China: Employment Notes From Greater China

The Workplace
Last Updated: 1 March 2010
Article by Pattie Walsh and Amber Millhouse

Employment law challenges for foreign companies seeking to establish a business or extend their operations in Greater China.

On 1 July 1997, the People's Republic of China (PRC) resumed the exercise of sovereignty over Hong Kong, which became the Special Administrative Region (HKSAR) of the PRC. The Basic Law of the HKSAR (Basic Law) came into effect on 1 July 1997 and is the constitutional document for the HKSAR.

The Basic Law contains the concept of 'one country, two systems' and expressly provides that the laws previously in force in Hong Kong continue to be maintained. The exception to this is any laws that contravene the Basic Law. The Basic Law expressly states that the HKSAR courts may refer to precedents of other common law jurisdictions when making decisions. Further still, it states that the Courts of Final Appeal and the judiciary of the HKSAR are given the power to invite judges from other common law jurisdictions to participate in the judicial process. Given the marked similarity between much of the legislation in the HKSAR and legislation from England and Wales, in practice this means that there is heavy reliance on the authority from the English courts.

The Hong Kong Employment Ordinance (Cap. 57) (Employment Ordinance) sets out a statutory framework to govern many aspects of the employment contract. The Employment Ordinance is fairly inflexible in its drafting and can be difficult in places to understand.

The PRC's employment laws are complex and vary from region to region in terms of their legal content and how they are enforced. For instance, employers are still grappling with two significant pieces of legislation which came into effect from 1 January 2008, the PRC Labour Contract Law (LCL) and the Employment Promotion Law (EPL), which have been implemented in different ways throughout the country.

Only a PRC entity can enter into effective labour contracts in the PRC. For foreign companies they must arrange their employment contracts using the additional layer of a labour agent such as the Foreign Enterprise Service Company (FESCO). This leads to an unusual arrangement, whereby the employer in law is often not involved in the day to day control of its employee who, in all but name, is employed by the foreign company. There are practical issues that arise out of this arrangement, not least being the challenge in protecting confidential information and intellectual property. In all, there are some unusual elements of Hong Kong and PRC employment law which can cause difficulties for employers. We have summarised some of these below.

ISSUES SURROUNDING TERMINATION

In contrast to many other jurisdictions, including Australia, employers in Hong Kong are not bound by any statutory procedural formalities for carrying out terminations of employment. Further, there is no 'unfair dismissal' regime in Hong Kong to provide a remedy for employees whose employment has been unfairly terminated simply as a matter of process. However, the Employment Ordinance provides remedies to employees whose employment contracts have been terminated in a manner which does not comply with the Ordinance or whose employment has been unreasonably terminated in order to extinguish or reduce a right, benefit or protection awardable under the Employment Ordinance. These protections are fairly limited.

By contrast in the PRC, even terminations by mutual agreement lead to economic compensation. If mutual termination is not an option due to lack of agreement with the individual, it is difficult to bring the relationship to an end and even poor performers are well protected under PRC law. Before terminating an employee's employment, an employer must establish that the individual does not meet the role requirements. They must also engage in significant efforts to retrain the individual and seek other employment options within the employing organisation. If this fails, any termination requires 30 days' notice or payment in lieu, along with payment of economic compensation. In addition, the LCL provides that if the employer terminates the labour contract of the employee in the wrong way, the employer has to pay double economic compensation to the employee.

Given the difficulties of terminating labour contracts in the PRC employers will often use fixed term contracts that terminate at the end of a specified period. However, the LCL also makes this a challenging option as individuals whose fixed term labour contracts are renewed on two occasions will be able to require that any new contracts are on a non-fixed term or indefinite basis with all the protection this brings with it.

DISCRIMINATION

Discrimination legislation in Hong Kong provides similar protections to employees as those that exist in Australia. The Sex Discrimination Ordinance renders unlawful acts which discriminate against persons on the grounds of sex, marital status, pregnancy and sexual harassment as well as victimisation. The Disability Discrimination Ordinance makes unlawful acts which discriminate against a person on the ground of disability. Harassment, victimisation and vilification on the ground of a person's or a person's associate's disability (defined as a person's spouse, a person living with a person on a genuine domestic basis, relative, carer, or another person who is in a business, sporting or recreational relationship with the person) are also unlawful. The Family Status Discrimination Ordinance renders unlawful acts which discriminate against persons on the grounds of family status (ie the status of having responsibility for the care of an immediate family member). The Race Discrimination Ordinance (RDO) makes it unlawful for employers to discriminate on the grounds of race (which includes colour, descent or national or ethnic origin of a person but interestingly, grounds such as nationality, citizenship, resident status, length of stay or indigenous villager status of a person are not grounds of race under the RDO).

In the PRC, several laws and regulations have been drafted, revised or passed concerning the protection of the rights of some groups, for example, women, the disabled, HIV carriers and Hepatitis B Virus carriers. The protection of equal rights in employment is included in these laws or regulations. The EPL states that the employee shall not be discriminated on the basis of nationality, race, sex or religious belief. It also extends the anti-discrimination protection to rural workers who are employed in cities who should be granted the right of employment equal to that of urban workers and carriers of infectious diseases (but who are otherwise healthy and whose condition does not affect their ability to work). Perhaps most importantly, under the EPL, employees in the PRC are given a legal basis to bring a civil claim for unlawful discrimination against their employers in the People's Court.

TRADE UNIONS

Although Hong Kong residents have the right to form and join trade unions, the level of participation in trade unions is relatively low and, in fact, Hong Kong enjoys a relatively harmonious climate of industrial relations.

The PRC Government supports trade unions. PRC companies face pressure from the Government and the local federation of labour union to set up a labour union. This is despite the fact that a labour union must be established by the employees rather than the employers. Employers must contribute and pay funds to its labour union, in an amount equal to two percent of its total wages on a monthly basis. Unions will be involved in collective negotiations and are required to be notified of any termination of employment made by the employer.

HOLIDAYS AND ANNUAL LEAVE ENTITLEMENTS

In Hong Kong, employees are entitled to 12 paid statutory holidays under the Employment Ordinance. However, it is not uncommon for employers in Hong Kong to enhance this entitlement and allow employees to take general holidays – which are the 12 statutory holidays plus an additional five holidays – as paid holidays. The number of public holidays in the PRC increased from 10 to 11 days on 1 January 2008.

In Hong Kong, anyone employed under a continuous contract of employment for a minimum period of 12 months is entitled to paid annual leave. This is calculated on a sliding scale depending on length of service.

There is also a clear implementation of annual leave entitlements in the PRC. If an employee has at least one year's continuous service, he or she will be entitled to paid annual leave of between five and 15 days depending on their length of service, in addition to public holidays. Certain employees will not be entitled to annual leave at all. These include employees who are entitled to a winter and summer vacation (where the total days' vacation is more than their annual leave entitlement), employees who have taken at least 20 days' fully paid personal leave in any leave year, or employees who have taken a certain period of sick leave (depending on continuous service).

EMPLOYEE BENEFITS

In Hong Kong sick leave is at a rate of two paid sick days each month in the first year of employment and four paid sick days each month thereafter. The maximum accumulation at any one time is 120 days. These accrued days are paid at a rate of four-fifths of the employee's average daily wages (calculated over the previous 12 months) but payment is only due when an employee is off sick for four consecutive days or more. Once the employee is off for at least four days all the sickness days are deemed subject to the sickness allowance up to the accrued maximum.

In the PRC, subject to local requirements, employers and employees are generally required to make contributions on a monthly basis for social security benefits in retirement, illness, unemployment, work-related injury, child bearing and housing. The contribution generally amounts to around 40% of the employees' monthly salary.

WAGES AND WORKING HOURS

With the exception of certain cleaning and security workers who are covered by voluntary provisions, there are currently no formal legal requirements in Hong Kong with regard to minimum wages. However for the first time in Hong Kong's legal history, a Minimum Wage Bill (Bill) was introduced into the Legislative Council in June 2009 and if passed, will apply to all employees, subject to limited exceptions including some students and live-in domestic workers. The Bill is intended to set a statutory minimum hourly wage in Hong Kong. Further, apart from the mandatory provision of rest days, there is no regulation on maximum working hours in Hong Kong (except in regard to the employment of children and young persons) although the Bill will impose an obligation on employers to keep records of the total number of hours worked by an employee in a wage period. There is no requirement to pay overtime as long as the obligations with regard to the payment of the minimum wage are complied with.

Under PRC labour law, standard working hours means eight hours a day, 40 hours a week. In relation to work done in excess of the standard working hours, generally employers in the PRC must pay employees a specified overtime rate (of between 150% and 300% of the employee's daily salary rate or hourly salary rate depending on when the employee carried out the overtime). There are exceptions. Overtime requirements are often ignored and not fully adhered to.

GUIDE

Pattie is one of Asia's leading employment lawyers having been recognised as a leading employment lawyer in Asia Pacific Legal 500 and Chambers Asia and also listed as an expert in the Guide to the World's Leading Labour and Employment Lawyers. With her team Pattie has prepared a guide to the major employment issues in Hong Kong and Greater China – From Hiring to Firing. If you would like to receive a copy of either guide please contact: Rebecca Veli at rebecca.veli@dlaphillipsfox.com

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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