Preparing for China ‘s First Employment Contract Law
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On 20 March 2006 the State Council of the People’s Republic of China (“PRC”) released a draft of the Employment Contract Law (“Draft Law”) in order to solicit comments from the public. The Draft Law is intended, among other goals, to reflect a commitment to the working class. It is expected that the Draft Law will pass into law later this year, although it is still subject to further revision. The Draft Law will be the PRC’s first law expressly designed to address employment contracts and, as currently drafted, significantly strengthens employee rights and adds a range of restrictions on employers’ behavior.
Set out below are some significant issues that arise from the Draft Law:
• Employers are encouraged to use open-term contracts (i.e., a contract with no fixed termination date) rather than fixed-term contracts (e.g., a twelve month contract). Specifically, if a fixed-term contract expires without being renewed or expressly terminated, such contract will automatically convert into an open-term contract. Therefore, employers must establish human resource systems to ensure adequate notice that fixed terms contracts are due to expire.
• Severance payments equivalent to one month of salary for every year worked must be provided to an employee for lawful termination (e.g., when a fixed-term contract expires and is not renewed). Severance payment will be doubled in the event of an unlawful dismissal. Such a provision may encourage employers to outsource work to third party service providers, although the Draft Law attempts to limit outsourcing.
• Criteria for terminating an employee with a fixed term contract will become more stringent. As a result, employers may need to place greater emphasis on establishing and monitoring work performance standards and documenting sub-standard performance.
• Ambiguities in a contract will be resolved in favor of the employee. Therefore, employers may want to spend more resources preparing and scrutinizing employment contracts.
• Terminating a contract will require the participation of the relevant labor union. Employers may want to develop relationships and lanes of communication with the local labor union prior to encountering an employment-related problem.
• Employment relationships without a written contract will be deemed to be open-ended, regardless of what was agreed upon by the parties to the contract. For this reason, employers may want to ensure that all employment contracts are in writing.
• Mass layoffs (i.e., 50 employees or more) will require the approval of the relevant labor union, with down-sizing no longer being a sufficient justification. In addition, such layoffs will be seniority-based (i.e., recent hires being laid-off first).
• The maximum period for a non-compete provision for a former employee will be two years, with mandatory payments of 100 percent of the former employee’s salary being paid to such person. In addition, the non-compete obligation will be limited to territories within which there exists competition with the former employer. In the event of a breach, the former employer can be compensated no more than three times the amount paid to such person. Seconded off-shore employees (that can be bound by less restrictive non-compete agreements) may become more attractive.
• Penalty clauses against employees will be limited to reimbursing the employer for training expenses and payment for violating non-compete obligations.
• Probationary periods of employment will be restricted to no more than one month for ordinary employees, two months for technical employees and six months for senior technical employees.
• An employee can unilaterally and without notice terminate the employment contract if an employer fails to make payments to such employee’s social insurance funds.
• Company rules and regulations which impact the interests of employees will have to be discussed and approved by the relevant labor union or employee’s representative body, otherwise such rules will be deemed void.
Although the Draft Law has not yet passed in law, employers should begin planning for the Draft Law by reviewing human resource practices, reconsidering employment needs and determine what resources will be needed to prepare for the passage of the Draft Law.