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China Employment Contracts. Watching The Sausage Get Made.

Posted in Basics of China Business Law, Legal News

Just read an email to one of my firm’s clients from one of our China lawyers who does a lot of China employment law work.  The email explained a large set of employment documents prepared initially just for the in-country China WFOE manager, but written to soon be used with various imminent China employee hires as well.

Because this email so nicely sets out what it takes for a company to have employee documents that work well for both the employer and the employee while also complying with China’s labor laws, I thought putting it into a post would be helpful.  The below is that email (modified slightly to take out any identifiers and to make it just a bit more blog-like).

 

Attached please find a .zip file containing drafts of the following employment-related documents for _______ [their in-country China manager]:

  1. a Labor Contract;
  2. the _____ Company WFOE Rules and Regulations;
  3. a Sign Off Agreement, in which the employee acknowledges receipt and comprehension of the Rules and Regulations;
  4. a Trade Secrecy and Intellectual Property Agreement;
  5. a Non Competition Agreement; and
  6. an Educational Reimbursement Agreement.

As you review these documents, please consider the following questions and comments:

1)          Information To Be Filled In. In each agreement, we have highlighted in yellow the areas that need to be filled in before execution. Some of this information can be collected beforehand, and the rest can be filled in by hand. Information to be filled in includes:

a)    A telephone and fax number for ________, as legal representative of the WFOE (You will probably want to use the Shanghai WFOE office numbers, but it’s up to you).

b)    The effective date of the Rules and Regulations (probably today, or any date before the employee agreements are signed).

c)    For _________[the in-country China manager]:

i)      His (Shanghai) contact address and telephone number.

ii)    The term of the employment agreement (more on this below).

iii)   The date that wages will be paid during the standard employment term.

iv)   The exact amount of wages during the standard employment term.

v)    Whether he will be paid on a 12-month or 13-month schedule (more on this below). As a default, we have set this to a 13-month schedule.

vi)   The term of the probation period (more on this below).

vii) The exact amount of wages during the probation period.

d)    The address of the workplace, if different from the registered office.

e)    For the Non-Competition Agreement:

i)      The term of the labor contract.

ii)    The term of the Non-Competition Agreement (as a default, we have put 12 months; the maximum term is 2 years).

iii)   The amount of compensation during the non-compete term (as a default, we have put 50% of the standard monthly salary).

f)     For the Education Reimbursement Agreement:

i)      The name of the training program.

ii)    The period of training.

iii)   The location of training.

iv)   The wage and bonus provided during training.

v)    The total training expenses.

vi)   The service period after completion of the training.

2)         Rules and Regulations. The Rules and Regulations document is basically a handbook on Chinese labor law. Most of the content in this document is required by Chinese law and is therefore not optional. Though it is not what I would call pleasure reading, an initial review of the Rules and Regulations will likely resolve many of the questions you may have about these documents. At its heart, the document lays out the basis of the relationship between the WFOE and the WFOE’s employees. For your purposes, this document is especially important because 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: employers can terminate employees at any time for pretty much any reason. China’s system is a contract employment system: 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. More precisely, an employee can only be terminated for cause and cause must be clearly proved. Therefore, employers must maintain a detailed set of rules and regulations and must maintain careful discipline records to be able to establish grounds for dismissal. This is why the Rules and Regulations are so detailed and (from a Western standpoint) so negative in tone. If you have anything else you want included in the Rules and Regulations, please advise us now.

3)         Labor Contract. The Labor Contract must include both the term of the initial employment relationship and the term of the probation period. As more fully described in Article 6 of the Rules and Regulations, the length of the initial employment term determines how long the probation period can be. Also note the following:

a)    At the end of the probation period, you can terminate the employee with no further issues.

b)    At the end of the initial employment term, you can terminate the employee and pay severance or you can retain the employee. Under the current interpretation of the law in China, if you retain the employee for a second term, once the second term starts, you are required to retain the employee up to mandatory retirement age. Termination during that period requires good cause. We therefore recommend an initial term that is as long as possible to allow you the longest probation period possible.

c)    The probation period should be treated seriously and no employee should be taken beyond the probation period unless you are certain that he or she will work out under the terms of their employee agreement. For new employees, we generally recommend a term of three years and a probation period of six months. Many of our foreign clients choose to do an initial term of only one year, and most end up regretting that decision.

4)         Trade Secrecy and IP Agreement. Since your employees will be dealing with proprietary information, we have included a Trade Secrecy and IP Agreement for them to sign. Except for senior management like ________, there will be no way to control your employees’ behavior through a non-compete agreement, because they are not senior enough to be covered by such an agreement. Therefore, because your protection will be limited to the terms of the Trade Secrecy and IP Agreement, please review it carefully and let us know if you have additional concerns.

5)         Sign Off Agreement. The Sign Off Agreement memorializes the employee’s receipt of the Rules and Regulations and their agreement 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 – a claim frequently made at labor arbitrations in China.

6)         Other Considerations.

a)    Additional Benefits. Let us know if you want to provide benefits beyond the statutory minimums set forth in the Rules and Regulations. 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 specific benefits to a specific employee, the benefits should be spelled out in the specific employment contract.

b)    Travel. If your employees will travel domestically or internationally for work, you should have a written travel expense policy. (See Article 41 of the Rules and Regulations.)

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

First year of service: No vacation.
Between 1 and 10 years of service: 5 days/year.
Between 10 and 20 years of service: 10 days/year.
20 years or more: 15 days/year.

Note that these statutory limits are for the employee’s total years of employment (that is, from the time they started working, regardless of employer). If you want to provide more vacation time than set forth above, we will need to specify.

d)    Monthly Salary. You will need to convert the annual salary into a monthly wage. Note that in many parts of China, it is customary to pay the salary on a 13-month basis, with the final month paid just before 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 problems. This expectation varies by the industry, the type of employees (i.e., factory workers vs. office workers), and the geographic location. Note that paying on a 13-month basis does not obligate you to pay more in salary; you would just divide the annual salary by 13 instead of 12.

e)    Bonus. If you plan to have a bonus system (e.g., performance bonus, retention bonus, referral bonus, etc.), it should be set forth in writing.

7)    FCPA Manual. Enclosed is an English language and a Chinese language version of the FCPA manual. As we discussed the other day, we will be getting back to you shortly to schedule a time for our compliance attorneys to begin training your employees (both in the U.S. and in China) on what they must do to keep your company in compliance with the FCPA and with China’s own anti-corruption laws.  We will provide that training in both English and in Chinese, whichever is most appropriate for the particular audience.

Should you have any questions about any of the above or the attached documents, please do not hesitate to ask. Our goal is to provide you with readable, usable documents that not only comply with China’s laws but also maximize your business goals.

 

  • Ward Chartier

    In addition to scrupulously following the intricacies of the Labor Law, in practice it is often useful to establish constructive working relations with the local Labor Bureau. Terminated employees will often seek redress from the Labor Bureau. Checking in with the Labor Bureau before taking action and obtaining their understanding, if not agreement, goes a long way towards short circuiting complaints by former employees and possible investigations. By this method, me and my operation were well insulated from problems when I had to lay off a few dozen people in early 2009.

  • Devin Petty

    Perfect May Day post, you rock!

  • Tim C

    On the flip side, any advice for Expats on how to structure employment contracts to get the best conditions?