Issues for Employment and Training Contracts

By Vincent Wang, Legal Consultant and Ron (Rongwei) Cai, Resident Partner

Introduction

Often times, foreign investors entering into joint ventures ("JVs") with Chinese partners are pressured to deal with the Chinese partner about hiring several of the Chinese partners, former employees to work in the JVs even though they are lacking the qualifications. On occasion, your competitor poaches a few of your employees after you already invested time and money to train them. And one time, while working at your company an employee created an innovation that you could not legally retain the patent rights to. These employee-related problems could and do arise. So how can you best protect your company's interests and minimize these situations that negatively impact your business operations? Drafting detailed employment and training contracts that address these employee-related issues could be one of your answers.

Major Issues

In addition to the general legal requirements for employment, foreign investors need to consider several other factors. These specifically include: how to properly source employees, how to protect the company's trade secrets, and how to deal with the issue of "Work for Hire" in China.

• Sourcing Employees: The Chinese party may request that the future JV hire some of the Chinese party's employees despite the fact that these employees lack the necessary qualifications. Should this occur, foreign investors should be aware that both national and local labor regulations give the employers freedom to source their employees. In the event that foreign investor does not want to damage the relationship with the Chinese partner, establishing recruiting criteria is an effective alternative to eliminate unqualified personnel.

• Protecting Trade Secrets: Trade secret protection is another issue that foreign investor shall consider carefully. Foreign investor may incorporate detailed clauses, such as confidentiality and non-competition clauses, into the employment contract. They may also have potential employees sign a legal document that stipulates they will not divulge their former employers' trade secrets in order to show that they have no intention to infringe upon another company's trade secrets. In addition, they may also establish an internal system to protect their trade secrets, from document filing to key employees dismissal procedures.

• Work for Hire / Work Related Innovations or Works: China's Patent Law and Copyright Law treat Work for Hire, or Work Related Innovations/Works differently. Under Patent Law all Work Related Innovations belong to the employer, but the employer must reward the employee for such innovations. Under the Copyright Law, however, not all Work Related Works belong to the employers, and monetary or non-monetary reward is not a legal obligation for the employer. Taking these into account, employers shall with the help of their lawyers, find a cost effective and legally reliable solution. How to define those Work Related Innovation/Works? Is payment necessary for those Work Related Innovation/Works? What kind of payment is appropriate? ……These issues should be addressed in employment agreements or company manuals to avoid any possible confusions and disputes.

Some Tips for Employment Contract

There are several clauses that should be included in the employment contract. Employers need to keep these clauses relatively flexible and detail specific. The contract should address the duties and responsibilities of the employees, the issues surrounding confidentiality, and termination.

• Employment Term and Probation Period: employers may require a probation period, which can be part of the contract term, but it is not mandatory. The probation period should not exceed statutory period and it should be in correspondence with the length of the contract term. During this period, either contracted party may terminate the contract.

• Position, Job Duties and Responsibilities: this clause should be relatively flexible so that employers may change and/or add to employees' duties and responsibilities without breaching the terms of the initial contract. If employees are under "Work for Hire", this clause should be general and flexible so that employers can retain the patents and copyrights to employee innovations.

• Confidentiality: according to China's laws and regulations, certain requirements must be met for information to be classified as trade secrets. Thus, when drafting this clause, employers should be aware of those requirements. In addition, employers should require their key employees to provide advanced notice of their resignation. Upon receipt of such notice, employers can reserve the right to adjust the employees' position, such as reducing their duties and responsibilities.

• Compensation: this clause should clearly state whether the employers or employees pay income taxes. Employers may consider paying additional benefits to their employees to maintain a higher employee retention rate.

• Termination of the Contract: according to China's labor laws, employers are prohibited from terminating the contract under certain circumstances. Employers are free to provide in the contracts certain circumstances under which they can terminate the contract as long as they don't violate the statutory provisions.

• Covenant Not to Compete: employers can have their employees agree to "not to compete" during the term of their contract without providing them with compensation. However, when the contract expires, employers will have to compensate their employees "not to compete".

• Liability for Breach of Contract: to prevent employees from terminating their contract early, employers can stipulate early termination penalties in the contract, such as requiring employees to return recruitment fees, etc.

• Dispute Resolution: before a lawsuit can be filed, the case must first go to arbitration with the labor arbitration committee -- this is a legally required procedure in China. If either party that is not satisfied with the arbitration award, then such party may file a lawsuit.

Suggestions for Training Contract

As the employee turnover rate is high in Shanghai, when drafting a training contract, employers should consider the following measures:

• Service Period of the Trainee: employers should include a service period clause stipulating that employees must remain and serve the company for a certain period. China's laws protect such a provision and do not require a maximum or minimum period. This clause is enforceable if the employees and employers agree in writing to a service period of any length. This may reduce the employee turnover rate.

• Deterrence Measures: notwithstanding the above statement on the length of service period, China's laws grant employees the right to resign. To keep trained employees, employers should provide a good working environment and attractive compensation packages. Employers should also include the following clauses to prevent trained employees from leaving prematurely:
  1. High Penalties: the training contract is usually an auxiliary contract of the employment contract. Therefore, employers can stipulate in the training agreement that after training, penalties for breach of employment contract may be doubled or tripled;

  2. Return Training Costs: if the resignation of trained employees is inevitable, one reasonable and enforceable way to recover costs is to require the employees to reimburse the company for the training costs;

  3. Return Recruitment Costs: employers can demand employees to return recruitment costs paid by the company during the recruitment period. China's laws support such requirement. Such recruitment costs may include fees paid to hire employees, penalties reimbursed by employers to employees when they paid the former employers to terminate the employment, housing allowance, and other perks.

  4. Provision of Confidentiality and Non-competition: after a company trains its employees, the employees may obtain some technology and/or business information critical to the company's operation. To protect such information, employers can require employees to assume confidential and non-competition obligations. Regarding the latter, the term of non-competition shall be no longer than three years and such obligation is in effect only when employers pay reasonable compensation to employees.

Conclusion

It is critical for employers to pay attention to the contents and details of their companies' employment and training contracts. Well drafted employment and training contracts will prevent and reduce employment related problems. When problems occur, the contracts can also minimize the negative impact these situations may have on a company's business operation.

return to Advisory Bulletins main page