China: 10 Fundamental Issues For Employers In Managing Employees

Last Updated: 10 January 2018
Article by TransAsia Lawyers

The PRC Employment Contract Law (ECL), the landmark employment law legislation in China, came into effect on 1 January 2008. Its implementing regulations were promulgated and became effective later on September 18 in the same year. Together they outlined various general principles pertaining to the establishment of employment relationships as well as the conclusion, performance, amendment, termination and expiration of employment contracts. However, during their daily operations many employers in China (particularly foreign-invested enterprises) still need to study closer and to fully understand the requirements of the ECL and its implementing regulations.

We set out below 10 basic issues to which employers must pay particular attention:

1. Basic Understanding of National Labor Laws, Local Rules and Judicial Practices

Many companies have become entangled in disputes and incurred substantial costs in order to resolve the same. Indeed, such situation could have been avoided with a more thorough understanding of the law and greater attention being dedicated to a few vital issues. Further, some multinationals often only realize when confronted with a labor dispute that China's employee protection regime far exceeds that of their home jurisdiction. Moreover, they were perplexed by and even stunned by the fact that the employer carries in China the entire burden of proof to justify the basis for the termination where an employee is terminated by the employer unilaterally.

In addition, apart from national laws, employers must be familiar with the local rules, regulations and judicial practices of the locality in which they operate or are incorporated, since the local rules may vary among the localities. As an example, an employment contract or employee handbook prepared for Shanghai could conflict with the local rules in Beijing, or vice versa. For example, in Beijing senior management personnel may work under a flexible working hours system without the prior approval of the local labor bureau and are also not entitled to overtime pay even if they work on statutory holidays. In contrast, in Shanghai senior management personnel must still apply for and obtain the prior approval of the local labor officials to work under a flexible working hours system. Indeed, even if such approval is obtained, the employer is still required to pay overtime pay equivalent to 300% of the normal salary of the relevant senior personnel for work performed on statutory holidays.

In addition, it is important to note that China is not a case law country. Therefore, judicial practices in different cities often vary significantly. A case heard by an arbitrator or a judge in one city (or even in different districts in the same city) may carry a totally different outcome.

2. Employee Handbooks must be PRC Law-Compliant, Specific, Detailed and Well-Publicized

Many employers (foreign-invested and domestic) fail to fully understand the PRC law requirements for valid and legally binding internal rules and policies (generally implemented via an employee handbook).

Article 19 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Law in the Trial of Labor Dispute Cases1 sets forth 3 preconditions for internal rules and policies to become effective, namely that they:

  • must not violate any national laws, administrative regulations or policies;
  • must have been enacted via "democratic procedures"; and
  • must have been publicly announced to the employees.

Only when all 3 criteria are satisfied could the rules and policies be referred to by the people's court for labor dispute trials.

These criteria are further clarified by paragraph 2 of Article 4 of the ECL. Accordingly, in order for an employer's rules and policies to be admissible as evidence in labor dispute cases, they must have been formulated through an employee consultation process under which the employees' opinions are solicited and in turn the trade union or employee representatives are consulted on an equal basis.

According to the Rules on the Democratic Management of Enterprises2, the "democratic procedures" require a quorum of over two-thirds of all employees or employee representatives involved with the consultation process, subsequent to which the rules and policies may not be passed unless supported by the votes of over half of all employees or employee representatives. Thereafter, the rules and policies must be publicly announced by the employer to the employees. Not surprisingly, each locality may in practice enforce these requirements differently.

Many foreign enterprises with a "global" management policy simply choose to adopt their offshore internal rules and policies for their China employee handbook without making any adjustments based on the actual situation in China and specific Chinese legal requirements. Indeed, we can all appreciate the rationale behind the "global" approach. However, not all such global policies are applicable for China and among the China-specific topics often absent from imported or poorly drafted employee handbooks for use in China are those provisions detailing employee misconduct and the "corresponding punishment" for each level of disciplinary offence. As a result, some employee handbooks may contain a list of prohibited acts but totally lack sufficient detail or provisions on the "corresponding punishment", thereby making it impossible to punish those employees who have violated the disciplinary provisions.

3. Failing to Agree on Non-compete Obligations upon Execution of an Employment Contract

Many employers believe it to be unnecessary to stipulate a non-compete obligation in the employee's employment contract or to sign a separate non-compete agreement with employees. Generally such employers only realize their oversight when they find it impossible to prevent the employee from joining a competitor upon resignation. This is particularly problematic when the employee holds a senior management or senior technical position.

If indeed the employer wishes to impose the non-compete obligation on the employee upon his departure from the company, it would need to negotiate the terms with the employee including the scope, duration and monetary compensation payable. However, if the employee is determined to leave and join a competitor, he would most likely either refuse the terms or table very high demands. This would in turn put the employer in a very passive position. Another scenario involves the employer having agreed on the non-compete terms with the employee but not on the compensation payable, such that the employee could subsequently claim compensation from the employer after his departure by alleging that he had already performed the non-compete obligations.

Accordingly, an employer can best protect its interests, minimize legal risks and prevent labor disputes if it agrees upon all the non-compete terms including the compensation amount (which must not violate local rules) with the employee when signing the employment contract. After all this is when the employee would be most amenable to accept the non-compete terms in order to secure the job opportunity. Importantly, under the ECL only senior management personnel, senior technical personnel or employees bound by confidentiality obligations could be subject to non-compete obligations.

4. Foreign Law Is Not Applicable

Many foreign enterprises operating in China specify in their standard contracts that the law of their home jurisdiction is applicable. The basis for this position is understandable but it violates the ECL. The ECL explicitly requires that employment relationships between enterprises within the territory of China (which for purposes of this law excludes Hong Kong, Taiwan and Macau) and employees must be governed by PRC law.

5. Western-Style "Employment At-Will" Principle Will Not Apply to China

Many foreign enterprise employers operate under the misconception that "employment at-will" policies (i.e., termination of employees without cause) can apply automatically to employees in China. However, Chinese law imposes many restrictions on an employer for employee termination. Indeed, termination without cause is prohibited outright, even during the probationary period.

In China, wrongful termination provisions are also quite different from those in the U.S. or other foreign jurisdictions. Under the ECL, where an employee has been wrongfully terminated or the contract has wrongfully expired, he may request either reinstatement or compensation of double the applicable statutory severance amount. Importantly, the choice of reinstatement rests solely with the employee when he initiates legal action.

Where an employer intends to legally terminate an employee for incompetence, it must first offer the individual either job training or an adjusted job position. Thereafter the employer may only terminate the employee if it is able to prove that the individual is still unable to perform satisfactorily and at which point it must give a 30 days' notice (or one month's salary in lieu) and pay severance. This procedure is further complicated by the fact that the law is silent on the requisite duration of the training period or what type of new position should be provided.

6. Employee's Waiver of Overtime Wages Is Invalid

Fierce market competition often leads to employers requesting employees to put in longer working hours i.e., beyond the legal standard of 8 hours. In fact, blue-collar employees in many manufacturing enterprises even proactively request such arrangement in order to increase their income. However, for those employees who are subject to a standard working hours system or a comprehensive working hours system as approved by the local labor bureau, it is illegal to agree to work extra hours beyond the statutory limit or to waive their right to overtime wages (even in writing). The employer simply cannot defend itself on the ground that "the employee personally requested to work overtime".

Disputes over overtime pay are particularly common especially in employee termination cases, restructuring or sell-out exercises, as that is when the employees would generally request the employer to pay all compensation due or unpaid items owed to them. There is no statutory time limitation for the employees to claim their rights if the violation is continuous. Therefore, it is not surprising that collective actions always involve back payment claims for overtime pay going back 10 years or even longer. Furthermore, under such circumstances, the employees may terminate their employment contracts on grounds that the employer has failed to pay their remuneration on time or in full and demand for severance pay. Invariably, the amounts involved in such collective disputes are significant.

7. Importance of the Chinese Version

Employment contracts and other employment-related documents prepared by foreign companies operating in China often specify that the foreign language version will prevail for dispute resolution purposes.

However, under PRC law, only the Chinese version will prevail. In the event of a labor dispute, the arbitrators or judges will only review and rely upon the Chinese version when issuing their decisions. If there is no Chinese version, then a Chinese translation will have to be undertaken by a qualified Chinese translation agency whereupon there is a risk that the work of such translation may not reflect the true meaning and intent of the employer. Accordingly, all employment documents must have Chinese versions and specify that the Chinese version will prevail where bilingual versions are prepared.

8. Plan Ahead to Satisfy the Strict Evidentiary Requirements for Labor Disputes

PRC law requires that all employment disputes must first be submitted for resolution to the local labor dispute arbitration commission. Either party may appeal against the decision to the competent people's court (lower court), followed with a final appeal to the higher-level people's court.

Strict and specific evidentiary rules apply throughout the stages mentioned above. The fundamental reason why many employers are unsuccessful in winning cases lies in their inadequate preparation of the evidence and failure to take appropriate measures to collect and preserve such evidence. Solid and substantive evidence is required for all labor dispute cases, with an emphasis on documentary evidence. That is the reason why all employment documents must be thoroughly prepared.

In addition, under PRC law audio- and video-recordings are admissible as evidence, provided that they are not obtained by way of "entrapment" and have not been tampered with. However, collecting and preserving evidence is a very technical exercise and that is precisely why employers are advised to seek professional legal advice for undertaking such task.

9. Notification of the Trade Union When Unilaterally Terminating an Employee's Employment Contract

In accordance with the ECL, where an employer which has already established a trade union wishes to unilaterally terminate an employee, it must first notify the trade union of the relevant reasons and also study the union's comments and opinion and advise it in writing of the final termination decision. In practice, if the employer has not set up a trade union, the safest approach is for it to notify the higher-level trade union where the employer is located.

If an employer has failed to notify its trade union of an impending termination and proceeds to terminate the employee, then it must do so as early as possible before the employee initiates litigation. If not the termination could be deemed wrongful due to procedural defects.

10. Employees Need to Pay Nominal Fees to Initiate Legal Proceedings

There are no filing fees to initiate a labor dispute arbitration case. As such, filing for arbitration is free for employees. Indeed, if they are dissatisfied with any arbitral award and wish to appeal against the award in the local people's court, they would only need to pay RMB 10 as the litigation fee. Accordingly, it is very cheap for employees to initiate a dispute against their employers.

As mentioned above, in the case of unilateral terminations by the employer, it always bears the entire burden of proof to justify the termination. In contrast the employees do not need to be concerned with evidentiary issues. Therefore, the legal costs for employers to defend such legal proceedings far outweigh those for employees. Based on the available data from the past few years, employees continue to be victorious in about 80% of the labor dispute cases.

Conclusion

Employers operating in China must fully understand PRC laws, regulations and local judicial practices. If not, any failure on the part of their part to formulate the requisite employment documents as required by the law (or in a justifiable/reasonable manner where the law is silent on certain points) or is poorly prepared when dealing with the termination/expiration of employment contracts, it would most likely result in a time- and cost-consuming labor dispute.

In conclusion, when preparing employment documentation and formulating employee management systems, employers must pay careful and detailed attention to PRC legal requirements and local practices. Indeed, that is the only way and the first step for employers to take in order to prevent disputes from breaking out and avoid meaningless labor disputes.

Footnotes

[1] Judicial Interpretation [2001] No.14, effective 16 April 2001.

[2] Promulgated on and effective as of 13 February 2012.

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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