China: China Update – September 2008

Last Updated: 8 October 2008
Article by Daniel F. Roules

Labor Contract Law Implementing Rules Issued

Key Points:

  • Events leading to contract dissolution clarified
  • Methodology for calculating compensation on dismissal clarified
  • Events leading to employee penalties clarified

On September 18, 2008 the State Council promulgated the "Regulations on the Implementation of the Labor Contract Law of the People's Republic of China" (the "Rules") which complement the Labor Contract Law (the "LCL") that went into effect on January 1, 2008. The Rules focus on employment contracts, the related issues of contract termination/dissolution and compensation, and labor dispatch contracts. As there are no major substantive revisions in the Rules, the overall reaction of the business community has been positive if not rather muted.

First, the Rules emphasize an important revision introduced by the LCL, that all employers must execute written employment contracts with their employees. If an employee fails to sign a written employment contract within one month of the commencement of employment, then the employer is required to terminate the employment relationship and dismiss the employee. While agreed salary must be paid for services up to the date of termination, the Rules expressly exclude economic compensation. However, if after one month, but less than one year, an employer has failed to conclude a written employment contract with an employee, then the employee becomes entitled to receive double pay. If after one month, but less than one year, an employee fails to sign a written employment contract, then the employer must dismiss the employee and pay economic compensation. However, the rate is capped at three times the local area monthly average salary as published by the local or municipal government; the maximum number of years considered is 12.

If after one year, an employer has still failed to conclude a written employment contract, then the employer is required to immediately sign a contract and to pay double the employee's salary or wages from the end of the first month anniversary to the end of the first year anniversary of the commencement of the employment relationship.

The Rules elaborate on protection for employees who are transferred to another employer, not by their choice. In this situation, the period of work service considered is compounded for the purposes of calculating any compensation due for dismissal (if due). This provision is aimed at employment transfers during mergers and acquisitions.

On probation, the salary/wages payable during the probation period cannot be less than 80 percent of the salary/wages stated in the employment contract during the probation period or 80 percent of the minimum salary/wages payable for the position following expiration of the probation period. In no event can the minimum wage applicable to the employer's district be ignored With regard to open-ended employment contracts, it will be recalled that the LCL outlines several circumstances in which an open-ended employment contract must be concluded. The Rules clarify one such circumstance, that an open-ended contract should be signed where the employer implements a labor contract system for the first time or a state-owned enterprise rehires workers following restructuring provided the employee has been employed with the employer continuously for more than 10 years and is less than 10 years from retiring.

The dissolution and termination of employment contracts is one of the most important aspects of the LCL, consuming 14 articles of the law. The Rules neatly summarize the various events and circumstances that allow an employee and an employer to terminate an employment contract. Once the employment relationship is terminated, the employer must issue a Termination Certificate detailing the nature of the employment, the employment term and confirmation of termination. The Rules clarify a number of points regarding termination:

  1. If the employer terminates under Article 40 LCL, then the employee must receive 30 days notice or one month's salary. The Rules now clarify that the additional month's salary will be calculated based on the salary paid in the preceding month, as opposed to an average monthly salary over the previous twelve months which is sometimes argued.
  2. Often, an employer will terminate an employment contract due to an employee's occupational injury. In such case, the Rules confirm that the employer must pay economic compensation (per Article 47 LCL) plus medical treatment subsidies and employment subsidies based on China's occupation injury insurance program.
  3. Article 47 LCL details the methodology for calculating compensation payable to employees. Compensation is based on the number of years of service with the employer, at the rate of one month's wages for each full year employed.1 The Rules clarify: "one month's wages" refers to the "monthly wages that the employee deserves," this being inclusive of the hourly wage plus other earnings derived from the employer such as bonuses, allowances and subsidies.
  4. Penalties payable the employee must pay. The Rules confirm that where an employer terminates an employment contract due to the fault of the employee, the employee is required to pay a penalty to their former employer. The Rules mention five such circumstances where this rule applies, termination due to (i) employee's serious violation of employer's rules; (ii) employee's serious neglect of duty or engaging in malpractice for personal gain, and causing "severe damage" to the employer; (iii) employee entering into an employment contract with a third party resulting in the employee's inability to complete work assignments, or where work assignments are not completed despite the matter being brought to the employee's attention; (iv) the use of coercion or deception by the employee that causes an employer to execute an employment contract or to revise an existing contract; and (v) the employee being pursued for criminal liability.

Chapter IV of the Rules contains special provisions regarding labor dispatching, emphasizing the duty of employer's to comply with their obligations as set forth at Article 62 LCL; these are obligations relating to working conditions, the payment of overtime, training and wage adjustment. The Rules provide that where employers violate LCL provisions relating to dispatched employees, fines of between RMB1,000 and RMB5,000 per employee can be imposed.

The Rules are a welcome supplement to the LCL. Collectively, the LCL and the Rules serve to emphasize the important role that employment contracts can, and do, play in today's China. Especially welcome is the clarification of the events and circumstances that can lead to termination and dismissal, combined with the provisions detailing the compensation calculation methodology – these clarifications yield greater certainties and will certainly help reduce unnecessary labor disputes.

Diarmuid O'Brien, China Update Coordinator

China Improves Regulation Of Tendering And Bidding Activities

Key Points:

  • Provision for Public Announcement of Penalties
  • Complements the PRC Tendering and Bidding Law

In June 2008 to support the establishment of a credit system and a fair market in tendering and bidding activities, 10 PRC governmental agencies jointly issued the Recording and Public Notice on Illegal Activities in Tendering and Bidding Interim Rules ("Interim Rules").

The government agencies included the National Development and Reform Committee ("NDRC"), the Ministry of Industry and Information Technology ("MIIT"), the Ministry of Finance, the Ministry of Transportation, the Ministry of Commerce ("MOFCOM"), the Ministry of Housing and Urban-Rural Development, the Ministry of Supervision, the Ministry of Water Resources and the Legislative Affairs Office of the State Council.

The Interim Rules, which include four chapters and 21 clauses are effective January 1, 2009, and treat the illegal activities of tenderees, bidders, tender agencies and bid appraisal committees. Under the PRC Tendering and Bidding Law, relevant governmental authorities may impose administrative penalties on illegal activities in tendering and bidding, while the Interim Rules grant the NDRC power to publicly announce penalties including warnings, fines, confiscation of illegal gains, suspension or cancellation of tender agency qualifications, suspension of qualifications to attend bids for certain periods, cancellation of qualifications for membership of bid appraisal committees, suspension of project implementation, withdrawal of funds, suspension of provision of funds for construction provided by the state, and suspension of approval for construction projects.

Public announcements will include the parties' names, the illegal activities being penalized, the basis for the administrative penalties, decisions rendered, the time at which the administrative penalties were levied and the names of the authorities making the penalty decisions. The public announcement authority may also directly publish the administrative penalties decision issued by the administrative authorities.

The Interim Rules provide for relevant administrative authorities at the State Council or provincial level to make a public announcement within 20 working days after an administrative penalty decision is made. The duration of such public notices is generally six months, but if the restriction period of the administrative penalty prohibiting the parties from participating in tenders or bids is longer than six months, the duration of the public notice will be extended to cover the same period. The Interim Rules also set forth procedures for correcting a public announcement. If the parties consider the public announcement to be inconsistent with the administrative penalty decision, they may provide evidence of this and request a correction in writing from the public announcement authority. The public announcement authority must render any correction and notify the applicants if it finds that an error has been made.

Another notable aspect of the Interim Rules is that the public announcement authority need not suspend the public notice during a period of administrative appeal or an administrative lawsuit. If the administrative penalty decision is later changed or withdrawn, the public announcement authority must make the same change to its public notice and issue a special statement to that effect.

Historically, implementation of the PRC Tendering and Bidding Law experienced problems. A 2004 State Council document outlines problems in China's tendering and bidding activities and the Interim Rules are intended to address and improve this situation.

Jennifer Liu

Draft Law Of State-Owned Assets Deliberated

Key Points:

  • Clarification of Definition of "State-Owned Assets," and the Entities Competent to Manage Such Assets
  • Invalidation for Dishonest Transactions Leading to Loss of State-Owned Assets

On June 25, 2008 the Third Conference of the Standing Committee of the 11th National People's Congress deliberated the Draft Law of State-Owned Assets of the People's Republic of China and proposed significant revisions. Central purpose of the draft is to clarify both the definition of "state-owned assets," and the entities competent to manage these assets. This latter point is particularly important because of the existing overlap of agency jurisdiction. The other proposed revisions are as follows:

  1. Following the advice of some members of the standing committee, the Conference proposed that jurisdiction of the state-owned assets be narrowed to operational state-owned assets in the management of various state-owned enterprises.
  2. An earlier draft stipulated that state and local state-owned assets supervision and administration organizations, and other agencies and organizations with government authorization, represent the state as investors and supervisors. However, the latest draft stipulates that state and local state-owned assets supervision and administration organizations represent state and local government as both investor and supervisor. If necessary, the State Council and local government would be empowered to authorize other agencies to act as state-owned assets investors.
  3. The draft proposes to prohibit board chairs of wholly state-owned and state-owned holding companies from being general manager, unless otherwise approved by the agreement of investors or in a general meeting of shareholders.
  4. Under the new provisions, where collusion is found to have occurred in any deal involving the transfer or affiliated transfer of state-owned assets and which results in the loss of the assets, the transaction will be deemed invalid.

This invalidation is needed to prevent irregularities that can often lead to the loss of state-owned assets. However, it may also create market uncertainties given that parties may become reluctant to become involved in transactions involving state-owned assets for fear of possible subsequent invalidation.

These proposed revisions are significant in their scope and, if approved, may have considerable implications for the manner in which state-owned assets are managed and supervised. It is likely that once the final regulations are introduced, supplementary specifications by the State Council or other government departments will follow to solve other problems.

Edison Chen

Fresh Bid To Draw More Headquarters To Shanghai

Key Points

  • Establishment of HQs Encouraged via Start-Up Funding Grants, and Preferential Residency and Rental Policies
  • Up to 3,000 Headquarters Expected by 2013

In a fresh bid to attract more overseas enterprises, Shanghai's municipal government announced new regulations designed to encourage more multinationals to set up regional headquarters in Shanghai.

According to the new rules, newly registered companies, whether focused on investment or management, that select Shanghai for their regional headquarters will receive startup funding from the local government, as well as a preferential rental policy.

Regional headquarters should have comprehensive functions of operation management, capital management, research and development, sales, logistics and support service. Those contributing to Shanghai's economic development will receive special incentives. In addition, senior management of these companies will be granted "honors" by the local government.

The new rules also introduce preferential residency rules for employees of companies headquartered in Shanghai. 'High-level foreign managers' may apply for permanent residency status, while foreign hires of such companies will receive preference when applying for work permits. Domestic employees of regional headquarters and research and development centers will receive a Shanghai hukou (residency permit) more easily.

Liu Jie, an official with Shanghai Headquarters Economy Promotion Centre, told China Daily that by the end of 2007, more than 300 domestically listed companies and 183 multinationals had established their regional headquarters in Shanghai. Another 165 overseas-funded investment companies and 244 multinationals' research and development centers are located in Shanghai. So far, 10 more multinationals have reportedly been given the official go-ahead to set up their regional headquarters in Shanghai this year.

According to Liu, Shanghai has trumped other mainland cities in attracting regional headquarters of multinationals. However, in a sharp contrast to Hong Kong and Singapore, which are home to 6,000 and 9,000 headquarters respectively, Shanghai still has further to go.

Although Hong Kong and Singapore have certain advantages by way of superb investment environments, favorable government policies, high information transparency and preferential tax policies, Shanghai holds its own aces. It boasts a mature financial market, the most sophisticated infrastructure and a broad consumer base, and is regarded as the ideal place by many multinationals to expand their presence in China, Liu said.

Shanghai is expected to become home to 3,000 headquarters by 2013. Along with big names such as Unilever, GE and Alcatel, which have already set up regional headquarters in Shanghai, some multinationals are now considering moving their regional headquarters from Hong Kong or Singapore to Shanghai.

Lily Li

Mainland China And Hong Kong –Reciprocal Recognition And Enforcement Of The Decisions Of Civil And Commercial Cases Under Consensual Jurisdiction

Key Points:

  • Reciprocal Court Judgment Recognition and Enforcement Procedures Outlined
  • Two-Year Application Time Limit

Pursuant to Article 95 of the Basic Law of the Hong Kong Special Administrative Region ("HKSAR"), following negotiations, the Supreme People's Court and the HKSAR have concluded the Arrangement on Reciprocal Recognition and Enforcement of the Decisions of Civil and Commercial Cases Under Consensual Jurisdiction ("the Arrangement"), signed on July 14, 2006 and effective August 1, 2008.

According to the Arrangement, parties may apply to either a PRC court or a Hong Kong court for recognition and enforcement of a final decision of payment with judicial force made by either court in a civil or commercial case under a written jurisdiction agreement.

The term "final decision with executive force" refers, in mainland PRC, to either:

  1. Judgments rendered by the Supreme People's Court, or;
  2. Judgments rendered by a People's Court (District, Intermediate and Higher) that has been delegated jurisdiction at first instance of a civil or commercial case involving foreign, Hong Kong, Macao or Taiwan affairs, when an appeal is not allowed in respect of the first instance decision, no appeal is made within the prescribed time limit, or when an effective second instance decision or a decision made after the case are reviewed by the People's Court at the next higher level in accordance with the procedure for adjudication supervision.

"Final decision with executive force" in the HKSAR refers to an effective decision made by the Court of Final Appeal or the Court of Appeal of the High Court, the Court of First Instance or the District Court.

The "decisions" as mentioned in the Arrangement include decisions, verdicts, mediation awards and payment orders in the mainland and decisions, orders and legal cost appraisal certificates in the HKSAR.

The "written jurisdiction agreement" as mentioned in the Arrangement refers to an agreement concluded after the Arrangement became effective that expressly stipulates in writing that a People's Court or a Hong Kong court has exclusive jurisdiction over any dispute related to a certain legal relationship that occurred or may occur.

The "certain legal relationship" refers to a civil or commercial contract between the parties concerned, excluding a contract of employment or a contract to which a natural person is involved as a party for purposes of personal consumption, family affairs or other non-commercial purposes.

"In writing" means that the contract was concluded in the form of a written contract, letter, data message (such as a fax or e-mail) or other form that enables the availability of the contract content in a physical form that can be consulted at a future date.

In Mainland China, an application for recognition and enforcement of a civil or commercial decision must be filed with the Intermediate People's Court located at the defendant's place of domicile, residency or in the locality where the property of the defendant. In Hong Kong, application must be submitted to the High Court of the HKSAR.

If the defendant's domicile, residency and the locality of the defendant's property are in different jurisdictions, the applicant may file the application with the Intermediate People's Court in only one of these jurisdictions.

However, if the defendant's domicile, residency and the locality of the defendant's property are under the jurisdiction of both Mainland China and the HKSAR, the applicant may file the application with the competent courts of both places simultaneously, but the collective total amount sought in both enforcement applications cannot exceed the amount determined in the Decision.

The Arrangement also lists, in detail, the various documents that should accompany an application. Theses include a certificate issued by the Court rendering the final Decision evidencing that the Decision is, in fact, the Final Decision, as required by the Arrangement and that it can be executed at the place where it is rendered. Translation, notarization and legalization requirements are also set forth.

The Arrangement specifies that the applicable law in applications for recognition and enforcement shall be the law of the place of enforcement unless otherwise provided in the Arrangement.

The application time limit for recognition and enforcement of a decision is two years. For a decision made in Mainland China to be executed in the HKSAR, the time limit is calculated from the last day of the time limit for voluntary execution as stated in the Decision. If the Decision is to be executed in stages, the time limit is set from the last day of the time limit set for each stage or, if there is no time limit for performance contained in the Decision, then from the day when the Decision becomes effective. For a Decision made in the HKSAR that is to be executed in Mainland China, the time limit is calculated from the day when the Decision becomes enforceable, i.e., the date when the decision was made as indicated in the Decision or, if there is any other provision for the enforcement period, then from the date when the prescribed enforcement period expires.

Where the debtor identified in the Decision provides evidence to prove any of the following circumstances, the court accepting the application shall, upon verification, make a ruling to disallow its recognition and enforcement:

  1. According to the law of the place of the court of first instance selected by the parties, the jurisdiction agreement concluded by the disputing parties is invalid, unless the selected court has determined the agreement as valid.
  2. The Decision has been fully executed.
  3. According to the law of the place of enforcement, the court of the place of enforcement has exclusive jurisdiction over the case.
  4. According to the law of the place of the court of first instance, the party losing the lawsuit, by failing to appear in court, has not been summoned according to law or has been summoned but not been informed of the time limit for filing its defense. However, if the court of first instance has served the party with public notice in accordance with relevant laws and provisions, the party losing the lawsuit will be deemed as having been summoned according to law.
  5. The Decision was obtained fraudulently.
  6. The court of the place of enforcement, another country or an overseas region has made a decision for the same claim, or an arbitral agency has made an arbitral award for the same claim, and that decision or arbitral award has been recognized or enforced by the court at the place of enforcement.

Where a PRC court believes that enforcement of a Decision rendered by a HKSAR court is contrary to the public interest of Mainland China, or a HKSAR court believes that enforcement in Hong Kong of a Decision made by a People's Court is against Hong Kong's "public policies," then that court will not recognize and enforce the Decision.

The Arrangement includes provision for preservation and conservatory measures. Before or after accepting an application for the recognition and enforcement of a Decision, a court may, if the applicant so requests, order an attachment of property or other measures against the losing party.

Where a court in either jurisdiction refuses recognition and enforcement, an appeal can be filed with the next higher court.

Objects subject to reciprocal recognition and enforcement by courts on the Mainland and in the HKSAR include the amount determined in a Decision, the interest payable, and the attorneys' fees and legal costs ratified by the court, with the exception of taxes and penalties. In the HKSAR, legal costs refers to legal costs ratified by, or the payment whereof is ordered by, the judge or the registrar in the legal cost appraisal certificate.

–Linda Teng

Further Consideration Of China's IPR Administrative Law – Enforcement Still Required

Key Point:

  • SIPO and SAIC stress the effectiveness of the administrative track of the IPR regime

The Outline of the National Intellectual Property (IP) Strategy, issued on June 5, 2008 by the State Council, sets forth the mission and the goals of the government and the PRC intellectual property rights (IPR) system, with added emphasis on the measures necessary to continue the progress made in the area of IPR since China's accession to the WTO.

Although China's national IP strategy provides no detail as to provisions for implementing a program to realize these mission and goals, included in the outline are improving the IP regime, strengthening protection of IPRs and a mandate to implement strategic measures including improving the enforcement of IP rights. Key to the current IPR regime in China is the dual-track system, which offers IPR holders the option of filing complaints with the administrative authority responsible for administering protection of the particular IP at issue or pursuing an infringer in court (the judicial route), usually via a civil suit. The national IP strategy iterates the importance of improving the regime and strengthening enforcement so that IPR holders can avail themselves of laws and regulations that are practicable and enforced uniformly and efficiently.

Complaints from IPR holders abroad and in China include doubts as to the effectiveness of the administrative track in stemming the tide of infringing activity. In the face of these complaints, the State Intellectual Property Office ("SIPO") and the State Administration for Industry and Commerce ("SAIC") have continued to stress the effectiveness of the administrative track of the IPR regime. SIPO's website reports that in the first half of 2008, the AICs across the nation handled 21,000 trademark violations with goods valued at RMB397 million, and imposed RMB175 million in fines. A total of 53 suspects were referred to judicial authorities for criminal punishment. Information on these violations is available online.2

From 2003 to 2007, the number of patent disputes handled by local IP administrative authorities totaled 6,427 cases including 919 cases of counterfeit patents. Information on these disputes is available online.3

SIPO has recognized the administrative sector of China's IPR regime for its speed at resolving cases, relatively low expense and efficiency. According to SIPO, administrative legal enforcement of IPRs facilitates efficient resolution of IPR infringement cases.

The national IP strategy emphasizes the judicial track as the leader in efforts to strengthen IPR enforcement and achieve a more effective IPR system by:

  • Improving the trial system;
  • Optimizing the allocation of judicial resources;
  • Simplifying remedy procedures;
  • Carrying out studies on the establishment of special tribunals for handling civil, criminal and administrative IPR cases; and
  • Centralizing jurisdiction in patent cases, among other measures.

– LaRhonda J. Brown-Barrett

Draft Administrative Regulations On The Registration Of Resident Representative Offices Of Foreign Enterprises – Public Comments Requested

On August 29, 2008 the State Council's Legislative Affairs Office released a notice soliciting public opinion on the Administrative Regulation on the Registration of Resident Representative Offices of Foreign Enterprises ("Draft Rules"). The Draft Rules propose a number of revisions including the following:

First, Article 2 of the Draft Rules defines a resident representative office of a foreign enterprise as a non-profit generating organization without legal person status, established under regulations within China and undertaking activities ancillary to the business of the foreign enterprise.

A representative office may undertake non-revenue generating business activities such as market research, analysis and surveys; liaison activities; marketing and promotional activities, and other similar activities that are beneficial to the foreign enterprise, but do not amount revenue generating activities. Certain business activities must receive prior approval from the authorities according to relevant laws and regulations under Article 10.

Second, once an application for establishment of a representative office is filed, the registration authority must render a decision within 10 days. Subsequently, if there is any change in the status of the representative office, an application to update official records must be filed within 30 days.

Other clarifications include:

  • A foreign enterprise must apply for renewal of registration with the registration authority within 60 days of the expiration date.
  • If there is any change to the authorized signatory of the foreign enterprise, or the form of enterprise liability, capital or business scope as detailed in its memorandum and articles of association or its organization agreement, as well as to the representative office, the foreign enterprise is required to file with the registration authority within 30 days from the date of that amendment.
  • Representative offices are required to submit an annual report to the registration authority between March 1 and June 30 detailing their activities and other information related to the business of the representative office and the foreign enterprise during the preceding year.
  • The chief representative and the representative have the right to execute contracts under certain conditions with the written authorization of the foreign enterprise.

In addition, the Draft Rules clearly outline the functions and duties of the registration authority in investigating illegal acts and imposing legal liabilities for them.

Public opinions on the draft may be submitted before September 25, 2008 online at or by mail to P.O. Box 1750, Beijing, People's Republic of China 100017, or by e-mail to

Chen Junkang


1. Any period of more than six months but less than a year shall be counted as a year. For periods of less than six months, the compensation payable to an employee is half of his/her monthly remuneration.



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