Passed, finally

Author: | Published: 1 Jul 2007
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The new PRC Labour Contract Law was finally passed on June 29 2007. It will become effective on January 1 2008. It follows a lengthy and seemingly difficult process of internal debate amongst legislators and external consultation involving regulators, employees, and domestic and foreign companies and representative bodies. The many drafts have now been distilled into the final document, with further amendments since the last version made available in March 2007.

Appearances suggest that the new law was approved in something of a rush by the National People's Congress. Continued internal discussions and differences of opinion were preventing the PRC government from living up to rhetoric surrounding the advent of the new law, mostly based around improving employees' rights and protecting factory and migrant workers.

The final version of the law seems to take a compromise position on a number of issues that were hotly debated. Some draft provisions that were condemned as too harsh on employers have now been softened, but in a number of important areas there remains a lack of clarity.

There is speculation that implementing regulations may be passed to provide additional guidance before the law takes effect. Local authorities may also issue local regulations with their interpretation. In the meantime, employers should consider the changes that will apply under the new law, as it will prevail over the existing PRC Labour Law 1995 to the extent that they cover the same subject matter. The overall effect is that there will be increased restrictions and concerns for employers.

Set out below is an analysis of certain key changes under the new law.

Written contracts

The new law emphasises the need for employers to put written employment contracts in place with all full-time employees. Penalties will apply if the employer fails to do so, either at the commencement of the employment relationship or as part of a renewal of such relationship: the employer must pay double wages to the employee if no written contract is in place within one month of the relevant start date; and if there is still no written contract within one year of the start date, the contract will be deemed to be an open-term contract. Employers will need to be vigilant in implementing and renewing contracts.

Probation period

The maximum probation period that can apply to an employee's contract will still depend on the term of the contract but imposes unified national criteria in place of the local practices that currently vary slightly by location: one month for contracts of three months or more but less than one year; two months for contracts of one year or more but less than three years; and six months for contracts of more than three years or open-term contracts. This should help employers to achieve a consistent approach for their operations in different parts of China. Employers will also be able to pay 20% less during the probation period under certain circumstances and employees are now required to give at least three days' notice if they resign during the probation period.

The new law also expressly clarifies that only one probation period may apply to a specific employee. Viewed conservatively, this could mean that an additional probation period could not be applied even if an employee returns to a company after a period working for another employer.

The new law will restrict to some extent an employer's right to terminate an employment contract unilaterally without notice or severance during the probation period: the employee must now be proven not to satisfy the conditions for employment. Employers will need to be even more diligent in monitoring new joiners and ensuring that they have sufficient evidence to justify termination.

Fixed-term contracts

The provisions of the new law on fixed-term contracts are slightly unclear, perhaps deliberately so, given that this was one of the hot topics throughout the drafting process. The intention seems to be that employers may only have two fixed-term contracts with an employee and must then apply an open-term contract if the employment is further renewed. The fixed-term contracts rule will apply to the first contract or contract renewal put in place after the new law takes effect. Some commentators have also suggested that the wording could be interpreted to mean that an employee has a unilateral right to demand an open-term contract at the end of the second fixed term. This situation reflects the PRC government's desire to provide more job security for employees and to encourage full employment. An employer is liable to pay double salary to an employee for the relevant period if it fails to implement an open term contract when required by law.

What is certain, however, is that employers will now need to pay severance if a fixed-term contract is not renewed on expiry, unless the employee rejects a proposed renewal on the same or better terms.

The upshot is that fixed-term contracts will become more expensive for employers, although changes to the calculation of severance (see below) should limit the cost to some extent. As there is no "at will" employment and employers may only terminate contracts in the limited circumstances prescribed by law, employers should still use fixed-term contracts to the extent possible. However, they will need to consider carefully how to structure the specific terms. One practical implication is that employers may decide to only offer open term contracts to the most talented and diligent of employees. For other employees they may decide to take a cyclical approach to recruitment and use up two fixed terms of, say, two years only and then not renew. This would not necessarily result in the level of job security that was originally intended.

Employer rules and policies

The new law provides that rules and policies of employers (and any changes thereto) "that have a direct bearing on the immediate interests of workers" must be subject to consultation with all employees or an employee representative congress. The employer must consider the proposals and comments of employees and must also seek input from the labour union (if any) before publishing the rules and policies. There is no reference to outright "approval", but equally there is no guidance on what consultation means and what will happen if the employees or the labour union disagrees with certain items. In particular, if some but not all employees object to a specific rules.

The danger is that an employer potentially may not be able to rely on its rules and policies, particularly in relation to disciplinary action or termination. This is especially important given that the current ground for employers to summarily dismiss an employee for a serious disciplinary breach has been restricted in the new law to a material breach of the employer's rules and regulations. One possible approach for employers is to include more detailed information in employment contracts. At the very least employers will need to ensure that they have undertaken some form of documented consultation process.

Exemption from termination

Except for summary dismissal, employers are restricted absolutely from terminating the contracts of employees in certain circumstances, such as during pregnancy and nursing period for female employees and while undergoing medical care for a work-related injury. The new law adds additional categories: employees that have worked continuously for an employer for at least 15 years and are less than five years away from the statutory retirement age; and employees engaged in work that exposes them to possible occupational disease that have not had a pre-departure medical to determine that they are clear of any such disease.

Mass lay-offs

The new law provides additional scope for employers to make collective dismissals. A company may dismiss a minimum of 20 employees or 10% of its staff in the following circumstances: serious difficulties in production and/or business operations; a change of production mode; introduction of major new technology or business method; or other major change in objective economic circumstances. This should benefit employers, although certain priority criteria apply to the choice of employees to be laid off and the employer must consult in advance with the labour union or all of its employees in relation to this process.

Severance payments

In situations where an employer is required to pay severance, this is calculated as one month's salary per year of service. Any period of six months or more will count as a full month for this purpose. Half a month's salary will apply to any period of less than six months.

The major change is that if an employee's salary is greater than three times the average monthly salary published in the relevant location, "one month's salary" will mean an amount equal to three times such published average monthly. In other words, for highly paid employees, the amount of severance will be reduced as it will not be based on their actual monthly salary. This may help to reduce costs for employers and to counterbalance the fact that severance is now required for fixed-term contracts that are not renewed.

Remedies for unlawful termination

Another major change from the current law is that if an employee is unlawfully terminated, he/she is entitled either to severance pay at twice the normal rate of severance (discussed above) or, as before, to reinstatement. The employee may now demand reinstatement, as opposed to this being purely at the discretion of the labour arbitration tribunal. Reinstatement may not be applied if continued performance of the employment contract has become impossible, but there is now guidance as to how this will be interpreted. It seems likely that employees will demand reinstatement in the hope that employers will then decide to offer a settlement package that is more lucrative than the statutory severance package.

Non-compete

The maximum duration for non-compete periods has been reduced from three years to two years. The new law also emphasises that non-compete provisions may only apply to senior management, senior technical staff and other personnel with access to commercial secrets. Compensation is still a vital component of non-compete obligations, although there is no further guidance on the level of such compensation – the references in a previous draft to "one year's salary" have been removed. Local regulations will still apply where applicable, such as in Shenzhen. The new law does, however, add that compensation must be paid on a monthly basis during the non-compete period. This indicates that clauses providing that an employee has been adequately compensated through normal salary for any non-compete obligations will not be effective. There is no guidance on the level of liquidated damages that an employer may obtain from employees for breach of non-compete obligations, although a previous draft referred to three times the compensation received by the employee.

Training contracts

The provisions relating to training contracts have been slightly amended compared with previous drafts. The new law expressly permits employers to have training agreements with employees that require employees to remain with the company for a period of time following "professional technical training" for which the employer has provided "special funding". There are no definitions as to exactly what this means, although it probably excludes any normal form of training provided to an employee to enable him/her to do the job for which recruited and may mean only off-site professional or vocational training. In addition, if employees breach such agreements they can only be required to pay damages amounting to the training expenses allocable to the unperformed portion of the lock-in period.

Secondment / agency staff

Staffing agencies are required to engage staff to be supplied to other entities on employment contracts with a term of at least two years, although the employee's salary may be reduced to the minimum wage for any period that such employees are not placed with other entities. In addition, agency staff have the right to be paid the same salary as employees of the entity with which they are placed, to the extent that they are in similar positions or do similar work. Agency staff also have the right to join the labour union of either the agency or the entity with which they are placed. It is unclear how staffing agencies such as FESCO will react to this, but one possibility is that they will insist on placing staff with their clients for a minimum of two years. There is no suggestion under the new law that representative offices will now be able to hire staff directly, rather than through an agency.

Other changes

Other provisions of interest include the following:

  • The obligation on employers to pay overtime is re-emphasised
  • The new law provides expressly for payment in lieu of notice (in a case of legitimate termination under the law for which notice is required)
  • Employers are required to provide sufficient information regarding jobs to employees when hiring and employees are required to obtain basic personal information from the employee for the purposes of the employment
  • The new law specifies that part-time employees means those working not more than four hours per day and 24 hours per week for the same employer – a written contract is not required and employment may be "at will".
  • Employees have an express right to report non-compliance – this may lead to more whistleblowing schemes in the PRC
  • There is increased liability on employers for non-compliance
  • Regulatory authorities are encouraged to implement increased scrutiny of employers

How to proceed

The new law presents a challenge for employers, not least because of the ambiguity that remains and uncertainty as to how particular provisions will be interpreted and enforced. At this stage, the best approach is probably to digest the implications of the new law, consider the options for dealing with particular issues, particularly on fixed term contracts and company rules, and generally to be prepared. That said, it would also be worth waiting to see whether guidance appears in the form of national implementing regulations or local municipal and provincial regulations prior to the new law taking effect.

Author biographies

Fiona Loughrey

Simmons & Simmons

Fiona is a partner and head of our China Employment Group. Fiona heads the award-winning employment practice of Simmons & Simmons in Hong Kong. She has been with Simmons & Simmons since 1999 (from 1987 until 1999 she worked with another international law firm in Hong Kong, as a partner from 1993). Fiona qualified as a solicitor in England in 1985 and originally worked with Simmons & Simmons in London, from 1985 to 1987.

Fiona was named "Labour Lawyer of the Year" in Shanghai at the 2006 China STAFF Human Resources Awards, and three times previously since 1998 (2004, 1999 & 1998). She is consistently recognised as a "Leading Individual" for Employment Law by Asia Pacific Legal 500 legal directories (most recently in the 2006/07 editions), and is listed in the "Best of the Best" (Euromoney Expert Guides 2007 and 2005). She has consistently been named as a "leading [labour] lawyer" in Hong Kong by the Legal Media Group Expert Guide to Labour and Employment Lawyers since 2002 (latest in 2006 edition).

Matthew Durham

Simmons & Simmons

Matthew is a senior associate. Matthew's experience includes advising on employment contracts, employee handbooks and company policies, secondment arrangements, benefits, diversity and discrimination issues, disputes and termination, training agreements, and other employment issues relevant to mainland PRC. He is also regularly involved in advising on stock option plans and other forms of employee incentive plan.

Matthew qualified with Simmons & Simmons in 1998 and has spent most of his career in Shanghai, as well as time in the firm's London and Abu Dhabi offices.