Shanghai employment law
Life is RELATIVELY good for Shanghai employers

As I have previously written, one of the best grounds for terminating a China-based employee without having to pay severance is serious breach of employer rules and regulations. I have also written how employers may have no remedy against an employee if they have no specific provisions in their rules and regulations justifying the termination of an employee for serious wrongdoing. But in Shanghai, employers may be able to terminate an employee who has acted in bad faith so long as they have reasonable grounds for doing so pursuant to their rules and regulations.

Let’s look at a recent Shanghai case whose facts I have simplified a bit for this post. The employee was hired to work as a sales assistant. The employee submitted a request to the employer to take 15 personal days because her mother-in-law was sick and she needed to attend to her. The employer approved this request but then learned that the employee went on vacation abroad for about 5 days during the 15-day period. The employer then issued a termination notice, citing a serious breach of labor disciplines based on the employee having deceived her employer to secure her personal days. The employer’s rules and regulations stated that employees could be terminated for dishonest behavior. The employee brought a claim against the employer for unlawful termination and won, but the arbitrators did not award the amount of damages the employee was hoping to get. So both parties were dissatisfied with the arbitral award and sued each other. The employee lost at trial and then lost again on appeal. The employee argued that she had planned to do some international traveling before she asked for the personal days but because her mother-in-law fell ill, she decided to postpone her trip. But when her mother-in-law got well about 5-6 days into her personal leave, she then decided to go on her trip as originally planned. She argued that because she was not getting paid during her personal days and because her employer had already approved her request to take those days off, she should have had the freedom to arrange her own time and basically do whatever she wanted during her personal days.

The court held that even though the employee rightfully went on personal days to take care of her sick mother-in-law, when that basis for her leave ceased to exist, the employee should have performed her duty of good faith and complied with basic professional ethics as an employee and reported her new situation to her employer. Her failure to inform her employer about her planned trip and her using her personal days to go on vacation violated the duty of good faith she owed to her employer. The employer terminated her according to its rules and regulations and there was nothing unlawful about such a termination. The court did not talk about how seemingly harsh the employer’s termination decision was.

Don’t read this case to mean that your rules and regulations do not need to be reasonably specific for it to be held enforceable. Shanghai courts — more so than probably anywhere else in China — dislike employees who act in bad faith. Nonetheless, if you don’t have a set of enforceable rules and regulations, you will still find it virtually impossible to terminate a problem employee.

Want to be able to terminate an China employee? Have the right tools.
Terminating a China employee? You need the right tools.

I am constantly writing about how China’s labor laws generally favor employees and how Chinese arbitrators and courts also favor employees. However, employers who do all the right things can prevail against their employees, or at least create enough of a chance for prevailing to greatly reduce the severance they need to pay their departing employee to get that employee to agree not to sue. China’s courts will side with employers that make termination decisions pursuant to a set of enforceable employer’s rules and regulations/employment contract.

Let’s take a look at a recent case (only a few months old) in Shanghai, with its facts simplified a bit for this post. The employee was hired to work as the business development department manager. The parties executed a written employment contract. The employer unilaterally terminated the employee in the beginning of 2016 because the employee had formed two companies that competed with the employer during the employee’s employment term. The employee had formed and was the shareholder and director in two companies with business scopes that overlapped with the business scope of the employer business.

Despite all this, the employee brought a labor arbitration claim against his former employer, alleging unlawful termination. The employer lost and was ordered to pay the employee double statutory severance. The employer then filed a lawsuit against the employee. The employee lost at trial and then lost again on appeal.

The employee put forth two main arguments: (1) he established his two companies before he received his employer’s rules and regulations so they should have no legal effect on him; (2) his companies were flagged as “abnormal” by the relevant authorities and therefore they are not in business, and therefore his companies never adversely affected his former employer. The Shanghai People’s Second Intermediate Court rejected both arguments.

The employer argued that the employer’s rules and regulations explicitly prohibited the employee from taking a position outside his work and from establishing companies in competition with the employer. Moreover, his employment contract expressly listed the employer’s rules and regulations as an exhibit to the contract. The employee did not dispute having signed the contract.

The court noted that an employment contract governs both parties’ rights and obligations and is binding on both parties and both parties should act in good faith in the course of the employment relationship. Though it was disputed as to whether the employee’s two companies were ever actually in business, this does not change that the employee did breach the employer’s rules and regulations by opening them at all. The employment contract also expressly prohibited the employee from taking any outside job. So even if the employee did not receive the employer’s rules and regulations before he formed the two companies, his failure to report his activities to his employer after he received the rules and regulations justified his employer in terminating him pursuant to the employee pursuant to the employment contract and the employer’s rules and regulations. The employee’s failure to alert his employer violated his duty of good faith to his employer and justified his termination. The primary takeaway from this case is that employers benefit from having enforceable rules and regulations to which they can cite to when disciplining or dismissing an employee.

Bottom line: One of the best grounds for terminating an employee without having to pay severance (or if you want to be safe, you pay a relatively low severance and you get your employee to sign a settlement agreement) is serious breach of employer’s rules and regulations. We regularly receive inquiries from foreign company employers who want to terminate their employees for misconduct, but have no enforceable rules and regulations. To quote Confucius, “to do a good job, one must first sharpen one’s tools.” To be able to terminate an employee for violating your rules and regulations, you need to have the right “tools”: an enforceable employment contract and enforceable rules and regulations.

 

 

China employment law audit
Salary reductions in China

Can an employer in China unilaterally reduce the salary of one or more of its employees? Like so much having to do with China employment law, it depends.

Because labor remuneration is an often-litigated issue in China, employers should be very careful when reducing an employee’s salary and should take that action only when prepared to defend it before an arbitrator or a judge. As with China-based employee terminations, the best way to proceed and avoid employment disputes will usually be to do it via a mutual agreement (in Chinese) structured as an amendment to the existing employment contract. If you as the employer can get your employee to agree in writing to a salary reduction, that will both minimize your risk of later being sued for reducing your employee’s pay and it will increase your chances of prevailing should such a lawsuit occur anyway.

The tricky question though is whether an employer can reduce an employee’s salary without that employee‘s prior written consent. It is possible, but how you can do it will depend on the local employment laws and even to a certain extent on the local employment bureau. But even if allowed where you are, to maintain its legality, you must do a number of things (and document them) to make this work. In the real world, very few employers take the time and effort to do these things and those who don’t virtually all lost in labor disputes.

China’s Labor Contract Law does not explicitly give an employer the right to unilaterally reduce an employee’s wages because the employee is not competent at his or her job. The Labor Contract Law instead speaks to employer’s being allowed to unilaterally adjust an incompetent employee’s position, provided the employer meets all local requirements in making such adjustment. The Labor Contract Law also calls for the employer to provide 30 days’ written notice or an additional month’s salary in lieu of notice, if the employer can prove the employee is incompetent and remains so after training or assignment to another position. The employer may also reduce an employee’s salary in response to an employee’s breach of the employer’s rules and regulations.

The below are a few of the things employers typically (I say typically because these things vary depending on locale) must do for its unilateral salary decision to hold:

First, the employer needs to make sure its employment contract gives it the right to adjust an employee’s position and remuneration. Make sure the employment contract is fully executed by both parties. With China cracking down on employers lately (particularly foreign employers) our China employment lawyers have been doing a ton of employment audits and we are stunned by how many times we are seeing employment contracts signed only by the employee, signed only by the employer, or never signed by either party. Get your employment contracts signed by both parties and retain copies of those signed employment contracts in a safe and accessible place!

The employer then needs to ensure that its Rules and Regulations set forth its salary reduction policies. Forget about unilaterally reducing one of your employee’s salaries if you do not have a China-centric set of employer rules and regulations. And just as our employer audits are revealing a ton of foreign companies that do not have their employment contracts in good order, many do not have their Rules and Regulations in good order either. Some companies either did not know which was their current version or could not find their current version. And far too many had no written proof of ever having given their Rules and Regulations to their employees. Even with your salary reduction policies in writing, if you never obtained the employee’s written acknowledgment of having received a copy of such a policy, you will likely have a hard time getting a Chinese court or arbitrator to allow that to provide the authority for your reducing a salary.

But if you do have a proper set of Rules and Regulations that gives you the right to reduce the employee’s pay for violations of the Rules and Regulations and you can prove employee did in fact violate your Rules and Regulations, you may be able to reduce the employee’s pay on that basis. For this to work (and even then only in some locales), your Rules and Regulations must clearly specify the Rules and Regulations breach that will lead to a salary reduction and, as I wrote before, such provisions in your Rules and Regulations must be reasonable and not violate any Chinese laws.

If you as employer can get past all of the above hurdles, you next need records proving why the employee deserves a salary reduction. Something like written performance evaluations are usually best, and if signed as received by your employee, all the better. Make sure though that your performance evaluations are in Chinese or have been translated into Chinese; do not wait until your employee brings a legal action against you before you put this into Chinese as that will not be viewed as a contemporaneous document and it may be rejected entirely by the court or at least viewed with much less credibility.

Even if you satisfy all of the above requirements you still have another one: reasonableness. Was the adjustment you made for this particular employee reasonable. For example, is the new position suitable for the employee? Is the reduced pay appropriate for the adjusted position? Does it meet local minimum wage standards? Keep in mind the local differences: e.g., what is considered reasonable in Dalian may not be deemed reasonable in Beijing.

Finally, when you notify your employee of your salary reduction decision, you typically will need to provide him or her with an explanation for your doing so, so the employee can understand what led to your adjustment decision. Again, doing so in a writing in Chinese and getting that writing signed by your employee will almost always be the best way to do this.

Reducing a China employee’s salary is like pretty much everything else employment law related in China: it’s local and it’s not so simple, but done right, it’s possible.

China employment lawyers
China employment law tips

If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up-front is much less expensive than the alternative. These eight tips will help you stay on the right track.

1. Write employment contracts that spell out every aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will employment is foreign to the Chinese and American companies often get themselves into legal trouble when they fail to adequately understand this significant difference between the two countries. As an employer in China, you must have written employment contracts with all full-time employees.

Employers that don’t implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment agreements, which essentially means that the labor relationship has no definitive end date.

If an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, the employer will be required to pay double the employee’s monthly wage.

If an employer lets more than a year go by without implementing a written employment contract, the employee will be considered to have entered into an open-term employment contract with the employer. Such a contract usually means the employer must retain the employee until his or her retirement age. After an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is operating under an open-term contract.

2. Make sure all mandatory provisions are included in your employment contracts. China’s Labor Contract Law requires employment contracts to contain the following provisions:

  • Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
  • The specific term/duration of the employment contract (and any probation period)
  • Salary
  • A description of the work to be done by the employee
  • Location of the workplace
  • Working hours
  • Rest and leave time
  • Social insurance
  • Applicable labor protections, labor conditions and protection against occupational hazards
  • Other terms required by relevant laws and regulations

In addition to the required items, employers should include provisions describing any additional benefits they will provide to particular employees.

3. Clearly spell out the term of the employment contract and probation period. A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months, and for employment terms of more than three years or for an open-term employment plan, the probation period cannot be longer than six months. Each employee can have only one probation period.

Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to provide a six-month probation period (the longest permitted under Chinese law). Though it is fairly easy to terminate an employee during this probation period, it not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.

Keep in mind that, in most cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether you should convert the employee to a lifetime employee.

As with most aspects of employment law in China, the general rule is just that; it is not the right option for everyone since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.

4. Know China’s working hour rules. Most municipalities enforce an eight-hour workday and 40-hour workweek, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is somewhat similar to the salaried employee system in the United States. It applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than eight hours a day or 40 hours a week without having to pay overtime wages; however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local labor bureau and the approval is valid for only a limited time. You must submit a renewal application before the expiration of the term specified in the government’s approval letter.

Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.

5. Learn China’s rest time and vacation rules. Every employee must have two rest days, typically Saturday and Sunday.

Employees who have worked continuously for one year are entitled to paid vacation days. The statutory vacation period, based on the employee’s total years of service (with any employer, not just for you), is as follows:

  • More than 1 and less than 10 years’ service: 5 days of vacation
  • More than 10 and less than 20 years’ service: 10 days of vacation
  • More than 20 years’ service: 15 days of vacation

Employers are required to make arrangements for employees to use their vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who does not allow an employee to take annual leave may be forced to pay that employee 300% of his or her daily wages for each unused vacation day. Chinese employees are very familiar with this law and they virtually always pursue the 300% owed to them (and more) when they leave a job.

6. Understand what you’re getting into before paying for a 13th month. Paying a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.

Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in your employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from a lower individual income tax burden.

7. Factor in social insurance and housing fund payments. As an employer in China, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Some employers mistakenly pay for expat employees’ social insurance when they don’t have to, and others neglect to pay for their expat employees’ social insurance when they are required to do so. Both errors can be very costly.

8. Make Chinese your employment contract’s governing language. We recommend specifying in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. Single-controlling-language contracts can help eliminate costly disputes related to differences in the two “official” languages. Such disagreements are practically inevitable with dual-language contracts. It also makes the terms of the contract clearer for both you and your employees. For the benefit of our clients who cannot read Chinese, our China employment lawyers virtually also create an unofficial English-language version as well.

China employment lawWhen it comes to your China employment law matter, you should keep the following three important precepts always in mind:

  1. China’s employment laws and its legal system favor employees over employers. As in most countries, the employer is presumed to be the more powerful party, so the law provides the employee with many protections. Among other things, this means that in most employer-employee disputes, the employer (not the employee) will bear the burden of proving what actually happened, and if the employer cannot prove it (usually with written documentation in Chinese) the employee will prevail.
  2. China’s employment laws cannot usually be modified by contract.
  3. China employment law is very local. What you can or cannot do in Shenzhen could be different from what you can or cannot do in Beijing. Before making any important employment move, you should check the rules for China, the rules for your province, the rules for your city and, in most cases, you should discuss with your local labor and employment authorities as well. Failing to do this is what causes foreign employers problems. See also China Employment Law: Simple Questions and Complex Answers.

This post is about how the second rule impacts China employee vacation days — an often-litigated employment law issue in China.

Let’s consider a hypothetical based on a question our China employment lawyers are often asked. A China employer’s Rules and Regulations provide that its employees are entitled to the statutory minimum number of vacation days and no carry-over of vacation time is allowed. Let’s further assume that the Rules and Regulations state that the employees have the responsibility to make sure they take all their vacation days within the relevant calendar year and they are expected to keep track of their vacation days. Lastly, the Rules and Regulations provide that if the employee fails to take all or part of his or her vacation time, the employee will be deemed to have given up all unused vacation days and cannot claim any compensation for such days. A disgruntled employee then sues the employer for 300% pay for all of her unused vacation days. The employer’s response is to refer to its Rules and Regulations and the fact that this particular employee signed an acknowledgment of receipt form acknowledging receipt of these Rules and Regulations and refuses to pay the employee anything on the basis that she knowingly and voluntarily forfeited all her unused vacation days.

The employer then asks one of our China lawyers what it should do.

When I or another of our China lawyers gets this type of question, the first thing we do is gather up more facts. What city is it? What does the employment contract actually say? Is it in Chinese (which makes it a lot harder for the employee to deny knowing what he or she signed) and a lot easier for the court to know what it says. What do the Rules and Regulations actually say and is that in Chinese as well? Most importantly, what is actually going on with this employee and this employee’s anger with her employer and what actually happened regarding vacation time. Many times the best way to resolve a loaded employee-employer dispute like this is to get both parties to step away, calm down and compromise, realizing that full-on expensive litigation is not in anyone’s best interest.

For purposes of the discussion here, however, I am going to assume a number of things, like the following:

  • The employer Rules and Regulations were lawfully implemented. In other words, the employer followed all applicable national, state and local laws with respect to its implementation. This means it gave its employees prior notice of the Rules and Regulations and it gave them an opportunity to comment on them.
  • The employer never made any arrangements for the employee to take her vacation time or if it did, it does not have contemporaneous written proof of this;
  • The employer never obtained a written request from the employee expressly stating that she would not take those days for personal reasons (i.e., reasons not related to the employer).

Before I give my analysis, let me first give you our loyal readers a super quick review of the applicable China law on vacation time: All China employers are required to provide their employees with paid vacation days based on each employee’s total years of service. Employers are also legally obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of her normal wages for each unused vacation day.

So, what has the employer in my hypothetical above done wrong? The below is an non-exhaustive list:

First, the employer’s vacation policy in its Rules and Regulations is probably illegal because it shifts the employer’s obligation to the employee. I say “probably” because the law on this, like so many other China employment laws is very localized. The law says the employer must ensure all employees take their legally entitled vacation time and if that is not possible, the employer must pay the employee in lieu of the vacation days. Many jurisdictions in China very strictly interpret this law. The Western mindset that if you don’t exercise your legal rights, you waive or lose them does not comport with the legal reality here. It does not matter that the employee signed off on the receipt of the employer’s Rules and Regulations. The employee did not waive her rights to vacation time.

Even if the employer’s policy on vacation time were legal (which is not going to be the case just about everywhere in China), the employer (not the employees) should stay on top of tracking their employees’ vacation time. The employer’s failure to keep track of this particular employee’s vacation time, standing alone, would probably be enough for the employee to prevail in any litigated or arbitrated dispute. A laid-back management style does not work for China.

Second, the employer never obtained the employee’s written request expressly stating she would not take those vacation days for personal reasons. Of course, very few employees would go along with a voluntary forfeiture of their mandatory vacation days. If an employer is going to argue that one of its employees voluntarily relinquished her vacation days, the employer must be able to produce relevant evidence of this because the employer bears the burden of proving this. And without something in writing from the employee showing that she herself expressly requested that she be able to give up her vacation time, the employer is going to lose, and the employer’s Rules and Regulations and the employee’s signed acknowledgment of receipt form are not going to change this result.

Finally, suppose the employment relationship in the above hypothetical has been formally terminated and the employee has sued. The employer really should have dealt with this vacation issue before it got sued. China employees are getting increasingly serious about enforcing their legal rights under Chinese labor laws and this makes it essential that employers seek to resolve all outstanding issues between them and their employees before  termination. Otherwise, there is a good chance the employee will bring a claim for whatever issues are outstanding, including unused vacation time. A well-crafted termination/separation agreement will ensure that the employee will not and cannot come back seeking payment for unused vacation time (or whatever) and that if she does, the court will rule against the employee because the parties have a legally binding and enforceable agreement covering the issue.

Bottom line: Employers too often believe they have China-centric and legally binding Rules and Regulations when they don’t. They often also think they have great evidence against their employee(s) when they don’t. Employers often blame their employees for not doing everything the employers are supposed to do under China employment laws and this will mean the employer will almost certainly lose in any dispute regarding the contested issue. Still think you are in compliance with China’s employment laws? Maybe you should think again.

China employee probation
China employee probation: like a maze.

Employee probation periods has to be one of the most misunderstood issues in China employment law. Westerners just assume their probationary employees are at will employees who can be fired at any time, for good reason or for no reason at all. Wrong. The probation period is PART of the normal employment term and therefore pretty much all protections afforded to regular employees also apply to employees on probation as well. This period should really not even be called “probation” because it really isn’t. It was five and ten years ago, but no longer and your failure to realize this will be at your peril. Trust me.

Our China employment lawyers often are faced with situations like this: Employer hires an employee on January 1st with a two-month probation period. Employer then contacts us in late February to say it will be terminating the employee before the employee’s probation period runs out so it can avoid paying statutory severance. The employer’s reason for the termination is that the employee is “just not all that good” and they believe they “can do better.” The employee neither failed to follow employer directions nor did he or she fail to possess the qualifications required for his or her position. In other words, the employer has NO legal basis for terminating the employee. So with the probation period now coming to an end, can the employer go ahead with its planned unilateral termination without having to pay severance? Probably not.

The employer is shocked when we tell them that if they go ahead with the unilateral termination, they will be at risk of being sued for an unlawful termination. China is not an employment-at-will jurisdiction and the probation period is not an exception to this general rule. An employee termination during the probation period requires a legally permissible ground and except for the limited number of grounds permitted under the law, an employee on probation cannot be unilaterally terminated. If this sounds familiar, it should. Because if you replace the italicized parts with “during the employment term” you get the most fundamental rule of China’s employment law: a China employee cannot be unilaterally terminated without cause.

So under what grounds can an employer terminate an employee on probation?

Article 39 of the PRC Labor Contract Law provides that an employee on probation may be terminated with no severance for one of the following six reasons:

  1. The employee is proven to have failed to satisfy the conditions of employment during the probation period;
  2. The employee materially breaches labor disciplines or the employer’s rules and regulations;
  3. The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer;
  4. The employee has established an employment relationship with another employer which materially affects the completion of her tasks with the employer, or she refuses to terminate such employment relationship with the other employer, after she is required to do so by the employer;
  5. The employee uses deception or coercion, or takes advantage of the employer’s difficulties to cause the employer to conclude the contract, or to make an amendment thereto, that is contrary to that party’s true intent;
  6. The employee has criminal liability imposed in accordance with the law.

Under Articles 40(1) and 40(2) of the Labor Contract Law, an employee on probation may also be terminated if:

  1. He or she has fallen ill or sustained a non-work related injury and, at the end of the medical treatment period, can neither engage in the original work nor in other work arranged by the employer;
  2. He or she is incompetent and remains incompetent after training or assignment to another post.

That’s IT. No law allows an employer to terminate an employee on probation for whatever reason the employer wishes (or for no reason at all) simply because the employee is on probation.

In addition, Article 21 of China’s Labor Contract Law clearly states that when an employer terminates an employee during the probation period, the employer must provide the employee with reason(s) for such termination. It is critical that the employer convincingly document its terminations in writing — in Chinese. If the documentation setting forth the grounds for termination is not convincing, you will be giving your terminated employee incentive to challenge the termination and a good chance of prevailing against you in a labor arbitration proceeding. This is especially true when the employer is a WFOE because let’s face it, China is always going to favor a Chinese employee over a foreign-owned entity.

The most common ground for terminating an employee on probation is the first ground under Article 39; the employer can prove the employee on probation does not satisfy the conditions of employment. Note the wording though in Article 39. The employer must be able to prove that its employee failed to satisfy the employer’s conditions of employment. For the employer to be able to prove this, it must have specified such conditions/requirements in writing and it must communicate those conditions to the employee beforehand. Though some courts will consider the general requirements in an employee’s specific industry as conditions of employment, most courts will not. What this means is that the smart employer has a clear writing setting out its probationary employee’s conditions of employment and if a termination becomes necessary, another clear writing documenting exactly how the employee failed to meet those conditions.

What then is the difference between a probation period and a normal employment term? Not much, actually. If an employer can prove any of the above grounds for termination exits, it can terminate the employee during the probation period without having to pay severance. Or the employer can wait until the end of its initial fixed term and not renew the contract but pay severance to the employee.

What then should you as an employer in China do? The best way to proceed is usually to specify the employment requirements in your employment contracts or in a separate agreement/document (in Chinese!) and preserve good evidence of how your employee fails to meet those requirements. If you as an employer want to be able to fully take advantage of the probation period, you should set out the conditions of employment in writing and provide those to the employee for review and sign off before the employment relationship commences. And then, as discussed above, if you find yourself wanting to terminate that probationary employee, you should give the employee a reason beyond telling them that “you are fired because you are still on probation.”

Few WFOEs seem to understand these rules and even fewer seem to get them right. Many try to manage their China-based employees from afar in a foreign (especially U.S.) style that does not work for China, without China-centric employment contracts or China-centric employer rules and regulations. These WFOE employers consistently fail to maintain records of employee behaviors/performances in a way they can later use in their favor in an employment dispute.

China employment cases are rife with examples of foreign employers that lost and lost big because they did not understand employee probation periods. Chinese employees know this and they are quick to sue when terminated during their probation period.

In a fairly recent case in Shanghai (which is actually more pro-employer than most cities in China), a foreign employer sought to have the court overturn a labor arbitration ruling finding the employee had been wrongfully terminated during the probation period. The employer argued that the employee was emotional at work, had on many occasions read magazines unrelated to work, and did not possess the professional skills expected for the job. The employer also argued the employee failed to pass his evaluations during the probation period. The Second Intermediate People’s Court rejected the employer’s arguments, noting that the employer failed to put forth any real evidence to prove an evaluation of this employee had actually occurred and it ordered the employer to pay damages to its former employee for unlawful termination of the employment contract.

Because employers in China must prove the grounds of termination even during a probation period and because there is no legal basis for unilateral termination the safest way for an employer to terminate its probationary employees is via a mutual termination agreement. This usually involves the employer giving the terminated employee a small severance payment in exchange for the employee’s voluntary departure. This mutual termination agreement should be in Chinese and it should include provisions making clear that the terminated employee is releasing the employer from any future claims. If the employee refuses to agree to such an agreement (this almost never happens), the employer essentially has the following two courses of action:

  1. Inform the employee that he or she is being terminated, and then sit back and wait for a potential labor arbitration, or
  2. Continue to employ the employee throughout the employment specified in the employee’s contract.

Can you extend the probation period? As is true of so much of China employment law, that depends on the locale. But this is not something you want to get wrong because in some locales, extending the probation period is just about the worst thing you can do. And keep in mind that even if your extending the probation period is legal, you as the employer still must prove cause for any eventual unilateral termination.

Bottom line: China probationary periods are neither what they used to be nor what they seem to be.  If you are unsure whether you are using your China employee probation periods correctly, now is the time to find out.

China employee termination rules
China employment law: know the rules

Terminating a China-based employee usually requires good cause. A serious breach of employer rules and regulations can be a basis for an employer’s unilateral termination of an employee, but China employers have other options as well.

A China-based employer may terminate an employment contract if the economic circumstances which formed the basis for the parties’ having signed the employment contract in the first place have changed, causing the employer to be unable to perform under the contract. This sort of termination is permitted only after negotiations between the employer and employee have proven they are unable to reach an agreement on amending the contract. But does this sort of termination really work? As with just about everything related to China employment law that will depend on whether the employer handled the termination 100% correctly and a bit on the locale as well. See China Employment Law: Simple Questions and Complex Answers.

 Let’s look at an actual case out of Zhejiang province. The employer and employee signed an open-term employment contract in 2010 for the employee to work in a managerial position in Hangzhou. During the term of employment, the employer decided it needed to shut down the department this employee managed so as to cut costs. The employer provided its shut-down plan to its labor union for comments. The employer then notified the managerial employee in writing of its decision to close down his department and directed the employee to report to a new position, with pay and performance standards essentially the same as the managerial employee’s existing position. The employer’s notice clearly informed the employee that if he failed to report to his new position within a specified period, the employer would not be able to assign him to a similar position and would instead have to terminate his contract.
The employee refused to cooperate as directed and the employer then prepared a notice to terminate the employee’s contract and it provided notice to the company’s labor union for comments. The notice made clear the basis for the employee’s termination was the employee’s failure to abide by the employer’s new position assignment coupled with the employer’s inability to accommodate this employee with another similar position. These circumstances caused the parties to be unable to perform under the existing employment contract and after negotiations, the parties were unable to reach agreement on amending the original contract. The employer tried to serve the employee with his termination notice in person, but the employee refused to accept it, so the employer sent notice to the employee’s last known contact address by mail. The employer also published the termination notice in the daily newspaper and paid the employee an additional month’s wage as severance based on his years of service.
The employee sued for unlawful termination and demanded reinstatement of his position.

The courts sided with the employer and ruled as follows. After the employer decided to shut down the employee’s department and eliminate the employee’s original position, the employer provided the employee with notice specifying (1) his new position, (2) the new payment standard (which would not reduce his take-home pay one Yuan) and (3) the requirement that he report to his new position or be terminated for failing to cooperate. The employer also repeatedly asked the employee to report to the new position. The court held that the employer had handled the termination correctly and ruled entirely in the employer’s favor.

This case almost certainly would have turned out very differently had this employer not been so punctilious in following all the procedural requirements for a termination due to economic circumstances. This employer did not go full speed ahead and unilaterally terminate the employee right after it made the decision to eliminate his position. It instead got its labor union to sign off on its plan and then it sought to give the employee a similar position with similar pay.

Keep in mind that terminations because of economic circumstances require the employer pay their terminated employees statutory severance. And as always, it is important to check the local requirements before you terminate an employee.

 

China employee terminationWhat happens if a China employer makes an employee termination decision that is later ruled unlawful? According to the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes recently released by the Beijing High People’s Court and the Beijing Labor Personnel Dispute Arbitration Committee, the answer is specific performance. In other words, if you unlawfully terminate an employee, you must reinstate that employee to his or her previous position in your company. This technically applies only to Beijing but we expect this will become the norm in many other places in China as well.

Under this new law, if the employer’s termination decision is unlawful and the employee demands reinstatement such a demand will ordinarily be granted. If the court discovers reinstatement is not possible, the employee will be instructed to bring a severance claim for the unlawful termination. What circumstances will make specific performance “impossible?” The new law provides the following guidance:

  1. The employer is declared bankrupt, has had its business license revoked, or has been ordered to close down or has decided to dissolve its entity;
  2. The employee has reached mandatory retirement age during the arbitration/litigation process;
  3. The employment contract has expired during the arbitration/litigation process, and the employer is not required by law to enter into an open-term contract with the employee;
  4. The employee’s original position is critical to the employer’s normal business operation and is of an irreplaceable nature (e.g., general manager, finance manager), and the original position has been filled, and the parties cannot agree on a new position;
  5. The employee has started working for another employer;
  6. During the arbitration/litigation process, the employer delivered a notice of reinstatement to the employee and the employee refused to accept such notice;
  7. Other circumstances that demonstrate obvious impossibility of specific performance.

As is true with many (most?) of China’s employment laws, the employer bears the burden of proving facts sufficient to invoke impossibility. Just because the employer found a replacement for the former employee, without more, it will not be sufficient for the employer to argue “specific performance is impossible.”

This new Beijing law is really not so new at all; it is more a clarification of existing law than anything else. Beijing has a longstanding reputation for a pro-employee approach and we have routinely seen cases where employers were ordered to give terminated employees their jobs back. It is important to note that employer’s cannot contract away their employees’ reinstatement rights.

Bottom Line: As a Beijing employer, you should assume reinstatement will be the norm for an unlawful employee termination, which is all the more reason to be sure you handle all of your employee terminations lawfully. As for the rest of China, reinstatement will still largely depend on where and how.

 

China employment law
China employment law — Watch your local regulations

Our China lawyers are always getting a slew of emails from both employees and employers doing business in China. The questions typically involve employees who are questioning their treatment or who want to change jobs or employers who want our quick confirmation of something they are planning with one or more of their employees. We can rarely provide instantaneous answers to their questions. This is because in addition to the complexity of Chinese employment law at the national level, there are seemingly endless legal twists and turns and variations at the local level.

For example, one of our regular blog readers asked “just a few quick questions” about issues related to volunteering for a company that was not his employer. He worked for a U.S. Wholly Foreign-Owned Enterprise (WFOE) and had a residence permit and the following questions:

  • Do I need a certificate or other documentation to allow me to volunteer at the company one day a week?
  • Do I have to ask my current employer for permission to volunteer at another company?
  • If the company decides to start paying me for my work, would that interfere with my relationship with my existing employer?

Though these may seem like straightforward questions, here’s a sampling of the information we would need to gather before being able to provide any meaningful guidance:

  • We’d need to know the name and location of his employer. We would also need to run a conflict check on that company because it would not be good for us to be advising an employee of one of our clients on how to work elsewhere, even if only on a volunteer basis.
  • Since employment laws in China can vary greatly from city to city (sometimes even by district within a city), simply understanding the laws in an unfamiliar city can require extensive research.
  • A key aspect of understanding local laws and regulations is actually discussing them with the appropriate governmental authorities. This is especially true when the written laws are not as clear as they should be, which is quite often the case.
  • The specific contract with the employer would also have to be reviewed in detail. What if it forbids any outside work without written permission? Our giving this employee the okay to volunteer could get him fired.

As you can see, there’s almost no such thing as an easy question when it comes to labor laws in China.

For more on this, check out this Forbes article, China’s Hourly Work Week: Think Locally, explaining how something as seemingly simple as the 40-hour workweek can trip up employers who don’t take the time to learn the ins and outs of local employment laws.

 

China employment lawyersEven routine China employee terminations are usually challenging and pretty much always require preparation and care. Throw in an employee pregnancy and you increase the complexity and the risk exponentially. Our China employment lawyers have in the last few years increasingly had to resolve situations where a pregnant employee seeks to revoke her termination decision (sometimes by demanding reinstatement of her position), no matter how or why her employment contract is terminated — even when the termination was mutual and even when the termination was with cause. And as is true of just about everything having to do with employment law in China, the laws and the rulings on these things will depend on the facts and on where the employer is located.

Suppose the employer and the employee mutually terminated their employment relationship and after the employee’s departure, the employee finds out she is pregnant. The employee goes back to the employer and asks for her old job back. Recent cases seem to suggest that if the mutual termination was done correctly, the parties’ agreement will be deemed enforceable and the employer does not have to take the employee back. By “correctly,” I mean the following:

  • The termination is documented in writing and the employer has preserved good hard copy evidence. Note that emails and social media do not constitute good hard copy evidence.
  • The employer and its former employee executed a proper mutual termination agreement in Chinese. Note that we do all of ours in both Chinese and in English: the Chinese so that it will actually work and the English so that our client fully understands what they are signing.
  • There is nothing to suggest the former employee was coerced or deceived into signing her termination agreement.

Now suppose the employee’s departure was voluntary at first and the employee resignation was handled correctly. That is, the employer has proper documentation showing the employee resigned voluntarily and there was no employer wrongdoing. But before the separation process was entirely  completed, the employee learned she was pregnant and wanted to withdraw her resignation. Does the employer have to take her back? The answer is likely no. First, Chinese laws give the employee the right to unilaterally terminate a labor contract by giving 30 days written notice, and the employer cannot make it more difficult for the employee to quit. In other words, once an employee gives his or her written notice, the employment relationship will be terminated once the 30-day period has passed. On the flip side, once an employee quits, he or she cannot revoke this decision unless the employer agrees. Under this scenario, the decision to leave was of the employee’s own free will and since the employer does not want to revoke the employee resignation, forcing the employer to take the employee back would be both unjust and unlikely to happen.

It gets a lot trickier if the employee’s departure is a result of her employer unilaterally terminating her. In that situation, if the employer’s termination was lawful it probably will not be ordered to rehire the now pregnant ex-employee. But if the employer did not correctly terminate this employee, the employer will almost certainly be required to rehire the now-pregnant employee. In fact, the employer would probably be required to rehire this employee even were she not pregnant. However, in the case where the employee is pregnant, it means the employer must not only reinstate that employee, it means it will also now need to treat her with extra care and afford her more protections and benefits than other regular employees. It also means the employer must give the employee paid maternity leave of 128 days, more depending on the location.

Regardless of the reasons for having to rehire an employee, you will need to do that correctly as well. Among other things, this usually means you should execute a new employment contract since the last thing you want is to find yourself in a situation where you employ someone without a written employment contract — especially someone you wanted to terminate.