termination condition, usually the date the task is completed. By using these types of contracts for specific tasks, employers avoid the risks associated with signing employment contracts of indefinite duration. However, no probation period is permitted in this kind of employment contract.

Part time contracts

Part time contracts are permitted under the Labour Contract Law, provided the employee agrees to this arrangement.

Part time contracts offer employers flexibility in that they provide for an employment arrangement where the employer does not have to commit to a fixed term or open ended contract where the position does not require a full time employee.

Under a part time contract:

  1. Employees are paid on an hourly basis rather than receiving a fixed salary (as is the case with open ended and fixed term contracts);
  2. Working hours may not exceed 4 hours per day and are limited to an aggregate of 24 hours per week;
  3. The employee may conclude an employment contract with another employer provided this does not interfere with his performance of his duties under the other contract.

While part time contracts offer significant flexibility for both the employer and employee the requirement that the employee consents to this arrangement limits their use in practice.

Probation periods

Probation periods are permitted under the Labour Contract Law and are often included in employment contracts because they give the employer the opportunity to assess an employee during the initial stages of employment.  Probation periods allow some flexibility for employers because if an employee proves to not be up to scratch during the probation period, the employee can decline to continue to employ him, thus avoiding the burden of an open ended or fixed term contract.

However, it is important to note that probation periods are subject to a number of restrictions.

First, there are restrictions on the length of the probation period.  If the term of the employment contract is more than 3 months but less than 1 year, the probation period cannot exceed 1 month.  If the term of the employment contract is more than 1 year but less than three years, the probation period cannot exceed 2 months. For an employment contract with a fixed term of 3 years or more or with an indefinite term, the probation term shall not exceed 6 months.

Second, pursuant to Articles 39 and 40 of the Labour Contract Law, an employee on probation can only be terminated in a limited range of circumstances.  Typically employers will terminate employees on probation where the employee has not met the recruitment conditions during the probation period – i.e. has proven to be incompetent.  However, there are strict procedures that must be followed before an employer can rely on this ground.  The employer must be able to show that it has formulated specific recruitment requirements and that the employee was informed of these at the time he was hired. The employer must also hold a performance review with the employee and identify where the employee has failed to meet the recruitment requirements.  Finally, the employer needs to inform the trade union of the cause of termination before the termination is conducted.

Third, probation periods cannot be used for employees on specific tasks contracts, part time contracts and contracts with a fixed term less than 3 months.

While probation periods do not give employers the same flexibility as may be the case in other jurisdictions, they are in our view worth having as they at least give employers a means to dismiss non-performing employees at any early stage of the contract provided the relevant procedures are followed.

Conclusion

China does not have a "hire and fire at will" system of employment.  To the contrary, Chinese labour laws and the justice system are designed to safeguard the rights of Chinese workers rather than protect the economic interests of the employer.  As a result, it can be difficult for employers to maintain efficiencies in what is a reasonably inflexible labour market.  Having said that, effective use of labour dispatch agencies, using fixed term contracts instead of open ended contracts, using part time contracts and contracts for specific tasks where appropriate and including probation periods in employment contracts are measures that employers can take to introduce some flexibility into the management of the workforce.  The key point is that when it comes to hiring employees, one size does not necessarily fit all.  Employers should look at the make-up of the workforce and the functions each employee or category of employees performs and select an employment arrangement that provides for maximum flexibility and efficiencies.

Footnote

NOTE: This restriction does not apply to representative offices of foreign companies who set up in China. As Rep Offices cannot employ employees directly, they must source employees through labor dispatch agencies. In these circumstances, labor dispatch arrangements are not subject to the restrictions on the proportion of dispatched workers employed in temporary, auxiliary or substitute positions.

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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