It is far cheaper in the long run to avoid China employment law problems than to have to deal with one that has arisen. If you follow the following eight rules, your chances of having a China employment problem will markedly decrease.
1. Use written employment contracts. China’s employment system is a contract employment system. This makes it a very different system from the United States, where U.S., employers can terminate employees pretty much at any time and for any reason. The U.S. system is called employment at will. China is most assuredly not an at-will employment jurisdiction, and American companies often get themselves in legal trouble in China for failing to realize this. As a China employer, you must have written employment contracts with all of your full-time employees.
China employers without a written employment contract are exposing themselves to penalties, administrative fines and the risk of being deemed to have entered into an open-term employment contract with their employees, which essentially means no definitive end date to the labor relationship.
If an employer goes more than a month (note that this period is shorter in some municipalities) without having a written employment contract with an employee, the employer will be required to pay its employee double the employees’ monthly wage. In addition to having to paying double the employee’s monthly wage, the employer must immediately execute a written employment contract with the employee.
If an employer goes more than a year without having a written employment contract with an employee, the employee lacking the written employment contract will be deemed to have entered into an open-term employment contract with his or her employer. Such a contract generally means the employer must retain the employee until his or her retirement age. As explained below, once an employee has completed his or her probation period, it is very difficult to terminate the employee during the term of the employment contract. It is even more difficult to terminate an employee on an open-term contract.
2. Put the mandatory provisions in your China employment contracts. China’s Labor Contract Law mandates that employment contracts 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 explicit term/duration of the employment contract (and any probation period)
- A description of the work the employee will be performing
- The place of work
- The working hours
- Rest and leave time
- Social insurance
- Applicable labor protections and labor conditions and protection against occupational hazards
- Other matters required by relevant laws and regulations
Many locales also require employers put additional provisions in the contract, and in addition to what is mandated by law, employers generally should be sure to include provisions describing any additional benefits they provide to particular employees,
3. Be clear with the term of your employment contracts and your probation periods. It often makes sense to include in your employment contract with any new employee a probation period to give the employer (mostly) and the employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. The general rule is that for employment terms of more than three months but less than one year, you may set 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 arrangement, the probation period cannot be longer than six months. You may use only one probation period for the same employee.
Since it is difficult to terminate an employee who has completed his or her probation period, we usually recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee.
This approach also makes sense because in most places in China the employee will automatically be converted into an employee with an open contract term when you re-hire the employee pursuant to a second fixed term contract. Terminating an employee on an open term contract is much more difficult than terminating one on a fixed term. Having a long probation period will delay the onset of the open term period so you can take advantage of this period to determine whether you should convert the employee to a lifetime employee.
But just like pretty much everything having to do with China employment law, the general rule is just that; it is not the right way to go in every circumstance 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. In China, most municipalities enforce an 8-hour work day and 40-hour work week, 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 akin to the U.S. salaried employee system and applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined in local rules. The flexible working hours system can benefit employers needing greater employee hour flexibility, without having to pay overtime every time one of their employees works outside the basic hours. Under the comprehensive working hours system, employers may have their employees work beyond 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.
But with very limited exceptions, before a China employer can implement either a flexible working hours system or a comprehensive working hours system, it must secure prior approval from the local labor bureau and such approval does not last indefinitely: you need to submit an application for renewal before the expiration of the term specified in the government approval letter.
Regardless of which working hours system you as a China employer choose to implement, the safest approach (to avoid having to pay overtime) is not to have any employee work on Chinese national holidays, if at all possible.
5. Know China’s rest time and vacation rules. Every employee will have two rest days, typically Saturday and Sunday.
Employees who have worked continuously for one year are entitled to paid annual leave. The statutory vacation period, based on the employee’s total years of service (with anyone, not just for you), is as follows:
- More than 1 and less than 10 years service: 5 days vacation
- More than 10 and less than 20 years service: 10 days vacation
- More than 20 years service: 15 days vacation
Employers are required to make arrangements for employees to take 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 fails to allow an employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation day. And trust us when we tell you that Chinese employees are well aware of this law and they virtually always seek the 300% owed to them (and more) when they leave your employment.
6. Get clear on your salaries. Your written employment contract must set forth a salary. One issue to consider is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This 13th month of salary is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month of salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.
It also makes sense for you to determine early on whether you are going to pay this extra month because many a foreign company doing business in China has felt compelled to add this 13th month only after calculating their expenditures based on a 12 month system. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may want a lower salary structure with an annual bonus which is usually paid in the early part of the following year. This will add no cost to you, but your China employee can benefit from the preferential tax treatment on his or her annual bonus, which means less individual income tax burden for the employee.
7. Get clear on social insurance and housing fund payments. As a China employer, 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 China employees. The exact type of social insurance you must pay depends on the local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Do not make the common mistake of paying for your expat employees’ social insurance when you do not have to do so or the equally common mistake of failing to pay for your expat employees’ social insurance when you are required to do so, as both mistakes can be very costly.
8. Use Chinese as your employment contract’s governing language. We recommend making clear in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. The advantage of a one-language contract is that it eliminates costly disputes between the two “official” languages which happens pretty much every time with dual language contracts. Equally importantly, it makes things clearer for both you and your employees. Nonetheless, even though the English language portion is not an official version, we still draft our China employment contracts in English as well so that our clients who do not read Chinese can figure out what it says both when we draft it and in the future.