The New PRC Employment Contract Law

- Armstrong Teasdale LLP

On June 29, 2007, after more than two years of drafting/deliberation and an unprecedented amount of public comment, China enacted the PRC Employment Contract Law (the “ECL”). The following article summarizes key provisions of the PRC Employment Contract Law, which became effective on January 1, 2008. The PRC Employment Contract Law has been controversial among employers in China because of its increased employee protections. It is critical for foreign investors to understand the ECL before entering into new contracts with Chinese employees.

Goals of the PRC Employment Contract Law

The ECL incorporates many new legal provisions, reiterates many of the basic requirements of the old PRC Labor Law and adopts many provisions from various local Chinese employment regulations.

The ECL generally promotes the following three main goals, as set forth below, which provide the rationale for many of its new provisions:

Favor long-term employment relationships by building in biases against shorter-term employment contracts.
Increase the presence and involvement of trade unions in the workplace by requiring employers to consult with the trade unions regarding a broader spectrum of issues.
Increase the power of the individual employee vis-à-vis the employer by granting employees greater rights.

Brief Summary of Key Changes

Formulation of Employer’s Rules

The employer in China must formulate rules and regulations that govern the workplace. Adoption of an employer’s rules that bear directly on the immediate interests of the employees requires:

Discussion with, proposal and comment by all employees or by an employee representative congress
Negotiation with the trade union or the employee representatives, and
Announcement or notification to all employees.

Empowerment of the Trade Unions

The ECL increases the pressure on employers to allow for the establishment of a trade union.
The ECL increases the presence and involvement of trade unions in the workplace by requiring the employer to
- Develop internal rules with the trade union’s involvement, and
- Consult with the trade union (or the employee representative, in the absence of a trade union) regarding the formulation or implementation of the employer’s policies that bear directly on the immediate interests of the employees.

Employer’s Obligation to Disclose and Rights to Disclosure

When recruiting an employee, the employer:

shall truthfully disclose to the employee the information relating to the job, and
has the right to know basic information about the employee in direct relation to the employment contract, which the employee shall disclose truthfully.

Written Employment Contract Requirement

If no written employment contract is signed within one month of an employee commencing work, the employee is entitled to double salary.
If no employment contract is signed within one month of an employee commencing work, the parties are deemed to have signed an open-term contract.

Open-Term Contracts Favored

The ECL requires employers to execute open-term contracts with employees in stipulated circumstances unless the employee requests otherwise. For example, an open-term contract should be concluded after an employee has completed two fixed-term contracts.
An employer must pay double salary if it insists on a fixed-term contract when the employee is entitled to an open-term contract.

Probationary Period

The maximum duration of a probationary period will hinge on the length of the employment contract, and allowable maximum probationary periods have been slightly shortened.
The employer may not impose more than one probation period on an employee.
During probationary period, an employee’s salary may not fall below a certain minimum.

Training Expenses and Service Period

An employer may require an employee to agree to a fixed service period in exchange for the “training expenses” of “professional technical training.”
If the employee resigns before completing the agreed-upon service period, the employer may recoup from the employee liquidated damages that may not exceed the pro-rata portion of the training expenses related to the remaining portion of the service period.

Non-Compete

The ECL restricts the use of non-compete covenants to senior management, senior technical personnel and other personnel who are obliged to maintain the employer’s trade secrets.
The duration of non-compete covenants shall not exceed two years following termination of the employment contract.
The employer should pay the former employee compensation in monthly installments during the post-termination non-compete period

Liquidated Damages

Liquidated damages may only be imposed on an employee for breach of non-compete covenants and of minimum service periods for training

Bases for Employer to Terminate An Employment Contract without Prior Notice

The ECL provides the following two additional bases for the employer to terminate an employment contract without paying severance:

the employee has a second position with another employer, which adversely affects the employee’s performance, or the employee refuses to resign from the other position, despite being given the opportunity to do so; or
the employee provided false information during the hiring process, which information the employer relied upon to form the employment relationship

Mass Layoffs

The ECL expands the grounds to justify a mass layoff, but increases the administrative burden on the employer to justify the mass layoff, which reflects the goal of encouraging longer term employment relationships.
The ECL prescribes specific provisions for the retention of employees irrespective of job performance but provides preferential retention provisions for those employees satisfying stipulated criteria.
The ECL restricts justification for mass layoffs to certain circumstances

Protected Categories of Employees

The following protected categories are added to the categories of employees with protection from termination:

those employees exposed to occupational disease hazards before or during a medical checkup; and
long-serving employees close to retirement

Severance Pay

The ECL broadens the circumstances under which an employer must pay severance. Marking a significant departure from current practice, the ECL requires an employer to pay severance:

- upon the expiration of a fixed-term contract which the employer does not renew, unless the employee refuses to renew the contract on the same or better conditions, or
- when the termination is due to bankruptcy, dissolution or revocation or the business license.

To reduce the effect of this new provision on employers with highly paid workforces, the ECL places a cap on the amount of required severance by limiting the severance amount to

- three times the average “monthly wage” based on the employee’s wages for the preceding year,
- for no more than twelve years of work.

However, the cap on severance will not apply to severance entitlements that accrued prior to the ECL’s effective date

Penalty for Unlawful Termination

If an employer terminates an employee without legal basis, the ECL requires that the employer reinstate the employee at the employee’s request.
If the employee does not request reinstatement or if reinstatement is not possible, the employer must pay the employee damages in the amount of twice the specified severance

Secondment

A staffing agency must enter into fixed-term contracts of at least two years.
Seconded employees are entitled to equal pay for equal work.
Seconded employees have the right to join the trade union of the staffing agency or that of the company contracting the temporary worker

Part-Time Employees

A part-time employee is an employee who works no more than an average of 4 hours per day or 24 hours in total per week for the same employer.
The compensation for part-time labor may not be lower than the minimum hourly wage rate.
The payment schedule for part-time employees may not exceed once every 15 days.
Either oral or written employment contracts are acceptable.
Either the employer or the employee may terminate the employment contract without notice and with no severance payable.

Armstrong Teasdale LLP is a U.S.-based international law firm with its PRC headquarters in Shanghai. With 269 attorneys practicing in eleven locations, the firm serves a dynamic national and international client base in virtually every area of law. In China, Armstrong Teasdale LLP specializes in assisting foreign companies in their foreign direct investment projects. Go to our website at www.armstrongteasdale.com.

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