Andrew Glenn and Nestor Gounaris
December 2007
INTRODUCTION
The Chinese government recently implemented the New Labor Contract Law (the “New Law”), which directly impacts a wide range of issues relating to employment contracts including the form and content of labor contracts, post-contract liabilities for employers, training reimbursement, adjusting employment levels, part-time employment framework and cost incurred from securing seconded support through employment agencies.
The New Law will take effect 1 January 2008, meaning contracts written after 1 January 2008 must comply with the New Law. Employers should note that pre-existing labor contracts will be grandfathered under the New Law. Nevertheless, we can expect the final interpretation of grandfathered contracts to be subject to a degree of enforcement based on the New Law.
SIGNIFICANT REVISIONS
WRITTEN LABOR CONTRACT The New Law increases the focus on the procedure and the content of labor contracts. Employers and employees must enter into a written labor contract within one month of the employee’s start date. Under the New Law, if an employer fails to do so within an employee’s first month of employment then such employee must be paid double salary for each month the written contract is not in place. In addition, if the employer fails to offer a written contract for an entire year, then the employee will automatically receive an open-ended contract .
EXPANDED POST-CONTRACT LIABILITIES Employers now face expanded post-contract liabilities. Prior to the New Law, employers had no obligation to pay an outgoing employee compensation upon the conclusion of a fixed-term contract. By repeatedly hiring employees with brief fixed-term contracts, an employer could avoided the costs associated with terminating employees since contracts expired frequently. The New Law demands that if an employee is not rehired under a new contract after the expiration of their fixed-term labor contract, then the employer must pay severance compensation. The compensation rate is essentially one month’s salary for each year of employment.
In addition, the New Law broadens the scenarios under which such compensation applies, including:
(i) Employer’s termination of labor contracts due to employee incompetence;
(ii) Employee terminates the labor contract due to employer’s breach of contract or violation of law;
(iii) Employee layoff takes place due to employer restructuring;
(iv) Employer and employee mutually agree to termination;
(v) Employer does not rehire employee after a fixed term labor contract expires; and
(vi) Employer is liquidated, loses its business license, or is ordered to close.
OPEN-ENDED TERM LABOR CONTRACTS An employee is now entitled to an open-ended labor contract with an employer under the following expanded list of conditions:
(i) An employee has worked for an employer for 10 consecutive years;
(ii) An employer initially adopts the labor contract system ;
(iii) A state-owned enterprise has to re-enter employment contracts with its employees due to restructuring; and
(iv) An employee consecutively concludes two fixed-term labor contracts with employer.
TRAINING REIMBURSEMENT If an employer pays for one or more months of off-the job training for an employee, the employer may claim repayment from an employee who leaves before their required term of service is fulfilled. This shows a shift in favor of employers; originally employers had to give employees six or more months of such professional training before they could claim repayment. However, this reimbursement does not include the employee’s salary paid during the training time period.
EMPLOYMENT FLEXIBILITY The New Law increases the employer’s right to adjust enterprise staff level and labor contracts. Employee layoffs are now permitted under an expanded list of situations:
(i) Bankruptcy reorganization;
(ii) Severe operational difficulties;
(iii) Major technical or operational changes; and
(iv) Change in company objectives and goals.
Lay-offs under the above scenarios will only be allowed if 20 or more employees are laid off. If the number of employees being terminated is less than 20, then the number must constitute at least ten percent of the workforce. Under such circumstances, the employer must obtain approval from the appropriate labor authorities, notify employees 30-days prior to the lay-off and seek union approval.
PROBATIONARY PERIOD RESTRICTIONS Due to past employer abuses of probationary periods, the New Law reforms the use of probationary periods. Probationary periods were traditionally based on contract term and allowed an employer to terminate an employee at no cost and without reason. Enterprises often forced employees to take lengthy probations periods to enjoy easy termination of an employee.
Employees can now only be placed on probation once during their service with an employer. During probation, an employee’s probationary wages cannot be lower than the local minimum wage. Furthermore, the probationary wages may not be lower than the lowest wage level for the same job with the employer nor less than 80 percent of the wage agreed upon in the labor contract. The New Law mandates the following time frames for probationary periods:
(i) One month probationary period for contracts up to one year in length;
(ii) Two-month probationary period for contracts between one and three years in length; and
(iii) Six month probationary period for fixed labor contracts of more than three years and open-ended labor contracts.
COLLECTIVE LABOR CONTRACTS Under certain circumstances, the New Law demands a new triangular relationship among the employer, employees, and labor union. It requires that if employees are unionized, an employer can be forced to sign a collective labor contract with the labor union representing member employees . If unionized, the employer’s rules and regulations governing employees are not binding unless negotiated and agreed upon by the union.
As a result, unions may gain a larger degree of power over the terms and conditions through which the employees are hired and fired. Thus, if unionized, the employers must fully understand area-specific union requirements, and must maintain effective communication with the union and its governing body, the government-sponsored All China Federation of Trade Unions.
PART TIME LABOR SYSTEM With its increasing use throughout various industries, the People’s Congress clarified the part-time labor system under the New Law. Part-time employment is now officially
defined as service of up to four hours per day or less than 24 hours per week. Employers are not required to offer part-time employees written contracts, and have no post-contract compensation liabilities to part-time employees. Part-time employees cannot be given probationary periods and must be paid as frequently as once every two-weeks.
LABOR SERVICE AGENCIES The New Law also addresses labor outsourcing and employment agencies which second their employees to work temporarily for another company. Such employment agencies are now obligated to pay seconded employees a salary as well as provide social security benefits. Furthermore, a two-year labor contract must be signed between the seconded employees and the employment agency. In addition, seconded employee should receive that same treatment as an employee hired directly by the employer, such as the same base pay, benefits and training.
CONCLUSION
As a result of these many changes, it is vitally important that managers and employees alike become well-versed in the New Law. Enterprises must think through the implications of these changes to their operations, cost structure and hiring practices. Additional Notes
On-Line Interview
Follow the link below to view an interview with Nestor Gounaris as he discusses the intersection of market entry and foreign direct investment in China. Nestor, principal of China Solutions LLC (Shanghai), has over eight years experience in China.
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