Introduction
China has come a long way since the labor contract system began in the mid-1980s. As the country moved away from its "iron rice bowl system consisting of state-owned enterprises and "lifetime workers, various types of employment contractual agreements have begun.
Despite this, the practice of having employment contracts in China is not widespread. While the culprits are mainly small and medium-sized local Chinese enterprises, some foreign firms are also guilty of not having employment contracts. But this situation might soon become a thing of the past. Earlier this year, China's Ministry of Labor and Social Security required employers to register all of their employment contracts with the local authorities.
In late June 2007, China's parliament passed a new labor contract law requiring employers to, among other things, provide written employment contracts to their workers. To be implemented on January 1 2008, the law will require employment contracts to stipulate minimum wage and safety regulations. They must also be drawn up within a month of starting work. The new ruling will apply to both domestic and foreign firms, except for foreign representative offices in China. Even without the new law, some foreign firms in China have already provided written employment contracts to their workers.
Since the labor contract law has only recently been released, some details remain unclear. The following information is what we have gathered after speaking with HR managers and other sources in China.
Main Components of an Employment Contract
In China, an employment contract can either be fixed term, flexible term, or specify the completion of a specific amount of work as a term. Required clauses in a contract include job description and responsibilities, remuneration, working conditions, conditions for termination, and liabilities for breach of contract. Agreed clauses include terms of probation, training, confidentiality, and number of holidays and paid leave.
The contract may be in Chinese or a different language, but in cases of discrepancies and disputes, the Chinese version applies. Only the Chinese version can be registered with local labor bureaus.
In the case of termination, the law stipulates that 30 days of notice are needed. But in practice, and depending on the nature of the job and the conditions of dismissal, HR practitioners say it is sometimes difficult to comply with the stipulation. They also note that in some cases, the 30-day notice can be waived if there are strong and valid reasons. These include the protection of sensitive information, or evidence of any potential disruptive behavior from the employee whose service is to be been terminated.
But as an HR manager in China pointed out, dismissing an employee with little notice is often tolerated in China. This is especially so when the employee in question is unable to quickly measure up to the requirements of the job, or has committed a serious dereliction of duty.
The 30-day notice can also be waived if the right spirit of negotiation and compromise can be undertaken. Many practitioners agree that being reasonable, maintaining harmony and giving "face are traits valued by the Chinese.
Different Foreign Enterprises, Different Nature of Employment Contracts
Depending on the nature of the foreign enterprise in China, there are slight differences in the types of employment contracts used.
For instance, a Wholly Foreign-Owned Enterprise (WFOE) can enter into a direct employment contract with Chinese employees. The WFOE will then have to submit the labor contracts for certification by the local labor bureau. A representative office, on the other hand, must employ staff through an authorized foreign enterprise service corporation (FESCO). Hence, employees working in a representative office are technically not staff of the representative office, but employees of FESCO.
While the division may seem fairly clear-cut, HR managers in China point out that in reality, things are a lot more fluid and practical. For instance, if a representative office is not satisfied with any of the employees recommended by FESCO, it can scout for its own employees. When a suitable employee from another source is found, what remains to be done is for the employee's dang'an (or personal records) to be moved to FESCO. This is especially common in cases when FESCO is not able to supply employees that have the necessary skills and expertise.
Implications of July 2007 Labor Contract Law
While the full implications of the Labor Contract Law are not immediately apparent, what is clear is that employees with short-term contracts can quickly become full-time employees (sometimes with lifetime benefits) after a short-term contract is renewed just twice.
But even under the new law, no maximum or minimum time limit has been set for the duration of a "short-term contract. Furthermore, the new law also allows provision of probationary contracts that give employers the scope to offer or deny employees full-time status.
Overall, the new law should be understood as China's efforts in playing catch up with its rapid economic expansion since the last labor law was enacted in 1994. The new law was mainly promulgated to protect the interests of workers, especially migrant workers and those working under poor or dangerous conditions. International employment lawyers say the new law is largely reasonable as compared to the labor laws in their home countries or within their international operations.
Fixed-Term Contracts Discouraged
Under the existing labor contract system, employers can terminate contracts without notice, withhold workers' wages, and refuse to renew contracts. Under the more pro-worker new law that will come into effect next year, these measures will be more difficult, or at least be subjected to greater scrutiny.
For instance, employers currently often resort to fixed-term employment contracts. This gives them the flexibility to allow contracts to expire when employees are not able to meet expectations.
Under the new law, even though fixed-term employment contracts are still tolerated, they are strongly discouraged. Incentives for employers not to resort to such contracts have been put in place. These include disallowing early termination, and payment of severance amounting to one month's salary for every year of service if the contract is not renewed.
Dismissal and Termination of Contracts
The new law makes it clear that employers may not terminate an employment contract under the following circumstances: if the worker has been exposed to occupational hazards as a result of performing his/has duties, lost the ability to work due to a disease sustained on the job, is pregnant, or has been working for the same employer for at least 15 years, and is less than five years away from his/her legal retirement age.
While making more than 20 employees or over 10% of the workforce redundant will still be allowed under the new law, this must be done on the basis of seniority, and not merit. Indeed, a clause in the law even stipulates that when reducing the workforce, the employer should retain with priority employees who are the sole breadwinners in their families. Employers should also retain those who have to provide for an elderly person or a minor.
Probation Period
If an employment contract has a term of 3 months to 1 year, the probation period may not exceed one month. If the employment contract has a term of 1 to 3 years, the probation period should not exceed two months. And if the employment contract has a term of at least three years or is open-ended, then the probation period should not exceed three months.
Penalties and Legal Liabilities
Many of the penalties and legal liabilities are generalized. For example, employers must pay damages if workers are harmed as a result of the employer's inability to discharge its obligations as spelled out in the employment contracts. But the extent of these damages is not clear, and will be determined by local labor bureaus.
In cases of unlawful dismissal, the employer must pay two months' salary for every year of service. This severance may be calculated by the local labor bureau, which can choose to apply salary standards for the industry or geographical location, rather than the actual salary itself.
If an employer hires a worker whose employment contract with another employer had not been terminated, both the new employer and the worker will have to pay damages to the previous employer. But the amount of these damages is also unspecified.
General Pointers
Under the new law, the government-controlled All China Federation of Trade Unions (ACFTU) will have more power to decide on discipline, safety, remuneration and working hours. But the true extent of how the ACFTU will flex its muscles remains to be seen. That is mainly because the Federation generally has a poor record of fighting for workers' rights, and seems more interested in propagating national policies within unions.
Overall, labor specialists point out that there are aspects of the new law that remain unclear or inconsistent. Although the new law is said to standardize practices throughout the country, it is predicted that it will be interpreted and applied differently in every region.
Practical Advice on Employment Contracts
While having clearly written contracts is important, many practitioners agree that it is sometimes difficult to have separate contracts that cover all the bases. Hence, many foreign firms in China resort to standard employment contracts stating the key terms of employment.
These include the designation, duration of employment, salary, working hours, number of holidays and conditions surrounding termination. Usually amounting to only two pages, such a standard employment contract is generally considered sufficient, both for the employees in question, and the needs of the local labor bureau. In case of disputes and uncertainties, local labor rules would apply.
But for some foreign firms, a two-version employment contract system is preferred. The first usually emanates from the head office and is written in English. The second is a standard employment contract written in Chinese. The English version is mostly to satisfy headquarters' requirements and is generally similar for all foreign-employed employees of the company. The Chinese version is needed due to local labor bureau requirements. Practitioners point out that in cases of disputes and uncertainties, the English contract holds little or no legal significance.
Many practitioners also point out that, although important, the employment contract is only one component of managing Chinese employees. Managing employees' expectations, having a structured training program and career path, and in the case of companies that are unionized, a good working relationship with the unions, are all equally important.
Finally, it should also be noted that even without an employment contract, and in the case of a dispute, Chinese employees can still have recourse to legal representation if they have evidence to prove that they have been paid on a regular basis. Even a card detailing the employees' arrival dates and number of hours worked can be used as evidence.
Having said this, legal representation of labor disputes is fairly uncommon, as most disputes are resolved either at the company or at the level of the local labor bureaus. Parties involved in the dispute can apply to the Labor Dispute Arbitration Committee for arbitration within 60 days from the date the dispute arises. The Committee will then arbitrate and issue an arbitration award. If the relevant parties fail to agree with the arbitration award, they can file a lawsuit to the People's Court, which will then issue a final decision. In China, disputed parties are not allowed to file lawsuits right away to the People's Court. Instead, they must apply for arbitration first.
Conclusion
As China grapples with its fast-changing economic and labor situation, it is important for both local and foreign firms to keep themselves abreast of the most up to date HR and labor policies.
Given the fluidity of operating in China, it is also equally important to constantly review and redraft human resource planning processes and strategies, HR policies, manuals, collective agreements and employment contracts.
Ames Gross is the president of Pacific Bridge, Inc., a recruiting and HR consulting firm specializing in Asia. For more information about Pacific Bridge, Inc., visit the company's website at www.pacificbridge.com or e-mail info@pacificbridge.com
