On Sept. 18, 2008, China's State Council published much-anticipated Implementing Regulations for the Labor Contract Law (the “Regulations”). The Regulations offer clarity on several issues arising from the Labor Contract Law (the “LCL”) enacted at the start of the year, but fall short of providing elucidation on others, notably a rule limitation that employers may only sign an employee for two fixed-term contracts before the employee is allowed to enter an open-term contract. (Please also refer to our previous advisory on the LCL and its impact on business.)
By cross-referencing the Regulations with the LCL, we have noted important adjustments and clarifications that employers must be aware of to effectively handle employment contracts and their execution in China. Significant addendums addressed in this advisory include:
- Applicability extension to partnerships and foundations
- Performance and sanction for branches to directly conclude employment contracts
- Open-term contracts
- Employee transfer
- Failure to conclude written labor contract and expiration of contract
- Probation period
- Liquidated damages and training period
- Staffing agencies and fines
We also highlight issues arising from the LCL itself that remain unclear.
Applicability extension to partnerships and foundations
The Regulations provide that partnerships and foundations are deemed as employers in consideration of the LCL.1 This clarification eliminates any potential loophole in the LCL itself, which originally defined employers as “enterprises, individual economic organizations, non-enterprise private entities and other entities.”2
Performance and sanction for branches to directly conclude employment contracts
Per the Regulations, if the primary place of performance of an employment contract differs from the employer's place of establishment, then the requirements of the place of performance take precedence in governing minimum wage, severance, labor protection, working conditions and protection from occupational hazards. The requirements of the place of establishment can be used if obliging a higher standard and if both parties agree.3 Such local requirements vary; Shanghai's, for example, are interpreted to prescribe different rules that apply to foreign nationals.
Further, licensed branches now have express authority to enter employment contracts without going through their parent entity. Unlicensed branches are likewise permitted to conclude direct contracts if so authorized by their parent entity.4
The Regulations stipulate that if an employer and worker do not conclude a written contract within one year, an open-term contract is deemed to have been entered. This one-year period of continuous employment commences on the initial date of service.5 The LCL provides that if an employee works an uninterrupted term of ten years then, at the employee's proposition, the employer is obligated to enter an open-term contract with the employee. Here also, the initial date of service is deemed as commencement and includes time prior to the LCL's effecting (Jan. 1, 2008).6
Of particular relevance and remaining uncertainty is that, under the LCL, an employer is limited to entering two fixed-term contracts with an employee. At expiry of a second fixed-term contract, the employer is obligated to enter an open-term contract with the employee. This means that entering a second fixed-term contract (renewal of the first) is, in effect, comparable to signing an open-term contract.
The LCL provides narrow exceptions where, (a) an employee did not satisfy the conditions of employment during the probation period or, (b) an employee seriously violates company policy.7 The Regulations fail to elucidate further and therefore, we recommended that employers monitor an employee's performance carefully during his/her first term.
The Regulations provide that the original commencement date is preserved and that continuous time worked under the original employer is unremitting in a case where, for reasons not attributable to the employee, the employee is transferred to a new employer. However, the “clock” resets if the original employer pays severance to the employee at the time of transfer.8
Failure to conclude written labor contract and expiration of contract
If a worker refuses to sign an employment contract within the initial month of service, the employer may terminate him/her without notice or severance so long as the employer compensates the worker for service provided.9
Likewise, if a worker refuses to enter an employment contract after the first month, the employer may terminate but in such case, must pay severance.10 If after one month a contract has not been entered, here the “double salary” rule of the LCL is realized and the employer must pay double salary to the worker, with commencement of service being calculated from the first day of service after the end of the first month and extending until the day before either (a) a contract is entered or, (b) the day before termination of the employee.11 The Regulations markedly lack instruction for a circumstance where, after commencing work, an employer and worker fail to agree on the terms of a contract.
Also clarified is that severance must be paid for contracts that have durations dependent upon completion of a project.12 For general severance calculations, “monthly wage” is defined as the average monthly wage of the employee for the 12 months preceding termination and includes any monetary remuneration (salary, bonuses, allowances, etc.).13
The Regulations further affirm that labor contracts expire when employees reach the legal retirement age (currently ranging from 55 to 60 for men and 50 to 55 for women, depending upon nature of employment).14 Still lacking however, is guidance on whether the previously mentioned rule applies to both open as well as fixed-term contracts with time remaining or only to open-term contracts. In light of the requirement for written labor contracts, employers should be mindful of the age of mature employees.
The Regulations clarify a stipulation under the LCL that wages during a probation period not be less than: (i) the minimum wage for the same position with the employer; (ii) 80 percent of the post-probation salary; and (iii) the minimum wage where the employer is located. An addendum in the Regulations further stipulates that wages during the probation period not be less than 80 percent of the minimum wage for the same position with the employer.15
Liquidated damages and training period
Originally, the LCL did not allow for liquidated damages to be paid by employees except in cases of breach of labor contract after special training is provided or breach of confidentiality and non-compete obligations.16
Under the Regulations, liquidated damages are payable by an employee in cases of termination where an employee has materially breached company policy, caused substantial damage to the employer due to serious dereliction of duty or graft, is prosecuted for criminal liability, was hired through deception or coercion, or simultaneously entered a labor relationship with another employer that impedes the employee's ability to perform for the original employer.17
An employee may, however, terminate without being subject to penalty, his/her contract with the employer if the employer violates the labor contract or the law.18 Where an employer terminates a contract early, it shall pay double compensation based on a standard of the employee's one-month wage per year of service.19
The Regulations reiterate that an employer and employee cannot specify termination conditions other than those stipulated in Article 44 of the LCL.20
In a case where an employment contract expires before the end of a training agreement service period, the Regulations provide that the contract is automatically deemed extended until the end of the training service period. The employer and employee may agree otherwise, however, and the employer has the right not to extend such a contract.21 Further, the Regulations specify that, limited to “professional technical training” (as stipulated in the LCL and not further defined), costs that an employee can be required to repay may include such training as well as travel expenses and other direct expenses that are verifiable by receipt.22
Staffing agencies and fines
Substantiation that staffing agencies may not engage part-time employees for placement with client companies is provided by the Regulations.23 Under Chinese law, part-time work is assessed at 24 hours of labor or less per week. Further, if a company that engages staff through such a placement agency seriously breaches—in relation to those employees—any requirements of the LCL (or the Regulations), a fine of RMB 1,000 to RMB 5,000 may be imposed.24
Another new fine that may be applied to employers concerns employee registers. If a company fails to maintain a register of employees after receiving warning from the local labor bureau to do so, then a fine of RMB 2,000 to RMB 20,000 may be imposed.25
What remains unclear
Besides the lingering questions above noted, the Regulations fail to offer guidance on how employers should fulfill their obligation to consult with employees regarding company rules and policies as stipulated by the LCL.
We recommend that employers effect a clear practice whereby all employees have access to company rules and policies, including on the company Web site. Further, employers should maintain evidence of such a practice and a record that all employees are aware of the rules and policies. Ensuring that each employee receives a company handbook and signs acknowledgement of such is advisable.
The Regulations also lack guidance on the amount of compensation an employer must pay employees to ensure that non-compete obligations are effective and enforceable.
The Implementing Regulations of China's Labor Contract Law reiterate as much as they clarify, with important rules of thumb being to: (i) always conclude employment contracts in writing; (ii) treat the renewal of any fixed-term contract effectively the same as entering an open-term contract; (iii) be aware of local requirements; and (iv) enter into labor contracts within each employee's first month of service. Further adaptive guidelines and interpretive local rules can be expected. We encourage you to stay tuned.
1 See Article 3 of the LCL Implementing Regulations.
2 See Article 2 of the Labor Contract Law.
3 See Article 14 of the Regulations.
4 See Article 4 of the Regulations.
5 See Art 7 of the Regulations.
6 See Article 9 of the Regulations.
7 See Article 39 of the LCL.
8 See Article 10 of the Regulations.
9 See Article 5 of the Regulations.
10 See Article 6 of the Regulations.
11 See Article 6 of the Regulations.
12 See Article 22 of the Regulations.
13 See Article 27 of the Regulations.
14 See Article 21 of the Regulations.
15 See Article 15 of the Regulations.
16 See Article 25 of the LCL.
17 See Article 26 of the Regulations.
18 See Article 38 of the LCL.
19 See Article 25 of the Regulations.
20 See Article 19 of the Regulations.
21 See Article 17 of the Regulations.
22 See Article 16 of the Regulations.
23 See Article 28 of the Regulations.
24 See Article 35 of the Regulations.
25 See Article 33 of the Regulations.