In July 2006, Wal-Mart Stores announced that it would allow employees in China to unionize following criticism that it was exploiting lax labor laws in the country to keep costs low. The current PRC Labor Law was first enacted in 1994. In response to increasing incidents of labor unrest and employment disputes in recent years, a draft PRC Labor Contract Law ("Draft Law") was circulated for public comment on 20 March 2006. The Draft Law is intended to supplement the PRC Labor Law and is expected to come into force at the end of this year. The Draft Law focuses on strong protection of employees, as currently:-

  • not many contracts are set out in writing;
  • the term of labor contracts is too short;
  • labor contracts are poorly drafted; and
  • enforceability is poor.

Draft PRC Labor Contract Law

We now take this opportunity to identify some of the changes or implications of the Draft Law :-

Probationary Period

Under the current Labor Law, a probationary period may be agreed upon in a labor contract and the maximum probation must not exceed 6 months. The Draft Law shortens the probationary period. It proposes that for non-technical work, the maximum probationary period must not exceed 1 month. For technical work, it must not exceed 2 months and for senior technical work, the probationary period must not exceed 6 months. However, the terms "technical", "non-technical" and "senior technical" are not clearly defined in the Draft Law.

Severance Payments

Currently, employers prefer to enter into fixed-term labor contracts with employees, given the restrictions on terminating open-term labor contracts under the Labor Law.  The Draft Law would make the use of fixed-term labor contracts less attractive because employers would have to pay severance compensation to fixed-term employees if their contracts were not renewed after expiration.  Therefore, severance pay will be payable upon the natural expiry of the employee’s contract and the proposed compensation would be at least one month’s salary for each year of service.


The Draft Law recognizes post-employment non-competition obligations, but limit their enforceability to a maximum duration of two years and the geographical area where actual competition may reasonably incur. The current Labor Law does not impose a geographic restriction and permits the maximum duration to enforce a restrictive covenant to be three years. For the non-competition obligations to be enforceable, the Draft Law also provides for a minimum compensation equal to the employee’s annual salary which must be paid by the employer upon termination. However, it is still not clear whether such payment will apply where the restricted period is for less than 1 year.

Company Rules/Employment Handbook

Any provision in the company’s employee handbook or other rules directly involving the "personal interest" of employees can be finalized only after discussion with the labor union or the employee representative body. The term "personal interest" is not clearly defined. The current Labor Law imposes no such requirement and thus it will be more difficult for employers to impose company rules unilaterally.

Representative Offices

Under the current Labor Law, staff hired by representative offices must be employed from designated labor service agencies such as FESCO to provide services to foreign enterprises. Direct private hiring is prohibited. Under the Draft Law, representative offices can enter into direct employment agreements with their staffs after their first year of service.

Contract Interpretation

If any term in an employment contract is found ambiguous, the interpretation that favours the employee shall prevail under the Draft Law.


Under the Draft Law, it seems that there will be more obligations on employers and higher costs due to the increase in severance payments. Therefore, employers are advised to review their company rules, employment contracts and non-competition agreements, and be more cautious in hiring people as it will be more difficult to terminate their employment.

If you are uncertain about your rights or obligations under an employment contract or relationship, lawyers in our Employment Department will be happy to assist you with any inquiries you may have regarding employment or data privacy issues in Hong Kong or the PRC.

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.