China’s labor laws allow employers to set a probation period for an employee to see if the employee works out for the company. Before the probation period ends, if the employer can prove that the employee does not meet its recruitment requirements, the employer can unilaterally terminate the employee without having to pay statutory severance. However, to prevent the employer from abusing such probation periods, Chinese law makes clear that the employer may set only one probation period for the same employee and it imposes a limitation on how long the probation may be. The rule on the maximum length of the probation period is not very complicated and can be found here. Nonetheless, if you don’t set it right, things can get complicated and messy fast and you may find yourself at risk. We have reviewed many offer letters and employment contracts that provide for a term of probation period that does not comply with China’s employee probation laws.
As noted before, the employer is permitted to unilaterally terminate employees that do not satisfy the conditions of employment during the probation period without having to pay severance. Now consider this: an employer sets a probation period longer than the statutory maximum, and before the term of probation period ends (but after the statutory maximum period has passed), it decides to terminate the employee because the employee failed to meet the conditions of employment. Can the employer legally do that? Probably not, because the remaining probation period is no longer considered a probation period under China’s labor laws, and the employee is thus no longer on probation and this specific ground for termination no longer exists. Can the employer still terminate the employee? It depends on the circumstances AND on the jurisdiction. Among other things, it depends on whether a permissible ground exists that justifies the termination and if the employer is able to prove it.
Another big issue is compensation. Suppose that the employer sets a probation period longer than the statutory maximum and the employment contract provides a basic salary during the probation period and a higher salary after that period. The employee continues to work after he or she has completed the probation period. Because the probation period in the employment contract does not comply with China’s employee probation laws, the employer will owe the employee the wage difference for the period between the statutory maximum and the probation period specified in the contract. In addition, the employer could also face an administrative penalty from the labor authorities.
If your specified probation period is longer than the statutory maximum, your company may also be at risk when it seeks to extend this period. For starters, even where the agreed-upon probation period is within the legal limit, the extension of such probation period may be illegal in your location. Furthermore, you may be exposing your company to additional risks if you extend a probation period that already violates the law.
And oh, just because the employee is on probation (and you don’t know if the employee is going to work out) does not mean you can wait until the employee passes the evaluation/performance review to enter into a written employment contract with him or her. For more on the importance of having a current written employment contract, see here.
Bottom line: Make sure your employment contracts comply Chinese law and it is better to do this before it is executed rather than after. All of the examples we gave above were based on China employment matters I handled, usually in a crisis, and usually at a cost way more than we would have charged had the company sought our employment law assistance at the very beginning.