|
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:
- 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;
- 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;
- 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.
- 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
|
