It is critical for foreign businesses which are doing business or planning to do business in China to understand China’s new labor laws as well as how the overall design of the legislation operates.  China’s labor laws underwent a major overhaul, the first overhaul in 15 years, when on January 1, 2008, the new Labor Contract Law (“LCL”) became effective.   Implementing Regulations, designed to clarify and provide further specific details to this new law, were adopted in September of 2008.

The overall design of the legislation is to ensure and protect the rights of employees.  The 1995 labor laws lacked any mechanism to protect and enforce employee rights.  To correct this problem the LCL was adopted to assure that employees have written employment contracts with enforceable terms. There are significant penalties that can be assessed against an employer for failing to conclude written employment contracts with its employees.
The new law further gives employees support through the increased role of the trade unions.  The LCL provides that employers must consult with trade unions on matters relating to the implementation of a new rule or regulation, and that the trade unions serve as a “collective consultation mechanism” with employers to protect the rights of employees as well as guide employees in the negotiation and performance of their employment contracts.

The summary below is a highlight of some of the changes to China’s labor laws. 

Written Employment Contract 
The LCL requires that all employees receive a written employment contract. It also requires the employer to conclude the contract, including obtaining the signature of the employee.
The burden is on the employer to ensure that written employment contracts are concluded and signed.  Failure to conclude a written employment contract with an employee within 30 days of the employee’s commencement of work shall cause the employer to be liable for twice the salary of the employee. If no written contract is obtained within a year of commencement of work, in addition to being liable for twice the salary, the employment relationship will be deemed an open-ended contract, discussed in the next section.

Employers should know they can avoid liability for failing to conclude a written contract by terminating a reluctant employee before the 30 day period has expired.  The employer should take care to have evidence, such as an acknowledgement signed by the employee on before the end of the 30 day period, that the employee was aware that termination could result from not signing the employment contract within 30 days of commencement.

Employment Term
The law allows for three kinds of contracts based on the employment term: fixed–term, open-ended and project-based.  A fixed-term contract has an agreed upon termination date while an open-ended contract has no termination date. A project-based contract has a termination date based upon completion of the project or task.

Although to the unacquainted these contracts may appear simple in nature, there is a relationship with termination rights. From an employee perspective, an open-ended contract is most advantageous; it provides no termination date, and termination can only occur under the specific grounds enumerated under the LCL.  A fixed-term contract is more advantageous to an employer, who has no obligation to renew the employment contract upon its expiration; an employee retained after two fixed-term contracts have expired, however, is deemed to have an open-ended contract.  A project-based contract is more like a fixed-term contract, unless the project is likely to take a very long time.

The LCL rewards employees who work longer for an employer.  An employee who has worked for 10 consecutive years with an employer, or who has completed two fixed-term contracts with the employer, is automatically entitled to have an open-ended contract.

Any employer in China must be well aware of the legal consequences of handling each of these kinds of contracts.

Mandatory Terms of an Employment Contract
Under the LCL, the following terms are required in the employment contract:

• name, domicile and legal representative or main person in-charge of the Employer;
• name, residential address and number of the resident ID card or other valid identity document number of the worker;
• term of the labor contract;
• scope of work and place of work;
• working hours, rest and leave;
• labor compensation;
• social insurance; and
• labor protection, working conditions and protection against occupational hazards

Aside from these mandatory terms, an employer and employer may agree to include other matters in the employment contract including probation period, training, and confidentiality and non-compete terms.

Probation Period
The LCL has reduced the length of an employee’s probation period.  If the employment contract is for less than six months, the probation period cannot exceed one month.  For employment contracts greater than a year and less than three years, the probationary period can be two months.  For contracts greater than three years and open-ended, the probationary period can be six months. 

The LCL also requires employers to pay employees wages during the probation period.  The   wages may not be less than the lowest wage for the same position or 80% of the wages provided for in the employment contract, whichever is lower.

Training
Employers often provide professional training to employees.  The LCL allows employers to enter into a training agreement with the employee stipulating a service period.   
In the event the employee terminates early the service period, the employer can claim liquidated damages against the employee.  Liquidated damages include training costs, travel costs and direct expenses.

Confidentiality and Non-Competition
The LCL allows confidentiality provisions included in the employment contract.   Non-competition provisions may be included in the employment contract or in a confidentiality agreement, but these shall be limited to senior management, senior technicians and individuals with confidential obligations.  Under the LCL, the employer must pay the employee compensation on a monthly basis during the period of non-competition, which shall not exceed two years.  The minimum compensation varies depending upon local regulations.  There is no expectation that injunctive relief can be granted.

Termination of Employment Contract
Both employer and employee can terminate the employment contract, but only upon the conditions set forth under the LCL. 

Where the employee terminates the employment contract due to the employer being in breach of the LCL, the employee will not be subject to liquidated damages.  But if the employer terminates the contract due to the employee’s fault, then the employer can seek liquidated damages from the employee.

An employer is entitled to terminate employment upon 30 days’ notice to the employee, except under certain circumstances cited in the LCL (e.g. employee is pregnant, worker is suffering from occupational disease, etc.).  The LCL also requires that the employer inform the union of the termination.

Termination of the employment contract by the employer triggers severance payment.  The usual rate of severance payment is one month of pay for each year of service up to 12 years.

Conclusion
The impact of the new law remains unclear.  It remains to be seen how the new Labor Contract Law will be enforced by the different local labor authorities.  It is certain however that foreign companies with employees in China must review their existing employment contracts and HR policies to determine if these are in compliance with the new Labor Contract Law and Implementing Regulations.