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July 20, 2007

New Labor Contract Law Strengthens Employee Protections and Provides Some Additional Support to Employers

China's first ever Labor Contract Law was passed on June 29, 2007 by the Standing Committee of the National People's Congress and will become effective on January 1, 2008. The law has been one of the most hotly debated in China's legislative history and its second draft alone prompted over 190,000 responses from interested parties.

The Labor Contract Law should be read in conjunction with the PRC Labor Law (1995), the PRC Trade Union Law (1992, amended in 2001) and their respective subsidiary regulations. In addition, it is expected that the PRC Ministry of Labor and Social Security and relevant local governments will issue implementing rules for the Labor Contract Law over the next few months.

On the whole, Chinese employees will be in a stronger position after the law becomes effective. The Labor Contract Law clarifies the responsibilities of both employees and employers and codifies many basic rights and protections of employees. Among other things, the law provides for a comprehensive collective bargaining system that gives rights to trade unions or employee representatives to act on behalf of employees. While this system already exists in current labor and trade union legislation, it has not been activated on a large scale. It is not clear how or whether the newly codified collective bargaining system will be implemented.

The law also requires employers to consult with trade unions or employee representatives on a wide variety of matters, including salaries, working hours, rest and leave, safety and health, insurance and benefits, training and labor discipline and the rules of the company.

In addition, employers will want to take note of the following aspects of the Labor Contract Law:

• Fixed term contracts are expressly permitted; however, after completing 2 such contracts, an employee wishing to continue working for an employer is entitled to require a non-fixed term contract. In addition, employees who have been employed for more than 10 years by the same employer are entitled to require a non-fixed term contract.
• Previously no severance pay was due upon the completion of a fixed term contract, but now severance is due unless the employer offers a new contract on the same or better terms and the employee refuses to enter into the contract.
• Severance payments are capped for high paid employees. If an employee's monthly salary is more than 3 times local average monthly salary during the previous year as declared by relevant local authorities, his or her severance is capped at 3 times the local monthly standard. In addition, the length of service in relation to which severance is due is capped at 12 years.
• The maximum non-compete period is reduced from 3 years to 2 years and consideration for a non-compete period must be paid in addition to salary. Non-compete agreements may only be signed with senior management and technical personnel and employees who have specific confidentiality obligations.
• There are strong incentives to sign written employment contracts. If an employment relationship without a written contract has been in existence for more than 1 year, a non-fixed term contract is deemed to exist. Further, if an employment contract is not signed within 1 month of an employee's start of employment, the employee is entitled to double pay. Employers are not required to enter into written contracts with part-time employees.
• Domestic Chinese secondment, or temporary employee assignment arrangements are limited to temporary, auxiliary or substitute positions and there are restrictions on using multiple short-term secondments to hire staff. New obligations placed on secondment agencies could lead to higher secondment costs for foreign-invested enterprises and foreign representative offices.
• Working hours for part-time employees must not exceed 24 hours per week and 4 hours per day.
• Probation periods are limited to 1 month for contracts of less than 1 year, 2 months for contracts of up to 3 years and 6 months for all other contracts.
• The law specifically provides for “training bonds” and permits employers to recover damages if those agreements are breached by employees.
• Trade unions or employee representatives (guided by higher level unions) are granted the right to negotiate collective contracts on behalf of employees. Trade unions can also negotiate industry-wide collective contracts at the county level or below.
• The circumstances in which lay-offs are permitted are clarified. A mass lay-off occurs when 20 or more employees or at least 10% of the workforce are laid off. Trade unions or employee representatives must be notified at least 30 days in advance of any lay-offs, and priority for retention in the event of a partial mass lay-off is given to employees on non-fixed term contracts and long fixed term contracts, as well as employees who are responsible for elderly people or children.
• An employee's damages in the event of wrongful termination will be double his or her severance pay entitlement.