Employment law in China affords employers and employees a certain degree of freedom in creating the terms of their working relationship. The National People's Congress (NPC) has supreme authority to enact laws governing employment. The Ministry of Human Resources and Social Security (MOHRSS), a department of the State Council, is responsible for drafting national employment laws, and for overseeing the enactment of local regulations by the labour administrative departments of regional governments. The local labour bureaus have responsibility for issuing local regulations and enforcing them. The most significant statutes regulating employment in China are the Labour Law, promulgated on 5 July 1994 and revised on 27 August 2009, and the Employment Contracts Law (ECL), promulgated on 29 June 2007 and revised on 28 December 2012.
The laws of China are interpreted by the judiciary, which comprises three levels of courts: the Supreme People's Court; the local people's courts (further divided into three levels of authority); and special people's courts (military and maritime courts). The judicial interpretation by the Supreme People's Court has almost the same effect as laws enacted by the NPC. Local people's courts also occasionally release 'internal' guidelines or meeting minutes regarding employment law issues. Although, theoretically speaking, the local interpretation has no legal binding force, they are still followed by judges in reality. China does not have a case law system. As such, judgments released by the courts do not constitute binding precedents as they would in common law jurisdictions, but the courts and labour arbitration commissions may rely on them as persuasive authority in subsequent employment arbitration and litigation.
Most employment disputes must first be heard by the local labour arbitration commission. The decision of the labour arbitration commission may be final and binding on the employers for disputes concerning small amounts. But most decisions of the labour arbitration commission can be appealed to the people's courts for litigation. In a litigation process, a case may be heard in two instances at most.
China is a pro-employee jurisdiction. Employment laws and regulations are restrictive and generally interpreted, administered and enforced in favour of employees. Under Chinese law, employers are required to give employees written employment contracts. The use of temporary labour is restricted in certain ways. The concept of 'termination at will' or 'unilateral termination without cause' does not exist in China. Employees' contracts may only be terminated based on certain limited grounds explicitly set out in relevant laws and regulations, and as a result of this, firing employees is quite difficult and costly.
ii YEAR IN REVIEW
i Significant legislation and legislative developments
On 20 July 2018, the General Office of the Communist Party of China Central Committee and the General Office of the State Council issued the Reform Plan on Collection and Management of National Tax and Local Tax (the Reform Plan).2 According to the Reform Plan, starting from 1 January 2019, all social insurance contributions (i.e., pension, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance) will be collected by the local tax authorities instead of the local social insurance authorities as in the past. Given that the local tax authorities (unlike the local social insurance authorities) have access to employees' salary information, it is expected that this change will effectively prevent underpayment of social insurance contributions, which has been a widespread non-compliance issue in China.
According to the MOHRSS's latest report from the end of 2017, the total number of workers in China is 776.40 million, of which 424.62 million people work in urban areas. The registered unemployment rate in urban areas in 2017 was 3.9 per cent.
As at the end of 2017, 915.48 million individuals were enrolled in the mandatory basic pension insurance and 1,176.81 million individuals were covered by the mandatory basic medical insurance programme.
In 2017, labour arbitration commissions in China heard 1.665 million employment dispute cases, a decrease of 6 per cent compared with last year.
iii SIGNIFICANT CASES
China does not have a case law system. Arbitration and court decisions are neither binding nor regularly reported. There has been increasing willingness on the part of the judiciary to publish decisions but it is difficult to determine with accuracy what significant matters have been decided or what cases are truly significant. Notwithstanding the lack of their binding authority, court and arbitration decisions that are publicly released, particularly those of the Supreme People's Court, may have some persuasive value in subsequent employment arbitration and litigation.
IV BASICS OF ENTERING AN EMPLOYMENT RELATIONSHIP
i Employment relationship
Employers must provide all full-time employees with a written employment contract, which must be signed by both parties and should be in Chinese.4 The employment contract must contain the following:
- employer's name, address and legal representative;
- employee's name, address and resident ID card number;
- employment term;
- job description and work location;
- working hours, rest and vacation;
- social insurance benefits; and
- information on work safety, work conditions, and prevention and protection from occupational hazards.5
The parties must execute an employment contract within one month of the date on which the employee starts work.6 For each month after the first month that the employee works for the employer without a written employment contract, the employee is entitled to twice the wages during this period (capped at 11 months' wages).7 The employer and employee will be deemed to have entered into an open-ended employment contract if they fail to execute a written employment contract within one year of the date on which the employee starts work.8
Changes to the terms of an employment contract are generally subject to employee consent, unless they are in favour of the employee (e.g., a salary increase).
ii Probationary periods
Probationary periods are permissible, but they must be included as a term in the employees' employment contracts. Furthermore, there are maximum lengths for probationary periods, which vary according to the length of the contract term. The probationary period may not exceed one month for a contract lasting at least three months and less than one year. The probationary period may not exceed two months for a contract lasting at least one year but less than three years. The probationary period for a contract with at least a three-year term or an open-ended contract may not exceed six months. An employer may not impose a new or second probationary period on an employee, even in the event of a rehire or transfer of position.9
Termination of employment is comparatively easier for both an employer and employee during the probation period than it is afterwards. An employee is required to give three days' notice of termination, unless there are grounds to terminate the employment relationship immediately. An employer may terminate the employment of an employee during the probationary period without notice if the employer can demonstrate that the employee fails to meet the requirements of the position.10
iii Establishing a presence
A foreign company must establish a legal presence in China before it can carry on business or hire local employees.
If a foreign company establishes a representative office in China, the representative office does not qualify as a legal person under Chinese law and therefore may only employ Chinese nationals (excluding Hong Kong, Macao and Taiwan residents) through a staffing agency (such as the Beijing Foreign Enterprise Human Resources Service Co or the China International Intellectual Corporation), which can hire Chinese nationals as a nominal employer and then second them to work for the representative office. Foreign nationals must be hired as representatives of a representative office.11 A representative office can have, at most, only four representatives, including the chief representative.12
On the other hand, a joint venture or a wholly foreign-owned enterprise constitutes a legal person and may employ workers directly by entering into employment contracts with them upon their establishment.
If a foreign company engages local Chinese people to perform services on its behalf, effectively as independent contractors, the foreign company may face myriad penalties, including an employment-related penalty for hiring the workers without having a legitimate legal presence and not providing the workers with an employment contract (which only a legally established entity may do, as noted above); foreign exchange penalties for paying the workers in a currency other than Chinese currency; penalties for not contributing to the social insurance schemes for the workers; penalties for not withholding individual income taxes for the workers; and tax exposure in China due to the permanent establishment created by the locally hired workers, and other potential penalties. While in practice it may be difficult for the Chinese government to assert jurisdiction over the foreign entity, this prohibited activity could affect the foreign entity's future ability to establish a legal presence in China.
In China, an employer must make contributions for its employees (except foreign national employees who are from countries that have social insurance exemption treaties with China) into the mandatory social insurance and public housing fund schemes, which include pension insurance, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and public housing fund. The ratio and basis for contributions to these schemes vary in different locations. The social insurance and public housing fund schemes are funded through employer and employee contributions, and the local government generally adjusts the respective contribution rates and amounts annually. An employer is responsible for deducting both its and the employee's contributions and submitting them to the applicable local authorities.
Similarly, an employer, as a withholding agent for income taxes, is responsible for reporting and withholding the income taxes due on a monthly basis on behalf of its employees.13
v RESTRICTIVE COVENANTS
Restrictive covenants prohibiting employees from engaging in the same type of business as their current or previous employer are permissible. Restrictive covenants effective during the employee's employment term should be included in the employment contract, and senior officers have a statutory obligation not to compete with their current employer.14
Post-termination non-compete agreements may not exceed two years, measured from the end of the employment relationship. Furthermore, they may apply only to senior managers, senior technical personnel and other employees with access to trade secrets.15 There are no national statutory restrictions on the amount of consideration, geographic scope or damages for such agreements. Nonetheless, for a non-compete agreement to be legally viable, the former employer must pay a financial consideration to the former employee at least monthly throughout the restricted period. The Supreme Court's latest judicial interpretation suggests that the financial consideration should not be lower than 30 per cent of the employee's average wages during the 12 months before the termination.16 Some provinces, municipalities and industrial zones have enacted their own local regulations setting the minimum amount of consideration that is required. For instance, in Beijing and Shanghai, the financial consideration may not be lower than 20 per cent of an employee's annual wage for each year of non-competition. Continued failure to pay the consideration for the non-compete agreement during the post-termination restricted period for three months, will render the non-compete obligation null and void.17 On the other hand, the employer is allowed to release the employee from a non-compete obligation and stop paying the non-compete compensation in the middle of the non-compete period by paying the employee three months' non-compete compensation as damages.18
i Working time
There are three types of working hours systems in China, namely the regular (or standard) working hours system, the flexible (or irregular) working hours system and the comprehensive working hours system. The default system is the regular working hours system under which the vast majority of employees in China are employed. Under the regular working hours system, a working day is generally limited to eight hours and a working week is limited to 40 hours.19 Subject to the approval of the local labour authorities, the flexible working hours system or the comprehensive working hours system may apply to certain employees who are unable to follow the regular working hours system owing to the nature of their jobs (e.g., senior management and sales staff) or industry (e.g., farming and fishing).
Currently, there are no national regulations regarding working hours at night but some local regulations provide that employees who work between 10pm and 6am should work one hour less than the standard daily working hours and also should receive extra remuneration for working the night shift. Notably, the draft Regulations on Special Working Hours Systems20 provide that employees who work between 10pm and 6am should receive additional payment, the level of which would be set by the local labour authorities. Further, there are some local and national regulations21 that restrict pregnant employees from working on the night shift or working overtime, once they reach the seventh month in the pregnancy.
Under the regular working hours system, overtime pay will need to be paid if an employee is required to work outside normal business working hours. The overtime pay rates provided by Chinese law are 150 per cent of the regular rate of pay on regular work days, 200 per cent on weekends or regular scheduled days of rest and 300 per cent on statutory holidays. Employers may only opt to give employees compensatory time off in lieu of double-time pay for work performed on weekends or regularly scheduled days of rest.22 Under current Chinese law, overtime should not exceed one hour per day, or under special circumstances where an extension of working hours is required, overtime may not exceed three hours per day. The total number of overtime hours may not exceed 36 hours per month.23
Under the flexible working hours system, employees' working hours vary in accordance with the business needs of their employers. Employees working under this system are generally not entitled to overtime compensation, although in some cities, they may be entitled to overtime compensation for work performed on a national holiday.24
Under the comprehensive working hours system, employees' working hours are calculated on a periodic basis, which could be weekly, monthly, quarterly or annually (calculation periods). This system is typically used for seasonal businesses or for employees whose work schedules ebb and flow, such that an employee works, on average, 40 hours a week.25 If the employees' average working hours exceed the limit for the calculation period (e.g., 174 hours where the calculation period is by month) then the employer must pay overtime compensation to the employees.
vii Foreign workers
A Chinese employer must obtain an employment licence to engage a non-Chinese worker, and the worker in question must obtain a work permit to legally work in China. Immigration requirements and procedures are largely carried out at a local level and each province has its local practice in this regard. There are, however, a few requirements that typically need to be met:
- the foreign worker must have special skills and a certain number of years (normally two years) of relevant experience;
- the work permit application of the foreign expatriate will need to be sponsored by a locally registered company in China;
- the foreign worker will need to live and work in the same location as his or her sponsoring company; and
- a medical examination will be required.
The immigration process generally involves the following steps:
- the foreign worker attends a physical examination;
- the Chinese employer (or sponsoring company) applies for an employment licence from the local labour authority;
- the Chinese employer applies for a work visa invitation letter from the local commerce authority;
- the foreign worker obtains a 'Z' visa (a work visa) from a Chinese embassy or consulate;
- after arriving in China on a Z visa, the foreign worker has his or her temporary residential address registered with the local public security bureau;
- the foreign worker applies for a work permit from the local labour authority; and
- the foreign worker then applies for a residence permit from the local public security bureau.
The entire process will usually take one to two months if everything goes smoothly. The work permit and residence permit are valid for up to five years, but in reality validity for one or two years is quite common.
Foreign workers employed by Chinese entities are subject to Chinese individual income tax, which employers are required to withhold from the foreign expatriates' salaries.26 Deductions should also be made from the salary payable to foreign workers (except those foreign workers that come from countries having social insurance exemption treaties with China) for social insurance contributions on their behalves.
Chinese laws, regulations and rules govern all direct employment relationships formed between Chinese entities and foreign workers. If a foreign worker is seconded from an overseas entity, however, Chinese laws may or may not govern the employment relationship, depending on which law is chosen in the employment or secondment agreement, and the local rules and practice at the location of the employer or local entity in China.
viii GLOBAL POLICIES
The ECL provides that employers must promulgate internal rules and policies that delineate employees' rights and obligations.27 A policy manual may be contractually binding if an employment contract explicitly incorporates its terms. Employers must, however, provide their employees with such manuals to enforce legally binding compliance with them. In order to establish that the employees received the policy manual in the event of a dispute, it is recommended that an employer distribute hard copies of the manual, preferably in Chinese, and obtain the employees' signatures in hard-copy acknowledgements for the manual. These steps will facilitate the employer's requirement to meet its burden of proof in a labour arbitration involving the company's internal rules.
An acceptable and legal basis for termination is the serious violation of an employer's work rules. While Chinese law does not mandate any specific due process requirements, if an employer fails to provide its rules to an employee or the employer cannot establish that it provided the rules to an employee, the rules cannot form the basis for a termination, even if the employee is in clear violation of a company rule.
Further, as of the implementation of the ECL, employers are required to consult with employees about any issues that bear directly on the material terms and conditions of their employment. While there is little guidance as to what constitutes effective or legally sufficient consultation, generally employers must review the proposed policies or rules with the trade union, employee representative congress or all of the employees, collect and consider their opinions and then implement the policies or rules, taking into account the respective bodies' opinions. Internal policies or work rules that, for example, affect remuneration (such as bonus or commission plans), leave, employee training, job safety and labour conditions, benefits and social insurance, working hours or work quotas, or that may result in discipline, must go through the consultation process for them to be binding on the employees.28
ix LANGUAGE OF DOCUMENTATION
Employment documentation, such as employment contracts, handbooks and any other agreements or policies, such as confidentiality agreements or non-compete agreements, that an employer wants to be binding on the employees should be provided in Chinese.29 It is at the discretion of the employer whether to execute such documentation in a foreign language as well. Further, in the case of employing a foreign national, an employment contract must be provided in Chinese in order to obtain a work permit for the foreign employee. The authorities will not accept an employment contract in English.
If employment documents are not translated and a dispute arises over the meaning or interpretation of a clause or work rule, then the employer may be at a disadvantage. First, if an employee challenges his or her understanding of the meaning of the work rule provided only in English, it will be virtually impossible for the employer to demonstrate that the employee has a strong command of the English language and must have understood the accurate or intended meaning of the provision. Second, the arbitration commission or court will only accept documents in Chinese, so the employer will need to submit a translation that is certified by approved translators. To the extent that the employee submits a different translation that supports his or her interpretation of the provision in dispute, the employer will not be able to control the translation that the labour arbitration commission or court accepts or credits. Often, the labour arbitration commission or court will find in favour of the employee if there is any doubt. Third, when a foreign-invested company does not provide its employment documents in Chinese, the labour arbitration commission or court, or both, often form a bias against the foreign employer for not adhering to Chinese rules. More often than not, to the extent that the disputed provision was the basis of a termination decision, a labour arbitration commission or court will in all likelihood deem the provision unenforceable and therefore deem the termination grounds unjustified. In such a case, the employee would be entitled to reinstatement, if he or she so requests, or double the statutory severance for the wrongful termination.
x EMPLOYEE REPRESENTATION
The All China Federation of Trade Unions (ACFTU) is the only union recognised by the Chinese government, which sponsors and administers the union. All trade unions in the country are branches of the ACFTU, as independent trade unions are not permitted. The State Council encourages employers to establish units of the ACFTU, which all employees who are Chinese citizens have the right to join. Unit members have the right to form a representative congress, which may elect a committee to manage the union.
A trade union's primary responsibilities include objecting to any inappropriate disciplinary actions against employees; negotiating with an employer on behalf of employees; participating in investigations of work-related accidents; initiating arbitration and bringing any necessary appeals to settle disputes about individual or collective contracts; and assisting workers in concluding and performing employment contracts.30 The ECL further provides that the trade union should establish a collective bargaining mechanism.31 Under the Chinese Constitution, a trade union does not have the explicit legal right to strike. Indeed, the trade union is mandated to help an employer to restore work and production as soon as possible if work is suspended for any reason.32
Employers are responsible for contributing dues to the trade union equal to 2 per cent of their gross monthly payroll.33 A percentage of this amount is returned to the company trade union for its use, and the remaining funds go to the ACFTU's local branches and national headquarters.
If a company has a trade union, it is required to consult with the trade union on matters that affect the 'immediate interests' of employees, such as remuneration, working hours, benefits, job safety, training and discipline, as noted in further detail above.34 If an employer fails to consult with the union or consider its opinion regarding internal rules and policies that affect employees' 'immediate interests', the rules or policies may not be enforceable or effective.
Further, if an employer intends to terminate an employee's employment relationship unilaterally or engage in a workforce reduction, then it must consult and give prior notice to the trade union and consider the trade union's opinions on the matter. Failure to do so could render the employee terminations invalid.35
In terms of establishing a trade union, an employer with 25 or more trade union members shall establish a basic-level trade union committee; if an employer has fewer than 25 employees, a basic-level trade union committee may be established separately by one entity or jointly by two or more entities, or an organiser may be elected to organise activities for the employees. If the number of female employees is relatively large, a trade union committee for female employees may be established under the leadership of the equivalent level trade union; if the number of female employees is relatively small, the trade union committee may reserve seats for female employees.36
The basic term of office is generally three or five years. There are no regulations with respect to how often the trade union should meet.37
The establishment of basic-level trade unions, local trade unions at all levels, or national or local industry trade unions must be reported to the trade union organisation at their immediate higher level for approval. The trade unions at the higher level may assign personnel to assist and supervise companies to ease the establishment of a trade union.
Trade union representatives, and particularly the chairperson of the trade union, enjoy greater protections against the termination of their employment. First, their employment contract extends by operation of law to correspond with the last day of their term as a representative, to the extent that the contract is scheduled to expire before that date.38 Their employment may be terminated, however, if they reach retirement age or commit a serious violation of the employer's work rules. Second, before any termination of employment takes place, in practice, approval from the upper-level trade union, which is independent of the employer, is required.
The ACFTU, joined by some other Chinese authorities, issued the Provisions on the Democratic Management of Enterprises on 13 February 2012. These provisions require that an employee representative congress (ERC) be established, in addition to trade unions, in all types of enterprises, including state-owned and private enterprises as a platform for employees to participate in the management of enterprises in a democratic manner. These provisions define the powers, duties, organisational structure and working rules of the ERC. The major powers of the ERC include review of employment rules and policies, approval of collective bargaining agreements and electing an employee director and employee supervisor. The provisions also require an enterprise to share certain information with the employees (important matters regarding the business's operation, work rules involving employees' immediate interests, integrity of the management personnel, etc.). This disclosure is meant to solicit the employees' comments and to subject the management to some supervision by the employees. These rules do not contain any punishment clauses, which makes it unclear what the legal consequences will be for non-compliance with the rules.
xi DATA PROTECTION
i Basic requirements
Data privacy and data protection is an emerging area under Chinese law. There are no requirements for an entity that collects personal data to register with any government body, and there is no centralised data protection authority, other than certain industry-specific bodies, such as the Ministry of Industry Information Technology in the telecommunications sector. An employer must keep its employees' personal data confidential and must obtain an employee's written consent if the employer wants to make the employee's personal data public.39 Except for this general rule, there are no workplace-specific privacy laws in China that govern the ability of employers to collect, use and disclose employee personal data. Notwithstanding the foregoing, China has enhanced online data privacy protection in recent years, and relevant government authorities have passed a series of laws, regulations, guidance and standards in this regard, two of the most important of which are the Cybersecurity Law, which took effect on 1 June 2017, and the Information Security Techniques – Personal Information Security Specifications (the Personal Information Security National Standards), which took effect on 1 May 2018. Although neither the Cybersecurity Law nor the Personal Information Security National Standards specify whether the requirements provided therein apply in the employment context, employers are recommended to act in compliance with such requirements to avoid any uncertainty.
ii Cross-border data transfers
Data localisation is a trend in China. The Cybersecurity Law includes a general requirement that critical information infrastructure providers (the CII Providers, the definition of which must be clarified) must store personal information and important data they collect within China. If there are business needs for CII Providers to transfer this information or data outside China, security assessments must be conducted. Owing to the fact that certain details concerning the data localisation requirement (e.g., detailed rules for security assessments) need to be clarified, it has not yet been implemented in earnest. To implement the new Cybersecurity Law, on 11 April 2017, the Chinese government released the Draft Security Assessment Measures for Cross-Border Transfer of Personal Information and Important Data,40 which is intended to be a major set of implementation rules for the new Cybersecurity Law (the Draft Implementation Rules). The Draft Implementation Rules require network operators planning to transfer more than one terabyte of data out of China, or network operators that have collected data on more than 500,000 data subjects, to obtain the permission of the data subjects, as well as pass self-imposed and government-run security assessments. Although the Cybersecurity Law and the Draft Implementation Rules do not specify whether the above-mentioned requirements apply in the employment context, employers are recommended to comply with them. Based on the above, it is advisable that an employer obtains written consent from the concerned employees and conducts a self-imposed security assessment before it transfers the employees' personal data out of China. Once the Draft Implementation Rules of the new Cybersecurity Law have been passed, the employer may also be required to pass a government-run security assessment if the size of the personal data to be transferred or the number of data subjects involved meets the criteria set forth in such rules.
iii Sensitive data
The Personal Information Security National Standards make a distinction between general personal information and sensitive personal information. The latter is defined as the personal information that, if leaked, illegally provided or used without proper authorisation, may harm personal or property safety, personal reputation, or physical or mental health, or lead to discrimination towards the data subject. Examples of sensitive personal information include a natural person's identification card number, biometric information, bank account number, correspondence records and contents, property information, credit information, location tracking, lodging information, health and physiological information, transaction information and personal information of minors under 14 years old. Expressed consent is required to be obtained from the data subject before sensitive data is collected from the data subject.
iv Background checks
There is no specific Chinese law prohibiting an employer from conducting a background check or credit check for an employee employed in China, but getting relevant and accurate information can be challenging for employers in practice. An individual's credit report is available from the People's Bank of China and the central bank of China and its local branches, but usually the individual in question must apply for the report in person. Criminal records information is available to employers as this information should be recorded on the official government personnel file maintained on all Chinese citizens who work for a company. Employers might also request an employee to provide a no-crime certificate issued by the local notary public or the police station as a condition of employment.
An employer should keep all such information strictly confidential. According to the General Principles of the Civil Law, the NPC Decision and relevant judicial interpretation, activities that publicise private data, or disclose an individual's private information, in writing or orally, without the individual's prior consent, are considered a civil injury to the employee and may constitute a criminal offence.
Generally, Chinese employers do not engage in drug testing. As a general rule, an employer would be expected to demonstrate a 'compelling interest' in screening an employee for drug use to justify any potential infringement on the employee's privacy. Nonetheless, specific rules exist with respect to certain industries where a direct connection exists between the employee's duties, and the safety and security of the employee and others.
xii DISCONTINUING EMPLOYMENT
Chinese law is much more protective of employees than the laws of many Western countries. Under Chinese law, only employees are given the right to terminate an employment contract without cause with 30 days' prior written notice (which will be reduced to three days' notice during the probation period), while employers cannot terminate an employment contract without cause. Employers can only terminate an employment contract based on certain specific grounds provided in the relevant Chinese labour laws and regulations.
Generally, an employer may legally terminate an employment contract on the following grounds.
Termination by mutual agreement
An employment contract can be terminated at any time by mutual agreement between the employer and the employee.41 In such case, if the termination by mutual agreement is initiated by the employer, the employer will be required to pay statutory severance to the employee (see below for details on the calculation of statutory severance).42
Unilateral termination by employer without notice and compensation
An employer is allowed to terminate an employment contract without giving the employee prior written notice and without paying statutory severance if:
- the employee on probation fails to meet the employment requirements;
- the employee has seriously violated the employer's policies;
- the employee is guilty of serious dereliction of duties, corruption and causes the employer to suffer significant losses;
- the employee is at the same time working for another employer, which has seriously affected his or her performance of current work tasks assigned by the employer, and refused to rectify the situation after being requested by the employer;
- the employee used fraudulent or coercive tactics to obtain the employment contract or to amend the contract; or
- the employee is subject to criminal prosecution.43
Unilateral termination by employer by giving prior written notice and compensation
An employer is allowed to terminate an employment contract under any of the following circumstances, provided that it gives the employee 30 days' prior written notice or pays one month's salary in lieu of notice where:
- after undergoing medical treatment for a period, the employee, owing to illness or non-work-related injury, is unable to perform his or her original duties or other work as arranged by the employer;
- the employee is not competent to perform the work required and remains incompetent even after training or reassignment to another post; or
- an employment contract can no longer be performed owing to changes in the objective circumstances that were relied upon as the basis for the contract, and no agreement can be reached between the parties to amend the contract. Statutory severance is required to be paid in this case.
Notwithstanding the foregoing, employers will not be permitted to terminate an employment contract based on these grounds if:
- the employee has been exposed to occupational disease hazards and has not undergone a pre-departure occupational health check, is under medical observation, or there is reason to believe he or she has contracted an occupational illness;
- the employee has contracted an occupational illness or suffered a work-related injury while working for the employer and is confirmed to have wholly or partially lost his or her ability to work;
- the employee is suffering from illness or a non-work-related injury and is still in the stipulated medical treatment period;
- a female employee is pregnant, on maternity leave or breastfeeding; or
- the employee has worked for the employer for at least 15 years consecutively, and is less than five years away from legal retirement age (protected employees).44
Termination by operation of law
An employment contract will automatically terminate by operation of law under the following circumstance:
- the employment contract expires and is not renewed by the employer and the employee;
- the employee retires;
- the employee passes away, or is declared deceased or missing by a court of competent jurisdiction;
- the employer decides to dissolve; or
- the employer is declared bankrupt, its business licence is rescinded or it is ordered to close down in accordance with the law.
In the event of termination under point (a) (unless the employer proposes to renew the contract on the same terms or terms more favourable to the employee but the employee does not agree to the renewal), point (d) or (e) above, the employer is required to pay statutory severance to the employee.45
Calculation of statutory severance
As mentioned, an employer will be required to pay statutory severance to an employee under certain circumstances. The statutory severance equals an employee's average monthly wage (AMW) during the 12 months immediately before the termination date multiplied by the number of years' service with the employer. The AMW is capped at three times local average wages in the previous year (a fixed number published by the local government on a yearly basis).46 For example, the local average wage in Beijing in 2014 was 6,463 yuan per month and in Shanghai in 2014 was 5,451 yuan per month. The cap is not applicable for severance for service years before 1 January 2008. For any period of service of less than six months, it is rounded up to half a year; and for any period of six months or more, it should be rounded up to a whole year. For example, for the purpose of calculation of statutory severance, a service period of four years and five months will be deemed as four-and-a-half years, and a service period of four years and six months will be deemed as five years.
The statutory severance is merely a minimum amount required by law. In practice, in the event of termination by mutual agreement or massive lay-off, employers usually offer a higher severance to obtain consent and cooperation by employees.
Although there is a general requirement under Chinese law that advance notice must be given to the trade union in the event of unilateral termination of employment by employers,47 such a requirement has not been seriously implemented in practice as most private companies in China do not have a labour union.
After the employment termination, employers are required to issue termination notices to the terminated employees and inform them of their right to unemployment insurance benefits. Employers are also required to inform the social insurance agency of any terminations within certain days of their occurrence.48
Mass lay-offs are generally not permissible, unless the individual terminations fall under one of the grounds set forth in subsection i, above, or in the event of economic lay-offs (as defined below) where employers follow the statutory procedures.
An economic lay-off is defined by the relevant Chinese labour laws and regulations as a lay-off of either 20 or more employees or 10 per cent of the workforce for the following reasons:
- the employer is undergoing organisational restructuring pursuant to Chinese bankruptcy law;
- the employer is falling into serious production and business difficulties;
- the employer is undergoing a change of production, significant technological reform or change of mode of operation, and after amendment of employment contracts, there is still a need for lay-off; or
- the circumstances upon which the conclusion of the employment contracts are based have significantly changed and, as a result, the employment contracts can no longer be performed.49
If an employer wishes to conduct an economic lay-off, it must give at least 30 days' notice and explain the circumstances to the labour union or all the employees, consider the opinions of the labour union or employees, and report the lay-off plan to the local labour authority.50 Notwithstanding the foregoing, protected employees cannot be laid off until the circumstances based on which they are protected (e.g., pregnancy or a stipulated medical treatment period) no longer exist, unless they agree otherwise.
Laid-off employees are entitled to priority in hiring if the employer re-engages staff within six months of the lay-off. In addition, certain categories of employees are to be given preference for retention by the employer in an economic lay-off, which include those who have relatively longer employment contracts with the employer; those who have concluded open-ended employment contracts with the employer; and those who are the only working member of a household and are supporting an elderly person or minor.51
Laid-off employees are also entitled to statutory severance (see subsection i, above). Although the law does not require any enhanced severance payment in the event of an economic lay-off, the employer, in practice, may need to provide a greater level of severance benefits to obtain consent and cooperation by the employees and the labour authorities.
xiii TRANSFER OF BUSINESS
China does not have any equivalent of the UK Transfer of Undertakings (Protection of Employment) Regulations or transfer-of-business rules pursuant to which employees are automatically transferred when a business is transferred. Except in very limited circumstances (such as mergers, as described in subsection i, below), the transfer of employees involved in a business transfer deal may only be effected through termination (or resignation) and rehire.
In a merger of two or more companies, employees of the merged companies automatically transfer to the surviving company or a newly established company by operation of law, with their prior service being recognised or compensated for. No employee consent is required in such case unless the terms of employment contract are changed.
ii Company split
In practice, employee transfer in a company split is more complicated than that in a merger deal, although Chinese laws and regulations provide for the same 'employee transfer' rule for both (i.e., the employment contracts of the merged or split company shall be succeeded by the successor company or companies). The complex issues involved in company split deals are how to determine which successor company an employee will be with and whether the employee has the right to choose. Unfortunately relevant laws and regulations do not provide specific guidance in this regard, and this leaves uncertainty for employee transfer in company split deals.
iii Equity acquisition
As in many other jurisdictions, an equity acquisition in China does not trigger an employee transfer issue as the buyer merely steps into the shoes of the seller and the employment of the target employees remain unchanged.
iv Asset acquisition
In an asset acquisition where the buyer takes over the assets of an existing company, employees do not transfer automatically. Instead, the buyer and seller determine which employees they wish to be transferred in the deal, and those employees must consent to the transfer (often by agreeing to a mutual termination of their employment with the seller and accepting new employment with the buyer). The prior service of the transferred employee must be recognised or compensated for in such case.
In practice, we have seen a lot of cases in China where employees have protested against unsatisfactory plans for their transfer in business transfer deals. Therefore, it is important that employee transfer plans are carefully designed from both a legal and business perspective before announcing them to the affected employees.
It was reported that the Chinese government is considering amending the ECL to make employment more flexible. Since the ECL was promulgated in 2007 there have consistently been complaints from employers that it is too protective of employees and imposes a high burden on employers. So far, these amendments are in an early stage of discussion, and it is still hard to say when the formal legislative procedures will be initiated for them.
There is a legislative trend of enhancing workplace protection for female employees in China. In September 2018, the NPC published a new draft of Several Sections of the Civil Code on its official website to seek public comments. The draft provides relatively detailed provisions on sexual harassment protections. Certain local governments, such as Shenzhen and Jiangsu, have also issued local rules to promote gender equality and strengthen workplace protection for female employees.
1 Erika C Collins and Ying Li are partners at Proskauer Rose LLP. The authors would like to acknowledge the assistance of Lijuan Hou, an associate at Proskauer Rose LLP.
2 Details of the Reform Plan in Chinese are available on the website of the State Council (http://www.gov.cn/zhengce/2018-07/20/content_5308075.htm)
3 Statistics issued by the Ministry of Human Resources and Social Security (MOHRSS) (http://www.mohrss.gov.cn/SYrlzyhshbzb/zwgk/szrs/tjgb/201805/W020180521567611022649.pdf).
4 ECL, Article 10; Labour Law, Article 19; and the Reply Letter of the Ministry of Labour and Social Security to Dalian Labour and Social Security Bureau in Response to the 'Application for Instructions on the Issue Regarding the Legal Validity of a Labour Contract Written in Both Chinese and Foreign Languages', effective 28 January 1994, Article 1.
5 See the ECL, Article 17.
6 id., Article 10.
7 id., Article 82.
8 id., Article 14.
9 id., Article 19.
10 id., Articles 37 and 39.
11 The Interim Regulations Regarding Administration of Foreign Enterprises' Permanent Offices in China, effective as of 30 October 1980, Article 11.
12 The Regulations on Administration of Registration of Resident Representative Office of Foreign Enterprises, effective as of 1 March 2011, Article 11.
13 See the Interim Rules on Withholding and Deductions of Individual Income Tax, effective from 1 January 2006, Articles 2 to 4.
14 Company Law, Articles 148 and 149.
15 ECL, Article 24.
16 See the Supreme Court's Interpretation on Certain Questions on Application of Law in Employment Disputes (No. 4), effective from 1 February 2013, Article 6.
17 id., Article 8.
18 id., Article 9.
19 Labour Law, Article 36; and Decision of the State Council on Revising the Provisions of the State Council on Work Hours of Workers and Staff, State Council Order No. 174, Effective as of 1 May 1995 (Decision of the State Council), Article 3 (superseding the applicable provision of the Labour Law and Reduced the working week to 40 hours).
20 The draft Regulations on Special Working Hours Systems was released by the MOHRSS for public comments in May 2011. As of the time of writing, the final regulations have not yet been promulgated.
21 Special Regulations on Occupational Protection of Female Employees, effective 28 April 2012, Article 6.
22 Interim Rules on Payment of Wages, effective 1 January 1995, Article 13; Labour Law Article 44.
23 Labour Law, Article 41.
24 Measures on Approval of Adopting Flexible Working Hours System and Comprehensive Working Hours System in Enterprises, effective 1 January 1995 (Wage/Hour Measures). Article 7; see also Shanghai Measures on Payment of Enterprise Wages, issued by the Shanghai Labour and Social Security Bureau on 7 January 2003.
25 Wage/Hour Measures, Article 5.
26 Interim Rules on Withholding and Deductions of Individual Income Tax, effective 1 January 2006, Articles 2 to 4.
27 Labour Law, Article 4; and ECL, Article 4.
28 id., Article 4.
29 Reply Letter to Dalian Labor and Social Security Bureau in Response to the 'Application for Instructions on the Issue Regarding the Legal Validity of a Labor Contract Written in Both Chinese and Foreign Languages', promulgated by the Ministry of Labour and Social Security, effective 28 January 28, Article 1; and the Supreme Court's Interpretations Concerning Certain Questions on Application of Law in Labour Dispute Cases (No. 1), effective 30 April 2001, Article 19 (requiring that any revision to the employment handbook must be published to the employees in order to have a binding effect on them, and implying that publication must be in Chinese).
30 Trade Union Law, effective 3 April 1991, amended 27 October 2001, Articles 20-28; and ECL, Articles 4, 6, 43, 51 and 56.
31 ECL, Article 6.
32 Trade Union Law, Article 27.
33 Trade Union Law, Article 42.
34 ECL, Article 4.
35 id., Articles 41 and 43.
36 Trade Union Law, Article 1.
37 id., Article 15.
38 id., Article 18.
39 See the Regulations on Employment Service and Employment Management, effective 1 January 2008, Article 13.
41 ECL, Article 36.
42 id., Article 46.
43 id., Article 39.
44 id., Articles 40, 42 and 46.
45 id., Articles 44 and 46.
46 id., Article 47.
47 id., Article 43.
48 Unemployment Insurance Regulation, effective 22 January 1999, Article 16.
49 id., Article 41.