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Guide to Employment in China 2008 Gregory M. Sy Provided by Grandall Legal Group Employment law in China is governed by a relatively comprehensive set of laws, more recently supplemented in late 2007 to strengthen workers’ rights. I. Employment Law Legislation 1. What legislation governs employment law in China? Employment law in China is governed by a relatively comprehensive set of laws, more recently supplemented in late 2007 to strengthen workers’ rights. Major laws include: - Labour Law of the People’s Republic of China (1994) (“Labour Law”) - Labour Contract Law of the People’s Republic of China (2007) (“Labour Contract Law”) - Labour Arbitration and Dispute Resolution Law of the People’s Republic of China (2007) (“Labour Arbitration Law”) (effective May 1, 2008) - Trade Union Law of the People’s Republic of China (1994) These laws and then supplemented by a myriad of national and local laws, regulations, measures and circulars. 2. Are there different laws which govern foreign-invested employers and domestic Chinese employers? The Regulations on Labour Management in Foreign Investment Enterprises (1994) governs employment by Sino-foreign equity and cooperative joint ventures, along with Sino-foreign joint stock companies. The Regulations very much mirror that of the Labour Law. Additionally, as any inconsistency with the Labour Law will be resolved according to the higher-level law, little reference is made to these Regulations. Ii. Labour Agreements 1. What are the different types of employment contacts? Employment in China, like most other jurisdictions, is divided into full-time and part-time. According to the Labour Contract Law, part-time employment is defined as a labour relationship in which the employee works, on average, no more than 4 hours per day and no more than the aggregate of 24 hours per week. Employment relationships which exceed the hours in this definition are termed full-time employment, which is further divided into 3 types:

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1) fixed term: expiry date agreed upon at outset; 2) open-ended / non-fixed term: no expiry date stipulated; or 3) project-based / completion of defined task: contract to expire on completion of pre-defined project or task. 2. What are the requirements of a labour contract? According to the Labour Law and the Labour Contract Law, other than part-time employment, all labour contracts must be in writing and contain the following terms: -

name, address and legal representative of the employer; name, address and identification number of the employee; term of labour contract; job description and work site; working hours, rest and vacation; labour remuneration; social insurance; labour conditions, working conditions and occupational hazard prevention; and other matters stipulated by laws and regulations.

If the labour contract contains a probationary period only (sometimes called “a probationary period contract”), then the probation term set out therein is deemed to be the term of the labour contract and the probationary period is invalidated. 3. What are the penalties associated with not signing a written employment agreement? A labour relationship commences on the date on which the employee commences work for the employer, and by law, it is required that a written labour contract be concluded within one month of this time. If a labour contract is not concluded within the one month of commencement, the employer will be liable to the employee for double labour remuneration, of up to 1 year. After 1 year with no written labour contract, fixed-term labour contracts are deemed to be open-ended. 4. What is the maximum probationary period allowable by law? Maximum probation periods allowed by law are as follows: -

less than 3 months: no probation period; 3 months to 1 year: 1 month; 1 year to 3 years: 2 months; and 3 years or more or open-ended: 6 months.

Iii. Wages, Benefits And Social Security 1. What are the components of wages or salaries? According to the Provisional Regulations for the Payment of Wages (1994), wages or salary are composed of: -

wages based on time; wages based on piece-work; bonuses; subsidies; allowances; overtime payments; and wages paid under special circumstances.

According to the Minimum Wages Provisions (2004) and based on the minimum wage standards promulgated locally, employers may not pay their employees less than the current minimum wage standard. 2. What are the standard working hours and when am I required to pay overtime?

The standard working hours in China are 8 hours per day, 5 days per week, for a maximum working period of 40 hours, with 2 rest days (typically Saturday and Sunday). Any additional requirements by the employer must be compensated according to the standard set out below: - Working days: 150% standard wages; - Rest days: 200% standard wages; and - Holidays: 300% standard wages. 3. What are the national public holidays? National public holidays (as of 2008) are set out below: -

New Year’s Day (January 1): 1 day; Spring Festival (lunar new year, typically January or February): 3 days; Women’s Day (March 8): half day for women; Qingming Festival (April 5): 1 day; May Day (May 1): 1 day; Dragon Boat Festival (5th day of 5th lunar month): 1 day; Mid-autumn Festival (15th day of the 8th lunar month): 1 day; and National Day (October 1 – 3): 3 days.

4. What are the social security payments required by law? Employers are obligated to provide the following benefits and social security payments to employees: -

Basic old age insurance; Unemployment insurance; Medical insurance; Maternity insurance; and Work-related injury insurance;

The employee and employer jointly contribute to the first 3 types of insurances, while the employer alone contributes to the latter 2, with rates varying based on location of employment. Iv. Non-Compete And Confidentiality 1. Can all employees be subjected to non-compete obligations? Not all employees can nor should be bound by non-competition obligations. The Labour Contract Law limits employees who may be bound by non-compete obligations to: - senior management; - senior technical personnel; and - those employees who have access to business secrets of the employer. It is required that the employee and employer conclude a written agreement, either separately or in the labour contract, with regards to term, scope, territory, compensation during the non-compete period and liquidated damages for employee breach. The maximum term is 2 years. 2. What are the typical compensation requirements for non-competes? Although it is required that compensation be paid on a monthly basis to the employee during the noncompete period, the law does not state a standard amount. In practice, it is common to pay at least 50% of the employee’s wages. 3. Are liquidated damages permissible for breach of non-compete obligations? Yes.

V. Termination And ‘Layoffs’ 1. Under what circumstances can an employee be terminated without notice? An employer may terminate an employee without requirement for notice in the following situations: - during the probation period, if the employee is determined to be unfit for the position; - employee materially breaches employer’s rules and regulations; - employee engages in serious dereliction of duty, graft or corruption causing substantial damages to the employer’s interests; - employee has established an employment relationship with another employer and that relationship affects the completion of his tasks and he refuses to appropriately remedy the situation after employer notification; - employee used fraud in concluding the labour contract; or - employee is subject to criminal investigation. 2. Under what circumstances must an employee be given notice of termination? An employer must give 30 days’ prior written notice or payment in lieu thereof, if it terminates the labour contract under the following situations: - the employee is unable to perform his original duties or re-assigned duties, after returning from medical leave or non-work-related injury; - the employee is incompetent and remains incompetent after training or adjustment of position; or - the occurrence of a major change of objective circumstances which were relied upon when signing the labour contract, and the employee and employer are unable to agreed on modified terms of the labour contract. 3. Under what circumstances may an employee terminate the labour contract without notice? An employee may unilaterally terminate the employment contract without requirement for notice in the following instances: - employer fails to provide labour protections and working conditions in accordance with the labour contract; - employer fails to pay remuneration in full and on time; - employer fails to pay social security payments in accordance with the law; - employer’s rules and regulations violate laws and regulations, harming the employee’s rights and interests; - employer uses fraud, coercion or the employee’s unfavorable position to conclude the contract; or - other situations set out in laws and regulations. 4. In what instances is compensation required and how much? Severance compensation is due in a number of situations, which are summarized below: - termination by employee under situations which result in his right to terminate the contract immediately (Item 3, discussed previously); - termination by employer under situations which require 30 days’ prior written notice (Item 2, discussed previously); - the employee is terminated due to restructuring or difficulties in business operations; - the labour contract is terminated after being proposed by employer and there is mutual agreement on termination; - a fixed-term labour contract expires (except where employee refuses to renew the contract on terms equal to or better than previously concluded); - termination of labour contract due to revocation of employer’s business license; and - termination of labour contract due to bankruptcy. Employers must pay severance in the amount of one month’s salary for each year of service, with half a month’s salary for each partial year. If the employee earns more than 3 times the average monthly wage of the locality, then the

compensation will be capped at 3 times the average monthly wage, up to a maximum of 12 months. 5. Can employees be ‘laid off’? Under the following circumstances, labour contracts may be terminated due to business difficulties: - restructuring due to the Enterprise Bankruptcy Law; - serious difficulties in production or operations; - a staff reduction is necessary due to changes in production, technical innovation or adjustment of management operation style; or - other major changes in economic circumstances relied upon at the time of conclusion of the labour contract, rendering them non-performable. For large-scale layoffs (20 or more employees, or in smaller organizations where employee layoffs are less than 20 employees but this accounts for 10% or more of the total employees), the employer must first explain the circumstances to the trade union or all employees (where there is no trade union) 30 days in advance, and may reduce the workforce only after consideration of the opinions of the trade union or employees and reporting the restructuring plan to the labour administration. Vi. Labour Arbitration And Dispute Resolution 1. How are labour disputes resolved in China? Like most jurisdictions, mediation is the preferred method of dispute resolution, however, this is a voluntary process. The Labour Arbitration Law provides that mediated settlement agreements for salaries, medical fees for job-related injuries, severance and penalties may be entered into court for enforcement. Labour dispute claims, according to the Labour Law and the Labour Arbitration Law, must first be submitted to the local labour arbitration committee located in the jurisdiction of the employer. The labour arbitration committee must then render its award within 45 days after the dispute has been accepted. Arbitration decisions are final for employers in the following instances: salaries, medical fees for jobrelated injuries, severance, and penalties, where the disputed amount does not exceed an amount equal to 12 months' local minimum wage. Employees and employers (with the exception of those instances set out previously) may within 15 days of the arbitration award submit the dispute to the people’s court for hearing. 2. What is the statute of limitations for bringing a labour dispute claim? The limitation period is 1 year after the employee knew or should have known that their rights have been infringed, however, if the dispute occurs under an existing labour contract, the limitation period does not start until the labour contract has expired or has been terminated. ABOUT THE AUTHOR: Gregory M. Sy Gregory M. Sy is a partner / foreign counsel with Grandall Legal Group. His practice includes general business advisory for SME businesses in China, particularly in the areas of international corporate structuring and transactions. Additionally, Gregory advises clients on labour and employment issues. Representative clients include the Consulate of the United States of America in China, Embassy of Brazil, various publicly listed companies (NYSE, LSE, DAX), along with numerous other SME’s operating in a wide range of industries. Mr. Sy obtained an LL.B. from the University of Victoria, and is admitted to the New York bar. Gregory publishes extensively on a variety of China legal issues for international and local publications, and has recently acted as chief editor for Martindale’s China Law Digest and was a regular contributor to Lexis-Nexis. Copyright Grandall Legal Group More information about Grandall Legal Group While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or

lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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