China has announced to the world that it is open for business. However, foreign companies find that this is not a simple task, particularly due to the existing China employment law. This article provides detailed and updated information about relevant China employment laws and what about these laws discourage foreign investors. It also provides a solid solution to all these issues.
Besides having the second largest economy in the world, China also has the second strongest consumer market globally as illustrated in the chart below. This is the reason entrepreneurs and businesses worldwide consider China as a potential location for startups and business expansion.
However, after learning what it takes to open a business in China, many backed out. Included, among others, in the reasons for changing their minds are as follows:
- The stringent China employment law and labor regulations, particularly with regard to employment contracts;
- Opening a legal entity in China is extremely process-intensive;
- The continuous changes in relevant laws, normally several times a year;
- The complexity and ambiguity of the relevant laws;
- The difficulty involved in the recruitment of both local and foreign employees;
- The lax intellectual property laws; and,
- The considerable costs and time involved in the creation of the business.
Fortunately for these entrepreneurs, they can again decide to bring their business in China with the help of a Global PEO. A good analogy for a PEO or Professional Employment Organization is that of instant human resources and administration department. It is an established entity in a particular country ready to do business for a client company.
A PEO in China can be hired directly by a foreign company and immediately operate the business, at times, in a matter of days.
This means that the foreign investor need not go through the complex and process-filled application for permits and licenses, and company registration.
Moreover, a PEO in China will be tasked to do all the necessary HR outsourcing and administrative activities for the foreign investor, depending on the service agreement that will be executed between the PEO and the client company.
To best appreciate what our PEO, New Horizons Global Partners can do for your business in China, it is better to learn what is involved in employment in China and the applicable China labor laws.
China Employment Laws
China employment law basically involves such issues as employment contracts, remuneration or salary, workplace safety, procedures for negotiations, labor disputes, working hours, protection from discrimination, compensation or wage regulations, training, social insurance, and other legal responsibilities the employer must follow according to law.
China employment law is deemed to have the following characters, among others:
- a very strict termination system;
- the existence of local policies and rules, besides the national laws, which differ in the approach to the same issues; and,
- varying court and arbitral tribunal interpretations on the same legal issues.
The two China employment laws that all foreign investors must consider before commencing a business in the country are as follows:
- 1995 Labor Law of the People’s Republic of China; and,
- 2008 Labor Contract Law of the People’s Republic of China.
These are the two primary sources of China employment law. However, these are not the only ones that should be considered since there are several other China employment law and supplementing policies applicable to any business in the country, including the following:
- Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration;
- Employment Promotion Law of the People’s Republic of China;
- Labor Union Law of the People’s Republic of China;
- Law of the People’s Republic of China on Work Safety;
- Social Security Law;
- Opinion on Several Questions Regarding the Implementation of the Labor Law of the People’s Republic of China; and,
- Implementing Regulations for the Law of the People’s Republic of China on Employment Contracts.
Clearly, the relevant China employment laws are way too numerous and not to mention quite complex and ambiguous. What makes them, even more, intimidating for investors are the legal risks and liabilities that the company may acquire if they fail to comply with these laws.
Moreover, the provisions of some of these laws are regularly amended by the government, thus the necessity for businesses to be vigilant about such changes.
To illustrate how challenging these China employment laws can be, it would be prudent to show concrete examples. Let us take the “employment contract” for instance and the applicable laws.
China Laws on Employment Contract
Article 1 of the 1995 China Labor Law protects the legal interests and rights of laborers and employers, shapes the appropriate labor relationships, and establishes and safeguards China’s labor system, among others.
As a result of the lack of efficient and effective means of implementing the 1995 China Labor Law, the 2008 China Labor Contract Law was enacted. The former remains to be the foundation of China’s employment laws while the latter allowed for the improved implementation of the labor principles contained in the 1995 Labor Law.
Such improvement was done through the inclusion of more specific enforcement of penalties, increased employee protection particularly those from agencies, and putting limitations on fixed-term contracts.
Article 12 of the 2008 China Labor Contract Law provided for three types of employment contracts, as follows:
- fixed-term labor contracts;
- open-term labor contracts; and,
- specific-task labor contract, which set the completion of specific tasks as the term to end the contract.
In China, hiring full-time employees means each one must execute a written employment contract with the employer. It is a provision of the law and failure to comply comes with corresponding penalties and sanctions, including the following:
- fines to be imposed on companies with full-time employees having no written employment contract;
- an employee working for one month in a company without an employment contract will legally compel the employer to pay the concerned employee to double his monthly wage. In some cities, it is less than one month;
- if an employee reaches one year without an employment contract, the employer automatically enters an open-term employment with the concerned employee where the latter must be retained by the employer until the age of retirement; and,
- upon the employee’s completion of the probation period, termination will be difficult in the absence of a written contract term on termination. Termination is even more difficult to apply to employees who have open-contract terms.
Given the foregoing China employment law provisions, it is vital that an employer spell out each and every aspect of the employment terms it wants to have with the employee.
There are no “employment at will” policies in China such as in the United States where companies may terminate an employee for any reason. Ignorance of these employment laws will not be accepted as an excuse by the Chinese government.
Part-Time Employees in China
While employers are required by law to execute a written employment contract with full-time employees, they are permitted not to execute one with part-time employees.
Oral agreements between employer and part-time employees are likewise accepted. However, to establish the employment relationship, it is recommended that a written contract be entered. It will be to the parties’ interests to do so.
Part-time employees in China are allowed to work only four hours a day and not over 24 hours per week. Employers are not required to provide them with severance pay when they are terminated, which the employer may do anytime.
Employers must be quite vigilant, however, when employing part-time employees. In the absence of a contract, and an accurate recording of the employee’s attendance, it may be difficult to prove that the employee works on a part-time basis.
Some employees could abuse the situation and claim that they are full-time employees. As such, without a written contract, they will be awarded by the courts with a double salary or open-term employment.
Moreover, employers should note the differences in regulations pertaining to part-time employees as they differ from city to city.
Compulsory Provisions to be Included in Employment Contracts
China’s enforcement of its 2008 Labor Contract Law clearly shows the importance it gives to employment contracts.
In fact, it is essentially prohibited in the country to have full-time employees without each having a written contract. The written employment contract serves as the basis for the employment agreements.
However, labor contracts in China are unlike in other countries, eg the United States, where companies, particularly private ones, may include whatever they deem suitable in the employment contract.
In China, there are mandatory provisions that must be included in the contract.
In 2013, a new Judicial Interpretation on Applicable Laws in Terms of Trial and on Labor Disputes Cases was enforced to allow for an even more effective implementation of the labor regulations. This 2013 regulation serves to improve the 2008 Labor Contract Law and seeks to address the confusing and vague provisions of the law.
The 2013 law is the 4th interpretation of the China labor contract law, which only shows how complex these employment regulations have become.
Based on the foundational labor laws, as well as the 2013 regulation, the following compulsory information and provisions must be included in the employment contract:
- Name, address, and ID number of the employee;
- Company’s name and address;
- Company’s legal representative;
- Term, time frame or probation period (whichever is applicable);
- Employment/job description;
- Employment location;
- Work condition, ie protection against occupation hazards and safety measures employed;
- Provisions on working hours, leaves and rest;
- Social insurance terms; and,
- Others that may be required by China’s dynamic labor laws.
The inclusion of the aforementioned elements in the employment contract protects both the employee and the employer.
To ensure the drafting of an employment contract that completely complies with the labor laws, it is necessary to acquire the services of a lawyer or a legal expert that is deeply knowledgeable about the complex labor laws of China.
How to Draft the Employment Contract
The assistance of a legal expert in drafting the employment contract is necessary not only to ensure the inclusion of the compulsory elements prescribed by the law. There are other requirements that the contract should meet to render it legal and enforceable.
Firstly, the contract should be written in the Chinese language. While the employer may choose to have two versions of the contract, eg in Chinese and English, the valid contract will be the one written in Chinese. While the English version is not valid or enforceable, it is advisable to have one for the reference of foreign employers.
Secondly, it is necessary to have the employment contract written with the use of clear and concise country-specific language (Chinese). This refers particularly to actual figures, exact dates, specific numbers, etc. The use of vague terms will render the contract confusing and subject to risks and problems that could arise in case of legal proceedings.
Employers who fail to specifically provide exact information in the contract may find it detrimental to their interests since courts typically favor workers over employers.
Having the actual data of the following information will be to the employers’ advantage during legal battles:
- Salary, bonuses, benefits;
- Working hours;
- Term of service;
- Probationary period;
- Social insurance program specific;
- Overtime rate; and,
- Other elements that required detailed provisions.
If armed with a legal and properly written employment contract, both the employee and the employer will have a strong basis in case a legal problem arises.
Implied Mandatory Provisions of the China Employment Law
Besides the mandatory provisions that must be included in a written employment contract, the China employment law also prescribes some implied terms, as follows:
- The legal minimum wages
- The grounds for the termination of employment; and,
- The computation of the statutory severance.
These terms may be contained in the contract. However, regardless if they are not included in the contract, the laws on these matters will be applied to the employment relationship.
This means that the employer may rely on these statutory clauses on such issues as termination of employment.
The minimum wage varies based on what is set by each local government. This is changed annually or every two years based on the following:
- Cost of living;
- Average wage levels; and,
- The particular region’s economic development level.
This minimum wage normally consists of a monthly and an hourly minimum wage for full-time and part-time employees, respectively.
To give an idea, in March 2018, the National People’s Congress (NPC) through the State Council Institutional Reform Plan of 2018 increased the minimum wage in Shanghai starting 1 April 2018.
The average monthly salary in Shanghai, which serves as a basis for the computation of the severance pay and social insurance, was increased by 5.2% from the previous minimum wage.
This translates to RMB 2,420 per month. Effectively, with the increase, the average monthly salary in Shanghai is now RMB 7,172. For part-time employees, the hourly rate was increased by one yuan per hour, ie from 20 to 21 yuan per hour.
Grounds for Termination of Employment
The employment laws in China protect laborers in general. This is one reason termination of employees in China is far from being an easy task.
There are several grounds by which employers can legally and summarily dismiss or terminate employees without compensation and there are terminations which require the employer to provide severance pay.
Under Articles 39, 40 and 44 of the 2008 Employment Contract Law, an employer may not dismiss an employee unless it is due to any of the following limited statutory grounds for termination:
- Failure to measure up to standards provided upon recruitment during the probationary period;
- Severe misconduct;
- Serious dereliction of duties or participation in corrupt acts causing the employer damages;
- Due to criminal acts outside work;
- The use of coercion, deception or position by the employee to cause the employer to execute the contract of employment or modify the same;
- If employee suffers injury or illness and after the medical treatment leave expires, is unable to do original work;
- Work incompetence despite training or change of position;
- Employer bankruptcy;
- Revocation of employer’s license, voluntary liquidation or was ordered to close down;
- Employee dies, or is declared missing or dead by the court;
- Expiry of employment contract;
- Employee started to receive his basic retirement pension as provided by Chinese law; and,
- Contract may no longer be performed due to a major change to the objective circumstances by which the contract of employment was executed, where employee and employee failed to reach an agreement.
If the reason for the termination is not included in the aforementioned grounds, then the employer must negotiate with the employee about termination and may only do so once consent is provided by the employee.
Statutory Severance – Entitlement and Computation
Some of the grounds for termination allow an employer to dismiss an employee without compensation.
However, as provided by the 2008 Employment Contract Law, if the employee was terminated under any of the following reasons, then the employer must provide him with severance pay:
- Employee resignation due to the infringement of his employment rights by the employer;
- Expiration of the contract of employment;
- The employer and employee mutually agreed on the dismissal, with the former initiating the dismissal;
- Termination was due to the bankruptcy of the employer;
- Unilateral termination of employee by the employer unless for cause, eg severe misconduct;
- Termination was due to the revocation of employer’s license, voluntary liquidation or was ordered to close down;
The 2008 China Employment Contract Law also provides how much severance pay must be paid. Two ways to compute for severance are provided, as follows:
- Employees whose service was before 1 January 2008 – the calculation is based on the existing laws prior to 2008.
- Employees whose service was after 1 January 2008 – a) one month’s salary for every year of service for services more than six months (Services with duration of six months to one year will be considered one year) and 2) half month’s salary for service duration of less than six months.
The employee’s one month salary is computed based on the average monthly salary within 12 months before termination. However, the amount of severance is capped at three times the local employees’ average monthly salary.
Additional China Employment Laws in 2017
Due to labor disputes and complaints of employer violations of labor protection laws in China, the government added two new regulations that will further protect laborers in the country.
The following laws took effect 1 January 2017:
- Measures for Announcing Major Violations of Labor Security; and,
- Measures for Credit Rating Evaluation of Enterprise Labor Security Compliance
Both are administered and governed by the Ministry of Human Resources and Social Security (MHRSS). The purpose of these regulations was to put in public light all companies, both local and foreign, which are in violation of China employment laws on compensation and work hours of employees.
These two new laws cover such employment aspects as follows:
- Work hours;
- Holiday leave, vacation and rest time;
- Social insurance payments on workers behalf;
- Late or non-payment of wages, ie minimum wage and overtime pay; and,
- The protection is given to juvenile and female employees.
These 2017 regulations relating to employment only confirmed the stringent China employment laws that serve to discourage foreign investors from opening a business in China.
However, all these issues can easily be solved with the use of a Global PEO.
The Need to Establish a Legal Entity in China
All the foregoing processes and regulations pertaining to employment will be rendered useless if the foreign investor will not first establish a legal entity in China.
Bringing a business in China is a prerequisite to recruiting employees in the country, either local or foreign employees, or both.
However, just as the China employment law is complex, so are the processes, procedures, and laws relating to the opening of a business in the country, as shown in this article. This is the reason why more and more businesses try to find a solution to these obstacles.
Solution – Professional Employment Organization (PEO)
A Professional Employment Organization, or simply PEO, is the solid solution to all the mentioned obstacles to doing business and recruiting employees in China.
It is a company that manages human resource (HR) outsourcing and other administrative tasks for client companies. It serves as a co-employer of the client, which are typically small and medium-sized organizations. It is focused solely on the HR and administrative needs of the business, thereby making the latter more productive.
The partnership existing between the PEO and the client company is referred to as a co-employment relationship.
Under this arrangement, the PEO shares employer responsibilities with the client company depending on the terms of their contract. Under this model, the employees serve as the workforce of both the PEO and the client company, thus giving the latter access to a ready-made HR, payroll, benefit, taxation and compliance infrastructure.
The co-employment arrangement with a PEO not only allows company executives and managers to focus on how the business can gain profits but also reduce its legal risks and liabilities.
The PEO also serves as the employer of record of the employees in China. As an employer of record, it is legally liable for the workforce it employs. It effectively implements employment laws, best practices, and compliance in relation to recruitment, management, termination, and other HR legal matters.
New Horizon Global Partners, or simply NH Global Partners, can offer unparalleled PEO services in China. NHGlobalPartners is a global PEO and Employer of Records that has been in partnership with numerous foreign companies in their overseas strategic development. To know more about what we can do for you in your global expansion, please contact us today and inquire from our experts.