China employers must have written employment contracts. When drafting a China employment contract, one of the critical issues is always going to be the term of employment. Our clients are always asking us how they should set the employment term, especially the initial employment term. The short answer is the typical lawyer answer: it depends on the situation. This being said, for new employees, our China employment lawyers usually recommend a three year initial term.
Let me explain….
An initial three year term for your new China employee usually works best when you want that new employee to have a probation period. Because Chinese law requires that the probation period be proportional to the initial employment term, a three-year initial term means you can set the probation period for the maximum six months permitted by law. You are not required to have any probation period at all, nor are you bound to use a full 6-month period, but if the initial employment term is for less than three years, you cannot use a probation period of more than two months.
Perhaps most importantly, three-year initial terms are what China employees generally expect and like. Why not make it longer, say five or six years? It usually does not make sense to use such a long term unless and until you are certain the employee will work out. Remember that employee terminations are usually very difficult in China because the employer must prove that its termination was legally permissible and that is often not an easy task. So, what happens when you wish to terminate an employee who has worked a couple of years but still has a few years left on the employment contract and you do not have any legal grounds for the termination. Though you may be able to get the employee to agree to a mutual termination, sometimes the worst scenario happens and you end up being “stuck” with the employee. Trust me, this happens. See China Employee Mutual Terminations: The Dos and the Don’ts. Getting stuck with an employee who has a 3-year contract is obviously a lot better and cheaper than getting stuck with an employee with a 5-year term. At the end of the 3-year term, you can simply not renew and pay the employee statutory severance for a non-renewal.
In most places in China, once you have renewed an employee for two consecutive fixed-terms (note though that different places have different interpretations on how exactly this works), you are then required to enter an open-term employment contract with the employee (up to the mandatory retirement age) unless the employee specifically requests a fixed-term contract. Though not impossible terminating an employee with an open-term employment contract is much more challenging than terminating an employee on a fixed term. See China Employment Contract FAQs. By establishing a long initial employment term, you can delay the onset of the open-term period. If your employee turns out not to be a good fit for your company, you should not take that employee beyond the first term. This generally means not extending the initial term for a few months to see whether the employee will change for the better.
There are though situations where a three-year initial term will not be the best option for anybody. For example, suppose a representative office “employer” plans to “transfer” their “employees” to their newly-formed WFOE. Though the employees will technically be new employees of the WFOE, they will not be new to the company and if they have already proven their value to the company, it will make perfect sense to put them on open-term contracts. This will not only make the employees happy, it will also make HR administration easier because it will not need to constantly renew the contracts before they expire. In this sort of situation, the WFOE employer should also skip probation periods and have a provision in the new contracts acknowledging the employee’s seniority at the company. We have had situations where foreign companies have gotten the terms so wrong that they angered their employees so much that they simply quit.