China: China and compliance: Reviewing your employment situation

Last Updated: 22 December 2017
Article by Robin Tabbers
  1. Introduction

Often, foreign invested businesses in China seem to be unaware of the compliance requirements in the PRC. They think that they can let their employers work whenever they feel it is necessary and that they can hire and fire at will. To be clear, this is NOT the case. In fact, Chinese employment law favors the employee quite stringently. Furthermore, its enforcement in labor arbitration and courts is very effective. Therefore, employers who treat their employees in China as if they were employed in their own country may find themselves in a very uncomfortable situation. Luckily, many problems can be avoided if the company's employment contracts are structured correctly and if the employer complies with the PRC labor law. In this article, the most important points with regards to PRC labor law compliance will be dealt with.

  1. Employment Contracts

Firstly, it is an absolute necessity to have written employment contracts with every employee. The employment contracts must be specific to China, so using standard contracts that are also used in the home jurisdiction is not advisable. These contracts will more likely than not contain plenty of clauses that will be void in China. It also signals to the Chinese courts that the company does not take the Chinese legal culture very seriously and could end up biasing the court against them during a procedure.

When drafting employment contracts, term and probation period are key considerations, and mandatory rules apply, and should not be violated. It speaks for itself that the employee must receive more than the minimum wage. The minimum wages differ from city to city and change very often, so it is crucial to stay on top of the recent developments. Therefore, pay special attention to the social insurance contribution levels, which are often - incompliantly - based on lower base levels than factually should apply.

Furthermore, it is worthwhile to protect the company's IP and trade secrets in the employment contracts. Any successful company will have several trade secrets they do not want to leak. Therefore, a non-disclosure clause is an essential part of a good contract. In addition, a non-compete clause can be useful. This will make sure (former) employees abstain from joining the competition. Please note however that the law on non-competes is quite extensive. The most important thing to consider is that the PRC law allows non-competes for the duration of two years, but this can be longer depending on local laws. It also requires the employer to pay the employee an economic compensation. This compensation is agreed between employer and employee. If they fail to do so, this compensation will normally amount to default 30% of the wage during the 12 months before termination.

  1. Foreign Employees

A WFOE may be employing several foreigners, who are then subject to special regulations in the PRC, and obtaining the necessary paperwork can be time consuming. Besides having to comply with basic requirements like being in good health, and having no criminal record, foreigners are also subject to specific local laws. For example, cities like Shanghai and Beijing require foreigners to have several years of relevant experience and at least a bachelor degree before allowing them to work there.

Pay extra attention to the fact that contracts with foreigners must comply with and be subject to PRC laws. This means that solely having contracts with foreign parent companies will not be deemed adequate for this purpose.

In most cities in China, foreign employees must contribute to social insurance funds, though some cities have not yet implemented adequate government systems for this purpose, which could save considerable employer cost (f.i. Shanghai., for the time being).

  1. Termination of Contracts

Finally, a company must act carefully when terminating employment relationships with its employees. China does not allow for at will employment, which means that an employee cannot be fired without due cause. Like many civil law jurisdictions, there must be legal grounds. One of the main legal grounds for lawful termination is violation of company rules. For this purpose, companies should have duly implemented (following strict mandatory procedures) an internal document that sets out the company rules and regulations. This should be a detailed document that describes as precise as possible how employees should behave. Without this document it becomes be very difficult to fire, or even sanction employees. Note that this document should be written in Chinese, otherwise chances are it will not be enforceable.

If an employment relationship is unlawfully terminated, the employee can demand reinstatement or compensation that is double to the compensation in case of lawful termination (yes, in cases of lawful termination with notice, there is still severance pay). If legal grounds cannot be found, it is advisable to negotiate with the employee and try to reach a suitable solution for both parties. Most of the time an adequate severance package will suffice, though if consensus cannot be reached, the employee may file a claim in labor arbitration which companies and their lawyers can then defend. Likewise, en employee whose contract is not extended after an initial contract, is entitled to severance.

It should go without saying that these are the general laws and regulations, but their application on a local level can vary quite strongly.

  1. Conclusion

It is common wisdom that prevention is better than the cure: compliance with employment provisions is thus key for running a successful WFOE or JV in the PRC, as this will significantly decrease the amount of money spent on labor arbitration and other legal issues. Especially in China where labor laws change frequently and locally, this does require extra diligence when dealing with employees. For this reason, your employment situation shall best be reviewed on a yearly basis.

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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Robin Tabbers
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