The Employment Law Review: China
Employment law in China affords employers and employees a certain degree of freedom in creating the terms of their working relationships. Nonetheless, 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 within 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 people's congress, government, and human resources and social security bureaus have responsibility for issuing local employment regulations and enforcing the national and local laws and regulations. The most significant statutes regulating employment in China are the Labour Law, promulgated on 5 July 1994 and revised on 27 August 2009, the Employment Contracts Law (ECL), promulgated on 29 June 2007 and revised on 28 December 2012, and the Social Insurance Law, promulgated on 28 October 2010 and revised on 29 December 2018.
The laws of China may be interpreted by the judiciary, which comprises three levels of courts: the Supreme People's Court, the provincial people's courts (further divided into three levels of authority) and special people's courts (intellectual property, internet, 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 release 'internal' guidelines or meeting minutes from time to time regarding employment law issues. Although, in theory, the local interpretation has no legal binding force, it is still followed by local judges as a matter of fact. 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 employers for disputes involving small amounts and for certain claims, such as social insurance benefits. However, most decisions of the labour arbitration commission can be appealed to the people's courts for litigation. In a litigation process, most employment cases may be heard at up to two instances, namely trial and appeal. In very rare circumstances, a case can be heard in a retrial proceeding by the provincial high people's court or even the Supreme People's Court.
China generally is viewed as a pro-employee jurisdiction. Employment laws and regulations are more restrictive on employers, and in general, are 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 concepts of 'termination at will' and 'unilateral termination without cause' do not exist in China. An employee's contract may only be terminated based on certain limited grounds explicitly set out in the ECL and, as a result, firing employees is a quite difficult process and costly.
Year in review
i Significant legislation and legislative developments
In February 2019, the MOHRSS, the Ministry of Education, the Supreme People's Court and other four ministerial departments jointly released a notice reiterating the probation on discrimination against women in recruitment and promoting the employment of women. It is the first time that the central government has made it clear that employers are not allowed to ask a female candidate about her marital and family status during the recruitment process.2
In April 2019, to reduce the financial burden of employers during challenging economic circumstances, the State Council decided to reduce employers' social insurance contributions. The pension insurance rate for the employer's share is reduced from between 18 per cent and 20 per cent to 16 per cent, and the occupational injury insurance contribution rate is reduced by 20 per cent or 50 per cent. In addition, local governments are required to lower the upper and lower limits of the base amounts of social insurance contributions.3
In May and July 2019, the Cyberspace Administration of China (CAC) published two regulations regarding data security. They were drafted to support the implementation of the China Cybersecurity Law. These two regulations request the network operators to meet different security requirements if they need to transfer important data and personal information out of China.4 The final versions of the drafts will probably be published in 2020.
In September 2019, the State Council issued the Guiding Opinions regarding enhancing governments' supervision of mid-matters and post-matters. The aim of the Guiding Opinions is to set up a whistle-blower system to award and protect those reporting material violations of law, and risks and defects. The whistle-blower system will create a new challenge for employers, not only in respect of compliance but also regarding responses to employees' related claims and demands.5
In November 2019, the MOHRSS released the Interim Measures for Hong Kong, Macao and Taiwan Residents to Participate in Social Insurance in Mainland China. From 1 January 2020, citizens of Hong Kong, Macao and Taiwan who are working in mainland China are required to participate in mainland China's social insurance system. Employers need to register these employees with the social insurance authorities, and both the employers and the employees must make social insurance contributions. If an employee has participated in local social insurance in Hong Kong, Macao or Taiwan, the employee can be exempted from participating in the mainland China social insurance system.6
According to the latest report from the MOHRSS,7 at the end of 2018, the total number of workers in China is 755.86 million, of which 434.19 million work in urban areas. The registered unemployment rate in urban areas in 2018 was 4.9 per cent.
Labour arbitration commissions in China heard 1.826 million employment dispute cases in 2018, a decrease of 9.6 per cent as compared with 2017.
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 significant persuasive value in subsequent employment arbitration and litigation.
Basics of entering into an employment relationship
i Employment relationship
Employers must provide every full-time employee with a written employment contract, which must be signed by both parties and should be in Chinese.8 The contract must contain the following:
- employer's name, address and legal representative;
- employee's name, address and resident identity card number;
- term of employment;
- job description and work location;
- working hours and leave entitlement;
- social insurance benefits; and
- information about work safety, work conditions, and the prevention and protection from occupational hazards.9
The parties must execute an employment contract within one month of the date on which the employee starts work.10 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).11 The employer and employee will be deemed to have entered 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.12
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).
Part-time employees are not required to have written employment contracts.
ii Probationary periods
Probationary periods are permissible, but they must be included as a term in employees' employment contracts. Furthermore, there are maximum lengths for probationary periods, which vary according to the length of the contract term:
- for a contract lasting between three months and one year, the probationary period may not exceed one month;
- for a contract lasting between one year and three years, the probationary period may not exceed two months; and
- for a contract lasting at least three years, or for an open-ended contract,, the probationary period may not exceed six months.13
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.14
Termination of employment is comparatively easier for both an employer and employee during the probationary 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 prior notice if the employer can demonstrate that the employee fails to meet the requirements of the position.15
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 it may only employ Chinese nationals (excluding residents of Hong Kong, Macao and Taiwan) 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.16 Foreign nationals and residents of Hong Kong, Macao and Taiwan must be hired as representatives of a representative office. A representative office can have, at most, only four representatives, including the chief representative.17
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 once it is established.
If a foreign company engages local Chinese individuals to perform services on its behalf, effectively as independent contractors, the foreign company may face myriad penalties, including:
- an employment-related penalty for hiring 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 workers in a currency other than Chinese currency;
- penalties for not contributing to the social insurance scheme for workers;
- penalties for not withholding individual income taxes for workers; and
- taxes and penalties for the permanent establishment created by locally hired workers.
While in practice it may be difficult for the Chinese government to assert jurisdiction over the foreign entity, a prohibited activity could affect the foreign entity's future ability to establish a legal presence 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) to the mandatory social insurance and public housing fund schemes, which include the following:
- pension insurance;
- medical insurance;
- work-related injury insurance;
- unemployment insurance;
- maternity insurance; and
- the 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 once a year. An employer is responsible for deducting both its own and their employees' 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 each month on behalf of its employees.18
Restrictive covenants prohibiting employees from engaging in the same type of business as their current or previous employer are permissible. Restrictive covenants that are effective during an 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.19
Post-termination non-compete agreements may not exceed two years, counted 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.20 There are no national statutory restrictions on the amount of consideration, geographical scope or damages for such agreements. Nonetheless, for a non-compete agreement to be legally viable, the former employer must pay financial consideration to the former employee at least monthly during the restricted period. The Supreme People's Court's most recent judicial interpretation suggests that the financial consideration should not be less than 30 per cent of the employee's average wage during the 12 months before the termination.21 Some provinces, municipalities and industrial zones have enacted their own local regulations to set the minimum amount of consideration that is required. For instance, in Beijing and Shanghai, the financial consideration may not be less than 20 per cent of an employee's annual wage for each year of non-competition. Continuous failure to pay the consideration for the non-compete agreement during the post-termination restricted period for three months or more, will give the employee the right to declare the non-compete obligation null and void.22 However, an employer is allowed to release an employee from a non-compete obligation and stop paying the non-compete compensation before or part way through the non-compete period, and in the latter case, the employer must pay the employee three months' non-compete compensation as damages.23
i Working time
There are three types of working hours systems in China: regular (or standard), flexible (or irregular) and comprehensive. The default system is the regular working hours system under which the vast majority of employees in China are employed. Under this system, a working day is generally limited to eight hours and a working week is limited to 40 hours.24 Subject to the approval of the local labour authorities, both the flexible and the comprehensive working hours systems may apply to certain employees who are unable to follow the regular working hours system owing to the nature of their jobs (such as senior management and sales staff) or industry (e.g., farming or 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 at night. Notably, the draft Regulations on Special Working Hours Systems25 provide that employees who work between 10pm and 6am should receive an additional payment, the level of which would be set by the local labour authorities. Further, there are local regulations26 that prohibit pregnant employees from working at night, or working overtime, once they reach the seventh month of pregnancy.
Under the regular working hours system, overtime pay must be paid if an employee is required to work outside normal business working hours. Employers must compensate employees at the following overtime rates: 150 per cent of the regular rate of pay on regular working days, 200 per cent for working at weekends or on regularly 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 for work performed at weekends or on regularly scheduled days of rest.27 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.28
Under the flexible working hours system, employees' working hours vary in accordance with the business needs of the employer. Employees working under this system are generally not entitled to overtime compensation, although in some jurisdictions, they may be entitled to overtime compensation for work performed on a national holiday.29
Under the comprehensive working hours system, employees' working hours are calculated according to a particular period, 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 employees' average weekly working hours are generally 40.30 If employees' average working hours exceed the limit for the calculation period (e.g., 500 hours if the calculation period is a quarter) or employees are required to work on public holidays, then the employer must pay overtime compensation.
A Chinese employer must obtain an employment licence to engage a non-Chinese worker, and the worker in question must obtain a permit to work legally in China. Immigration requirements and procedures are largely carried out at a local level and each province has its local practice in this regard. However, there are certain requirements that typically need to be met:
- the foreign worker should have special skills and a certain number of years (normally two years) of relevant experience;
- the foreign worker's work permit application will need to be sponsored by a locally registered company in China;
- the foreign worker will need primarily 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 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 just 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 salaries of foreign expatriates.31 Deductions should also be made on behalf of foreign workers, from their salaries, for social insurance contributions (except those foreign workers from countries that have social insurance exemption treaties with China) .
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 specified in the employment or secondment agreement, and the local rules and practice at the location of the employer or local entity in China.
Residents of Hong Kong, Macao and Taiwan do not need a work permit or residence permit to work in mainland China.
The ECL provides that employers must promulgate internal rules and policies that delineate the employees' rights and obligations.32 A policy manual may be contractually binding if an employment contract explicitly incorporates its terms. However, to enforce legally binding compliance with a policy manual, employers must make it available to their employees. To establish that employees have 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 of receipt 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 of an employment agreement 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 work rules to an employee or the employer cannot establish that it provided the work rules to an employee, those rules may not form the basis for a termination.
Further, as of the implementation of the ECL, employers are required to consult their 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 the employees, collect and consider their opinions and then implement the policies or rules, taking into account the opinions of the respective bodies. 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 a consultation process for them to be binding on the employees.33
i Maternity leave and breastfeeding breaks
Female employees in China are entitled to 98 days of maternity leave.34 In special circumstances, such as complications during delivery, an additional 15 days of maternity leave may be granted. For multiple births, an additional 15 days is granted for each additional infant produced from a single pregnancy.35
Female employees who comply with family planning requirements further enjoy additional maternity leave under local rules. For example, in Shanghai, the additional maternity leave is 30 days. Female employees who have miscarried are also entitled to a short period of leave of between 15 and 42 days.
Female employees are also entitled to a one-hour paid break per workday when they return to work after maternity leave, until one year after childbirth. For multiple births, another hour is granted for each additional infant. Additionally, female employees with children under 12 months old may not be required to work overtime.36
Female employees receive a maternity subsidy from the maternity insurance fund. In certain cities, an employer is required to make up the difference if a female employee's pre-maternity salary is higher than the maternity subsidy.37
Employers may not reduce the salaries of female employees during their pregnancy, maternity leave or nursing period (one year after childbirth) without justification.
During the pregnancy, maternity leave and nursing period, the employer must ensure that the scope of the female employee's work complies with relevant laws and regulations. For example, pregnant women past their seventh month of pregnancy may not work between 10pm and 6am and must be given rest time during working hours. Female employees who cannot perform their regular job functions as a result of pregnancy or breastfeeding may have their workload reduced or be transferred to more appropriate positions.
Finally, employers may not dismiss female employees during pregnancy, maternity leave or the breastfeeding period except for gross misconduct.
ii Paternity leave
There is currently no national regulation mandating employers to provide paternity leave. Availability of paternity leave varies across jurisdictions and is premised on the childbirth complying with relevant family planning requirements. Men are generally able to take between 10 and 30 days of paternity leave; for example, in Shanghai, men are entitled to 10 days of paternity leave.38
Employment documentation, such as contracts, handbooks and any other agreements or policies, such as confidentiality agreements or non-compete agreements, that an employer wants to be binding on its employees should be provided in Chinese.39 It is at the discretion of the employer whether to execute the documents in a foreign language as well. Further, when employing a foreign national, an employment contract must be provided in Chinese to enable the foreign employee to obtain a work permit. The authorities will not accept an employment contract in English.
If employment documents are not translated and a dispute arises regarding 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 wrongful termination.
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.40
The ECL further provides that the trade union should establish a collective bargaining mechanism.41 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.42
Employers are responsible for contributing dues to the trade union equal to 2 per cent of their gross monthly payroll.43 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.44 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.45
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 of trade union; if the number of female employees is relatively small, the trade union committee may reserve seats for female employees.46
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.47
The establishment of a basic-level trade union, local trade union at all levels, or a national or local industry trade union must be submitted for approval by the trade union organisation at the next highest level. The trade union at the higher level may assign personnel to assist and supervise a company 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.48 However, their employment may be terminated 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 is required from the upper-level trade union, which is independent of the employer.
The ACFTU, with certain 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 a trade union, in all types of enterprises, including state-owned and non-state-owned enterprises, as a platform for employees to participate in the management of enterprises in a democratic manner. The 2012 provisions define the powers, duties, organisational structure and working rules of an ERC. The major powers of an 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 its employees (e.g., important matters regarding business operations, work rules involving employees' immediate interests and the integrity of the management personnel). This disclosure is meant to solicit the employees' comments and to subject management to a degree of 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.
Employee representation (protected concerted activity)
i Requirements for registration
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 that employee's personal data public.49 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 employees' 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, it is recommended that employers should act in compliance with these 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 (CII providers, the definition of which must be clarified) must store personal information and important data they collect within China. If there are business reasons for CII providers to transfer the information or data outside China, security assessments must be conducted. Owing to the fact that certain details concerning the data localisation requirement (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, which is intended to be a major set of implementation rules for the new Cybersecurity Law. However, in 2019, the CAC issued two sets of draft rules, for individual information and data outside China, respectively.
The draft Measures for the Administration of Data Security, which was published on 28 May 2019, requires a network operator who wants to transfer important data across borders must conduct a security assessment and obtain approval from the appropriate industry regulator or the provincial branch of the CAC.50
The draft Measures for Security Assessment on the Export of Personal Information, which was published on 13 June 2019, requires a network operator who wants to transfer personal information across borders must obtain the permission of the data subjects and conduct a risk assessment. Further, the network operator must provide a security assessment report to the local provincial government.51
Although the Cybersecurity Law and the two draft rules do not specify whether the above-mentioned requirements apply in the employment context, it is recommended that employers should comply with them. Based on the foregoing, 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 two draft rules have been passed, an employer may also be required to pass a government-run security assessment if personal data and other important data needs to be transferred abroad.
iii Sensitive data
The national standards on the security of personal information 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 identity 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 regarding minors under 14 years old. Expressed consent must be obtained from the data subject before sensitive data is collected from that data subject.
iv Background checks
There is no specific Chinese law prohibiting an employer from conducting a background check or credit check on an employee employed in China but, in practice, getting relevant and accurate information can be challenging for employers. 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, NPC decisions and relevant judicial interpretations, activities that publicise private data, or disclose an individual's private information, either in writing or orally, without the individual's prior consent, are considered a civil injury to the employee and may constitute a criminal offence.
Chinese law is much more protective of employees than the laws of many Western countries. Under Chinese law, employers cannot terminate an employment contract without cause: only employees have the right to terminate an employment contract without cause, subject to giving 30 days' written notice (which will be reduced to three days' notice during a probationary period). 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.52 If a termination by mutual agreement is initiated by the employer, the employer will be required to pay statutory severance to the employee (see 'Calculation of statutory severance', below).53
UNILATERAL TERMINATION BY EMPLOYER WITHOUT NOTICE OR COMPENSATION
An employer is allowed to terminate an employment contract without giving the employee prior written notice and without paying statutory severance in the following circumstances:
- the employee fails to meet the employment requirements during the probationary period;
- the employee serious violates the employer's policies;
- the employee is guilty of serious dereliction of duties, corruption or causes the employer to suffer significant losses;
- the employee is working for another employer at the same time, which has seriously affected his or her performance of tasks as assigned by the employer, and has refused to rectify the situation after being requested to do so by the employer;
- the employee used fraudulent or coercive tactics to obtain the employment contract or to amend the contract; or
- the employee is the subject of a criminal prosecution.54
Termination under any of these grounds requires that the employer provide advance notice to the trade union.55
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:
- after undergoing medical treatment for a period, the employee, owing to illness or a 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 the stipulated period of medical treatment has not expired;
- 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 from legal retirement age (protected employees).56
TERMINATION BY OPERATION OF LAW
An employment contract will automatically terminate by operation of law under the following circumstances:
- the employment contract expires and is not renewed by the employer and the employee;
- the employee retires;
- the employee dies, 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 points (a) (unless the employer proposes to renew the contract on the same terms, or terms that are more favourable to the employee but the employee does not agree to the renewal), (d) and (e), above, the employer is required to pay statutory severance to the employee.57
CALCULATION OF STATUTORY SEVERANCE
As discussed in the foregoing, 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 of service with the employer. The AMW is capped at three times the local average wage in the previous year (a fixed number published annually by the local government). For example, in 2018, the local average wage per month was 10,592 yuan in Beijing and 8,765 yuan in Shanghai. The cap is not applicable to severance for service years before 1 January 2008. Any period of service of less than six months is rounded up to half a year, and any period of six months or more is rounded up to a whole year. For example, for the purpose of calculating statutory severance, a service period of four years and five months will be deemed four-and-a-half years, and a service period of four years and six months will be deemed 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 notice must be given to the relevant trade union in the event of unilateral termination of employment by an employer, this requirement has not been seriously implemented in practice. If an employer does not have a trade union, the notice usually should be given to the upper level union in the employee's local area. Failure to give notice to a trade union may cause the termination be held illegal during a wrongful termination lawsuit. The deadline to give notice to the trade union is before the wrongful termination case enters court proceedings.
Following the termination of employment, employers are required to issue termination certificates to the affected 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 a certain number of days of their occurrence.58
Mass lay-offs are generally not permissible, unless the individual terminations fall under one of the grounds set forth in Section XIII.i, or in the event of economic lay-offs (as defined below), provided 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 one of 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 redundancies; or
- the circumstances upon which the conclusion of the employment contracts is based have significantly changed and, as a result, the employment contracts can no longer be performed.59
If an employer wishes to carry out an economic lay-off, it must give at least 30 days' notice and explain the circumstances to the labour union or all its employees, consider the opinions of the labour union or employees, and report the lay-off plan to the local labour authority.60 Notwithstanding the foregoing, protected employees cannot be laid off until the circumstances for which they are protected (e.g., pregnancy or a stipulated period of medical treatment) 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, including 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.61
Laid-off employees are also entitled to statutory severance (see Section XIII.i). 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 from the employees and the labour authorities.
Transfer of business
China does not have an equivalent to the UK Transfer of Undertakings (Protection and 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 Section XIV.i), 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 unless the terms of the employment contract are changed.
ii Company split
In practice, employee transfer in a company split is more complicated than 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 remains unchanged.
iv Asset acquisition
In an asset acquisition in which 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 as part of the deal, and those employees must consent to be transferred (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 these circumstances.
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.
The draft Measures for the Administration of Data Security and the draft Measures for Security Assessment on the Export of Personal Information have completed the public consultation stage. At the time of writing, the two drafts are at the discussion stage, and it is possible that the formal legislative procedure will be conducted in 2020.