NEW REGULATIONS ON EMPLOYMENT CONTRACTS IN SHANGHAI

By Annie (Ran) Yan and Ron (Rongwei) Cai

On November 15, 2001, the Shanghai People's Congress approved the Shanghai Municipality, Labour Contract Regulations (the New Regulations) that will become effective May 1, 2002. All employment contracts entered into in Shanghai after May 1, including those involving wholly foreign-owned or Sino-foreign joint venture enterprises as employers, will be subject to the New Regulations. Compared with the Regulations on Employment Contracts published on November 23, 1995 (the Old Regulations), the New Regulations set forth the legal requirements governing employment relationships in Shanghai in greater detail, and introduce some new changes to the old law.

CONTRACT FORMATION GENERALLY

The New Regulations require an employment contract to be prepared in either Chinese exclusively, or Chinese and another foreign language, with any inconsistency between the different versions to be resolved in favour of the Chinese version.

Regarding non-compliance, the New Regulations state that if an employment contract fails to satisfy legal requirements, the employer has to satisfy the requisite obligations of an employer, and revise the employment contract to comply with the legal requirements.

EMPLOYEE-FRIENDLY CHANGES

A number of the revisions made in the New Regulations are sympathetic to employees. In compensation, for example, the New Regulations have added a provision stating that the working conditions and compensation set forth in an employment contract must not be inferior to or lower than those set forth in an applicable collective labour contract. Further, in recognition of the legal responsibility of employers' regarding de facto employment relationships, the New Regulations provide that a contractual employment relationship is deemed to exist where a person has performed the duties of an employee as required by the employer but where no written employment contract has been entered into. The working conditions and the compensation for the employee should not be inferior to or lower than those required in the relevant rules and regulations of the employer, a collective labour contract, or in labour laws. The deemed employee is allowed to terminate the employment at any time, whereas the employer has to give the employee 30 days' notice before termination.

Among other changes, the New Regulations provide that where two parties have so agreed, a part-time employment relationship may be created, if the employee works for not more than 50% of the legal working hours of a business day, week or month. The employer is obligated to pay social security on behalf of the part-time employee, and the proportional share of workers' compensation obligations where applicable.
Finally, the New Regulations now allow for temporary suspension of an employment contract if the employee is (i) conscripted or has to satisfy other legal obligations imposed by the state, or (ii) is temporarily unable to fulfil the employee's obligations.

EMPLOYER-FRIENDLY CHANGES

At the same time, the New Regulations give additional power to employers. For example, the New Regulations have eliminated the restriction in the Old Regulations whereby termination of an employee is disallowed if the person has worked for the employer for 10 years and is less than three years away from retirement. To protect a company's sensitive information, an employment contract may require an employee who knows the trade secrets of the employer to provide advance notice (not more than six months) when terminating the contract. During this notice period, the employer may adopt pertinent measures to protect trade secrets. Additionally, an employment contract may require an employee who knows the trade secrets of the employer not to compete for a period not exceeding three years after his/her employment has been terminated. However, the employer needs to pay reasonable compensation for such a non-compete covenant. It should be stated that advance notice and non-compete covenants are mutually exclusive provisions under the New Regulations.

OTHER CHANGES

The New Regulations now allow an employment contract to stipulate damages in case of a breach by the employee of (i) the term of the contract, or (ii) the employee's confidentiality obligation as provided in the employment contract.

Regarding organizational changes, the New Regulations provide that in the case of a company merger or division, the surviving company will assume the obligations of the original employer. Alternatively, upon agreement, the employment contract may be terminated or changed.

In the New Regulations, the role of labour unions has been modified. The New Regulations provide that the labour union is to assist the employee in entering the employment contract and supervise the implementation of the contract, while eliminating the labour union's obligation to provide support to the employee with respect to arbitration or litigation of a labour dispute.

As for employee benefits, the New Regulations no longer mandate, as do the Old Regulations, that the employment contract contain provisions on "insurance and benefits" for the employee. Additionally, the New Regulations have eliminated the requirement in the Old Regulations for an employment contract to provide for "medical treatment time" to employees as part of the benefits. The employee hasn't necessarily suffered in this regard as, for example, an employer must still pay insurance premiums for employees. Rather, these aspects of employment contracts are covered in other national legislation, especially the social security laws.

CONCLUSION

In our opinion, the New Regulations will bring about greater certainty in the area of employment law in Shanghai and provide greater protection to employees in a number of areas, while at the same time conferring somewhat greater power on the employer in certain aspects.