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China Employment Contracts. Ten Things To Consider.

Posted in Basics of China Business Law, Legal News

I love it when a ready-to-go post is delivered to my in-box, without my even having to ask. This morning, I received from Steve in Qingdao a carbon copy of an email he had sent to a software client of ours for whom we just started working on their China labor law issues after having registered their WFOE. The email is from Steve to the client explaining the various labor documents he prepared for them, including most particularly, a China Employment Contract, but it serves as a great introduction to many of the key differences between China’s employment laws and those of the United States.

Here’s the email:

As you will see, the Chinese employment system is based on Asian socialist and Northern European models. China’s employment law system is quite different from the U.S system. The main difference is that the U.S. is an employment at will system, which means you can terminate employees at any time for pretty much any reason. China’s system is the opposite. The Chinese system is a contract employment system. This means all employees must be engaged pursuant to a written employment contract and during the term of that contract, it is very difficult to terminate an employee. An employee can only be terminated for cause and cause must be clearly proved. This means the employer must maintain a detailed set of rules and regulations and must maintain careful discipline records to be able to establish grounds for dismissal. This whole situation makes the employment relationship and the employment documents much more adversarial than is customary in the U.S. You will find that the “tone” of the documents I am sending you is not consistent with your normal “team” approach to dealing with employment issues.

You should also note that China does not really have the concept of a “salaried” employee. The Chinese work week is 40 hours and overtime must be paid for work exceeding the 40 hour limit. I know this approach is very foreign to software/service businesses like yours. However, there are no exceptions to this rule.

I will be sending you set of preliminary documents to review. At this time, please consider the following issues:

1. Term of employment. As noted above, each employee must be hired pursuant to the terms of a written contract. After the initial contract term expires, you may re-hire the employee pursuant to a second fixed term contract. However, at the end of that fixed term the employee automatically will be converted into a employee with an open contract term. This means you have only one chance to hire an employee on a fixed term basis.

Due to the above considerations, determining the length of the initial employment term is critical. We recommend an initial term of three years. This has two benefits. First, it allows you to provide a six month probationary period, during which time you can terminate an employee for any reason. This gives adequate time to test the basic skills of an employee. Second, it delays the onset of the open term period for a period long enough to allow you to determine whether you wish to allow an employee to convert to the open term status.

Of course, you are free to specify any term you feel is appropriate.

2. Salary. You will need to provide a salary, of course. We will then need to convert that into an hourly wage.

One issue here is that in many parts of China, it is customary to pay the salary on a 13 month basis, with the final month paid just prior to the Chinese New Year. This is completely optional, but it is important to state clearly whether or not you will be using this approach. Many employees just expect this “New Year’s Bonus” and a failure to pay it (if expected) can cause many problems.

3. Bonus. If you plan to have a bonus system for your employees, we should set this out.

4. Vacation. The statutory rule on vacation for employees is as follows:

First year: No vacation.
Years 2 through 9: 5 days.
Years 10 through 19: 10 days
20 years or more: 15 days.

If you want to provide more vacation time than set forth above, we will need to specify.

5. Other benefits. If you plan to provide benefits beyond the statutory minimum (set out in the rules and regulations provided), we will need to specify that. If you want to provide a particular benefit to all of your employees, we should put it in your rules and regulations. If you want to provide employee specific benefits, we will include them in the specific employment contract.

For example, China requires employees pay a portion of the employment taxes/fees. Some employers pay that portion for the employee as an additional benefit.

6. On site security. As you will see, the Rules and Regulations have a detailed section regarding on site security. If there are things that should be modified or added, please let us know. In addition, for a company like yours, you should adopt formal policies on data and information security. I am sure you do this elsewhere, so use of the same policies in China should not be a problem. Please get those to me though so we can put them into Chinese with everything else.

7. Travel. If your employees will travel domestically or internationally, you should have a written travel expense policy.

8. Trade Secrets/IP Protection. The documents include a separate Trade Secret and IP protection agreement. This is designed to work for software companies like yours. If there are additional features we should add, please advise.

9. Training. Will you be providing training for your employees? If yes, we should also develop a training agreement. Please advise.

10. Sign Off Agreement. Note that we have added a “Sign Off Agreement.” With this agreement, the employee acknowledges having received the rules and regulations and agrees to abide by those rules. It is important to get your employees to sign this so they cannot later claim not to have received it, which claim is frequently made at labor arbitration in China.

  • Shaan

    No salaried workers in China? So is any company that pays staff a fixed monthly amount with no overtime operating illegally?

  • elle

    Is a payment for overtime mandatory? I know all AD & PR agencies work crazy but no overtime payment at all…

  • http://ilookchina.net Lloyd Lofthouse

    Wow, I’m glad I found this Blog. I’ve just added it to the Blogroll on iLookChina.net. I’m going to refer to this post in a debate I’m having on Gather with an American who left a comment that the people in China are slaves and America may be like China one day if Obama and the Democrats have their way.
    From What I’ve been reading here, maybe that wouldn’t be such a bad idea for workers. Clearly, it looks like the worker in China has better protection and more power than the worker in the US.
    The vast American ignorance about China that I keep running into is a shame. The Chinese work hard and they save money instead of living off credit. There’s a lot we can learn from China. After all, many Chinese have fallen in love with American cars, American fast food and the American lifestyle. Why shouldn’t this be a two way street?

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  • William

    I feel like a broken record since I think I always make a comment like this when you write about Chinese employment law, but man, I am glad to be an employee in the US system. China’s young people already have a hard time finding jobs; as this European-style system sinks in, it’s only going to get worse.

  • http://www.chinataxinsights.com Matthew

    “As you will see, the Chinese employment system is based on Asian socialist and Northern European models. China’s employment law system is quite different from the U.S system.”
    Dan I am not sure that I agree with sentiment here. Based on my experience, it is the US that is unaligned, in terms of the lack of legal protections for employees, than the rest of the world.I certainly would not say that Chinese labor law provides as much protection as many other countries, such as Australia.
    “[D]uring the term of that contract, it is very difficult to terminate an employee”
    I am also not convinced on this point either. Sure you may have to meet a requiste severance payment, but so long as you do (ignoring pregnant employees) then it is rather easy to terminate.
    Otherwise another excellent post as we have all come to expect over the years.

  • http://taikongren.net Jesse Covner

    I think this list is important. I would just add the following comments:
    1. About the labor contract, my understanding is that only Chinese language contract is valid. Many companies give a Chinese AND foreign language contract to employees, especially foreign employees. I think this is good for foreign employee, so that they can understand the contract. However, employees should be careful to independently check that the terms of the translation are the same. I have seen several companies (including my previous company that I worked for, and including the company which the AmPharm case study is based on) specify different terms in the Chinese and English contracts. I believe some HR people may think that gives them some protection if there is a labor dispute with a foreign, locally hired employee. I’m pretty sure the opposite is true. If the terms on the English and Chinese contracts don’t match…and there is further mismatch between the pay-slip and the Chinese contract, your company is just asking for a rigorous audit from the labor bureau.
    2. On Salary and bonuses, the 13th month salary is often considered part, if not all, of the bonus. Many companies provide 14 and 15 month bonuses, adjusted by the performance reviews. Stan is right though…this is expected to be given out just AFTER Chinese New Years, and if there are no bonuses, there will be labor problems.
    3. Benefits are usually mandated for each investment zone and can vary greatly. Note…Not according to each city…to each investment zone. In Suzhou, there are vastly different benefits mandated in Singapore Industrial Park (where a large “401K” type of allowance is required) and the New Technology Park. Companies must consider the mandated benefits requirement before they invest in an area.
    4. About training…if none is provided, don’t expect to hold onto mid-level managers. In areas where there is a lot of competition for good employees, training contracts are usefull for preventing your newly trained employees from leaving to higher-paying jobs, thus wasting the company’s training investment.
    5. About this: “An employee can only be terminated for cause and cause must be clearly proved. This means the employer must maintain a detailed set of rules and regulations and must maintain careful discipline records to be able to establish grounds for dismissal”
    In other words, the company should use a good Performance Management System, and enforce the system on a daily basis. Its an Obvious thing that many companies don’t do well.
    To Matthew, above,it really depends. All employees (including local Foreign hires) can go to arbitration, and if the arbitrator thinks the employee has a case…or if the arbitrator and the company do not have relationship, then the the case goes to arbitration and the company has to pay all the arbitration fees. Furthermore, in many areas (ie. Shanghai, Suzhou), if a case goes to arbitration, it becomes much more likely that the Labor Bureau will do an audit. Which can bring on a lot of mess. The company will also not get a “harmonious Danwei” award. I understand this will have tax implications. Of course there are many factors involved in this issue, such as:
    -How vigorous does the local Labor Bureau defend worker rights (I’m sure Shanghai has more labor law enforcement than say…Dongguan)
    - Future job prospects in a given area; employees will more likely want to make a clean break if they think going to the labor bureau will give them problems later
    - Relationship with boss and coworkers; employees who you fire are less likely to want to hurt their friends.
    - Pragmatism. Most semi-intelligent managers just pay the employee to go and end things on a good note, instead of getting into a fight about this.

  • http://www.amazon.com/CHINA-Portrait-People-Tom-Carter/dp/9889979942 Tom Carter

    I read a study a year or so ago that calculated that the average Chinese office employee (as opposed to labor or non-desk jobs) spent an average 3.5 hours per day chatting on QQ rather than completing their administrative duties. If this study is accurate, then we can’t really blame companies for the hostility they feel towards their own employees.

  • Adam

    I was intrigued by the tone of the post above, as it seems to attest that the working situation for employees in China is somewhat more enlightened and protective than in the U.S.
    Contracts are indeed honoured, but when it comes to the actual treatment of employees, payment of overtime etc, people that are close to me in China have had rather different experiences.
    The fact of the matter is that although contractual stipulations are there on large issues, there are innumerable ways to cut pieces of a salary for infractions, contributions etc, fictitious or not. Recently, there was some scandal over employees being forced to make donations to the Sichuan quake relief by simply having their wages docked.
    Overtime in your job and doing as your employer demands, even on evenings and weekends is also deeply entrenched. What the boss says goes, and your working day and duties can be changed accordingly. As many like Dan have pointed out, contracts are merely the starting point of the negotiation.
    The plain fact remains that the external pressure applied by the multitudes of job seekers wanting people’s jobs keeps them in employment where they are treated very poorly indeed, as they are aware that they can and will be very easily replaced, and may not find another job so easily.
    The only guarantee of safety in China is Guanxi with the boss, and people will go to extraordinary lengths to get this (if they did not have it when they joined). They know that stability and their long term prospects depend on it. They will not look to their contracts for succour.

  • Chris

    Can I assume that the Chinese labor laws apply to both foreign companies operating in China and Chinese registered companies alike? Also, do these laws apply to foreign employees and Chinese employees equally? Id Est: Can a foreign employee agree to work for something less than the Chinese minimum wage or for some other type of renumeration?

  • MK

    If employees finish the contract, the employer doesn’t renew the contract, as a foreign worker, can they get the severance pay?

  • RK

    Thank you for this. Very helpful. Tells me the situation is more complicated than I realized.

  • josaf

    Unbelievably helpful.
    Thanks.

  • Claire

    My questions are all related to staff who have been with you for a couple of years…
    I have heard that you cant keep renewing a one year contract for staff? I don’t know why but something to do with staffing benefits if they have signed 3 contracts with one company. If this rumour is true then I suppose the only way to deal with it is to offer an open ended contract. And if it is so difficult to terminate employees then I suppose it is impossible on an open ended contract.
    Does anyone know the answers to these questions? My company has been taking to court for one unfair dismissal because I wasnt aware of the system. I would love any insights / experiences anyone can share in relation to this.
    Cheers,
    Claire

  • http://www.chinalawblog.com Dan

    @Claire,
    The answer is to have a written contract (in Chinese) and an employee manual (also in Chinese) that set out the various basis for termination.

  • Charlotte

    I have the same question as above – if an employment contract is terminated and a new contract hasn’t been provided by the employer – is the employee entitled to severence pay when they leave?

  • maria

    We are considering a job in China. I have many questions about China’s labor laws. (Some have just been answered. )
    I would like to know if health insurance is common/ mandatory for full time employees/families.
    Thanks, I’m glad I stumbled onto your sight. M

  • maria

    …one other bit, I have been an employer in the US it is not as easy (as the above writing states) to terminate an employee in the US. Documentation of infractions and warnings must exist or one stands a good chance of being sued.

  • http://www.asiafreaks.net/wp Davide

    If only I could read this 4 years ago!
    Alas, how much time it would have saved me!
    Signed:
    He Who Had To Learn All This The HARD Way

  • tony

    I read carefully the email which compares China’s employment culture favorably against virtually all others. IT all sounds just a little like a CCTV piece. Whatever is written in the labour laws of China is as fluffy as a CCTV piece. It sounds good but in actual fact bare minimal resemblance to the facts. Indeed, PR and media companies employees foreign or Chinese are worked-to-death without compensation for overtime. In the case of one media-related firm, the bosses work the entire company (not a small one) right throughout Chinese NEw Year, Christmas and New Year with no overtime, loading or days off in lieu. When asked why they do it, their boss says, we are an entrepreneurial company. China is a great great nation with some of the world’s cleverest people who live in and come from it. But its legal protection for employees when put to the test is appalling at best. Suggesting some kind of nirvana for Chinese employees is bizarre. Comparing it to the US is cute but you would be better off looking at the systems in the European Union, Australia and New Zealand.

  • Rick

    i’m coming to the end of a 5 year contract (3+2) I’m told by a friend that they will need to give me 5 months money as they plan not to re-new the contract… is this true?
    Rick

  • http://www.v-coffee.com Benjamin

    Great post. Two things I’d like to add:
    1. There is something like exempt / non-exempt employees and those are called “fixed” and “non-fixed” working hours. You can apply for a non-fixed position for any staff but only special cases (like sales, seasonal workers, etc.) will get accepted. In that case maximum hours per week is something like 80.
    2. Vacation period is not calculated by years that the employee has worked with you but years that the employee has worked in total (that means that is the employee has worked for 20 years and only 2 with you he/she is still entitled to 20 vacation days).
    Rick – yes, that’s what you’re owed I believe. Even if your contract runs out and is not renewed you get a severance payment of 1 month per year worked (but the monthly payment will not exceed triple average salary).
    As for me, I think it’s great the government is taking steps to ensure worker’s right (even though it’s a pain as an employer) – they ARE communist, after all :). However, just as necessary to enforce that with Chinese companies (my competitors often pay less than minimum wage with no social benefits).

  • JM

    Hi Benjamin,
    Thanks for the information. As an expat HR professional in China, is there a training or online course/ material that one can read to understand the overall framework of employment laws in PRC, perhaps also specific to Shanghai, if state laws vary.

  • Contract Man

    Very helpful. Are there really still some foreign companies in China that are not using written contracts? Is that because they don’t know any better or becasue they have actually chosen for some reason not to do so?

  • Rob

    Thanks for the information and the questions are very helpful. As an HR professional in the US (who will be opening a location in China), is there a training or online course, material, websites that I too can read to understand the overall framework of employment laws in PRC. I am looking for information related to Shanghai and Hong Kong. Thanks!

  • Rick

    I am an American who has had an office in China since 1992. I can tell you all that hiring employees today in China is a far cry from years past. For example, we moved our office from Shenzhen to Guangzhou a year ago. Prior to the move, employment contracts included a travel allowance. Emplyees that had to travel from Shenzhen to Guangzhou received RMB$150 to make the trip. Now that the office is located in Guangzhou, the employees living in Shenzhen that travel to Guangzhou for work expect to receive a daily travel allowance of RMB$150. And, because this travel allowance was part of their employment contract, I can’t fire them for not showing up for work and I can’t get out of the RMB$150 travel pay for them to come to work. I’m looking for a good Chinese labor law attorney. Anyone know one?

  • Josephine

    Hello,
    Before we can hire an employee in China to the rest of our China team, what kind of documents must that potential candidate provide to us before we can bring them on? Are there any document from the previous employer that he/she must prove to us?
    Thanks!

  • Josephine

    Hello,
    Before we can hire an employee in China to the rest of our China team, what kind of documents must that potential candidate provide to us before we can bring them on? Are there any document from the previous employer that he/she must prove to us?
    Thanks!

  • Kim

    Hi!
    I found this very useful. My question is simiar to Chris’s who asked the question 1 year ago on 24 June.
    Are these laws applicable to foreign employees ? I read from somewhere that foreign employees by default are covered under the laws, but if the employment contract is signed in their home country, the laws of their home country shall prevail in the event of disputes.
    Can anyone please help clarify?
    Thanks!

  • experience in BJ

    “However, at the end of that fixed term the employee automatically will be converted into a employee with an open contract term. This means you have only one chance to hire an employee on a fixed term basis.”
    This statement is false. At the end of the fixed term contract, employers MUST either re-sign the employee to a new contract or issue a written notice that employment relationship with the employee will not be continued. If no renewal contract is signed and the employee continues to work at the firm, it is as if the employee is working without a contract. It is subject to 2x pay for the entire duration that the employee has worked “without an contract.” There is NO automatically renewal as of August 2011!
    Our firm in involved in a such a dispute. We listened to similar advice of open contract term and did not renew contracts. Some employees’ original contracts ended nearly a year ago. They unionized and are taking advantage of this law to sue us for the 2x the difference. Beware.

  • Ron

    Do foreign workers have to retire at 60 in China?

  • Earl

    I have a sales guy who I need to renegotiate the contract with, he is currently on a commission based bonus system (% of product sold) and we need to move this to a fixed salary and fixed bonuses (monthly salary) if targets achieved. Can I run into any potential problems here if I present a new contract for the employee?
    Thanks!

    • bobbybooshay

      As waiguoren we need to follow these rules to the letter. Forget what the locals do. That is just how it is. The locals can get away with murder (perhaps we can name this difference the BOXI-lie effect ;)

  • Felipe Saldarriaga

    our company has two employees in China but we have not been incoroporated, therefore, we have issued our employees a “consultant agreement”. Which law to we have to comply with?

  • http://www.redtapedoc.co.uk Employment Contract

    This is an interesting take on ideas; China is a country that is very much up and coming and I think there could well be more eye opening legislation being put in place over there.

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  • http://www.facebook.com/roger.henslee Roger Henslee Jr.

    Most of what the email says is in fact not followed throughout China. I have lived and worked in China since 2005 and deal with numerous business owners.
    Often employees are not given overtime, not given vacation, required to work MUCH MUCH longer than 40 hours a week. 

    • http://www.chinalawblog.com/ Dan Harris

      You very well may be right, but in our experience, when foreign companies fail to follow the rules in China, especially the employment rules, very bad things usually flow from that.

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  • nathaniel campbell

    how long was the contract