Newsletter from the Wikborg Reins Shanghai-office
| 11th September 2007Our office in Shanghai has published a newsletter regarding a new labor contract law in China.
After 18 months of deliberation and a government request for public comments, China’s new and highly debated law on labor contracts – PRC Labor Contract Law (the “LCL”) was promulgated by the Standing Committee of the National People’s Congress (NPC) on 29 June 2007. It will become effective in January 2008.This 8-chapter new law details the establishment, revocation, revision, and termination of labor contracts. Although it is based on some of the same principles as the existing law it will spark the need for employers, including foreign invested enterprises, to review and restructure existing labor contracts and human resources policies.
1. Application of Open Term Contract Expanded
The LCL divides labor contracts into three types: fixed term contracts, open term contracts (permanent contracts) and assignment-based contracts. An open term contract is difficult to terminate unless just cause can be established, which in it self carries strict conditions. Under the existing legislation an employee with a series of fixed-term contracts which total over 10 years of employment can request an open term contract. This flexibility has now been further limited. According to the LCL, only two consecutive fixed-term contracts are permitted. If an employee requests to continue the employment after the expiration of the second term, an open term contract must be signed.
It is important to note that for existing employees who have been employed under a number of fixed-term contracts, the first relevant fixed-term contract for this purpose will be the first new contract entered into after 1 January 2008.
2. Penalty for lack of Written Contract
While the obligation to provide an employee with a written contract of employment already exists, the new Law introduces significant penalties for failing to comply with this requirement. If the employer fails to present written contract within one month after a de-facto labor relationship has been established, the employee will be entitled to double payment until a written contract has been provided. In addition, if no employment contract is concluded after one year after the employment commenced, the employee will be deemed to have an open term contract with the employer. Going forward, if the open term contract is still not concluded, the double-pay principle continues to apply.
3. Probationary Period
Similar to the present Labor Law, the LCL still base the allowed length of the probationary period on the term of the employment. However, the allowed probationary period under the LCL is reduced compared to the existing legislation.
In addition, the LCL requires that at least 80% of the agreed regular salary must be paid during the probation and it may not under any circumstances be less than the minimum wages as published by the local government where the employer is based. The LCL also clarifies that an employer can only apply one probation period for every employee.
4. Stricter Condition for Dismissal
The LCL provides stricter conditions regarding early termination of the labor contract by the employer.
A labor contract can be early terminated without severance fee only if:
(1)The employee is proven to be incompetent during the probation period;
(2)The employee seriously violates internal rules and regulations;
(3)The employee commits serious default in his performance of duties or practices graft, causing severe damage to the interest of the Employer;
(4)The employee is concurrently involved in any other labor relations with other Employers, causing severe effect on the performance of his/her own duties and refuses to make correction as required by the Employer.
(5)The employee is pursued for any criminal liability in accordance with law.
The contract can be early terminated, provided that the employer gives 30 days’ prior notice or one month’s salary in place of it and pay severance fee when:
(1) The employee has suffered from illness or non-work-related injury and is not able to perform the original position upon the conclusion of medical treatment, and a mutual agreement on changing position cannot be made between the employer and the employee;
(2) The employee is incompetent in the job and remains so after receiving training or being transferred to another post;
(3) Where a major change in the objective circumstances under which the labor contract was made has rendered the contract incapable of being carried out, and the parties fail to reach an agreement on the amendment or suspension of such contract after negotiation.
The LCL further confirms the existing requirements that employer must notify labor unions prior to terminating a labor contract for any reason. The employer must seek and consider the opinion of the labor union and issue a written explanation of its final decision to the labor union. Several Shanghai courts have ruled that foreign-invested enterprises that have not established labor union must notify the union at the next higher level, failure to do so would make a unilateral termination void.
Another new point of the LCL is that even if the contract is terminated upon expiration, severance payment of one month’s salary for each year of service is still have to be paid.
5. Use of Economic Redundancy Tightened
The LCL has tightened the previous provisions on the use of redundancy as a ground for terminating employees.
If redundancies are proposed, the situation must be explained to the labor union or the entire staff 30 days in advance and their opinions solicited, and a report must be filed with the responsible labor authorities.
Priority must be given to retaining employees who:
(i) have entered into a ‘relatively long fixed-term contract;
(ii) have entered into an open-term contract; or
(iii) are supporting elderly people or minors, and where no other family members are in employment.
6. Compensation for Unlawful Dismissal
The LCL provides, if the labor contract is unlawfully terminated by the employer (the contract is terminated other than upon the grounds as mentioned in above 4 and 5), double severance payment shall be paid. Severance is calculated as one month’s salary for every year of service. Thus, in case of unlawful termination, the compensation will be two months’ salary for every year of service.
7. Non-competition Provisions
The LCL reduces the permissible duration for non-competition restriction from the current three years to two years. Another new issue is that non-competition restriction can only be applied to senior managing staff, senior technicians and other employees who has access to confidential information. Another slight change with this respect is that the compensation for non-competition must be paid monthly during the non-competition period, which is not clearly stipulated in the existing legislation.
The above may not be relied upon as legal advice.
