In Part 1 of this series, How to Avoid China Employment Law Problems, Part 1: An Employee Handbook That Works, we wrote how Chinese authorities are going hard after foreign employers (especially Americans) for violations of China’s employment laws. See also Want to Keep Your Business in China? Do These Things NOW. The Chinese government loves going after employment law violations because doing so 1) is popular with its citizens, 2) protects its employees, 3) generates hard currency for the government and 4) quietly and legally retaliates against American (and Western) companies in the trade wars. Add in the fact that it is so easy to find violators (the government interviews employees who are happy to report their employers, or paid or pressured to do so). It’s the perfect storm and it’s a rare day when one of our China employment lawyers is not contacted by a foreign employer caught in this net. The key for foreign employers to avoid these expensive (and sometimes terminal) employer problems is compliance.
In Part 1, we discussed how critical it is for foreign employers in China to have relevant, timely and well-crafted China employer rules and regulations — often referred to as an employee handbook.
But just having a good employee handbook is merely step one; you need more. You also need a current and appropriate employment contract with each and every one of your employees. Like the employee handbook, your employment contract must actually work for you and not against you and it must comply with all of China’s current national and local employment laws.
Chinese law requires every full-time employee be hired pursuant to a written employment contract and have an up to date one during their tenure. It also makes sense for your part-time employees to have a written contract as well because their part-time employment contract proves they are a part-time employee. This contractual proof often becomes necessary because part-time employees love claiming they were really full-time employees all along and you owe them lots of money for having failed to provide them with the required benefits that come with full time employment.
When the China employment lawyers at my firm are tasked with writing an employment contract, the first thing we do is review the employer’s HR program and the employee’s situation to determine what terms and conditions can/should go in the employment contract and what can/should be left in the employee handbook. What will be the employment term? Will there be a probation period? What will be the employee’s working hours? How will overtime be paid? What sort of compensation package will the employee get? What are the conditions (if any) for the employee getting a bonus? How many vacation days will the employee have? Will the employee get any additional paid time off besides vacation days and national holidays? A good contract protects both the employer’s and the employee’s interests within the laws and realities of the parties’ locale. See China Employment Law: Local and Not So Simple. Most importantly, a good contract helps guide both the employer and the employee in making good decisions and by doing so, it reduces legal and government disputes.
A good employment contract coupled with a good employee handbook gives foreign employers greater freedom to act. China’s declining and changing economy has led to many foreign employers wanting to lay off or terminate employees and our employment law team has been getting a lot of matters lately where foreign employers want to terminate an employee for “not working out. This is difficult to accomplish under Chinese law and nearly every time the dividing line between those employers who can do this and those who can’t has been the employment contract and the employee handbook.
We have had times where after we looked at all the facts regarding the employer/employee situation and reviewed the employment contract and the employer rules and regulations and other documents pertinent to the employee’s employment, we confirmed the employee’s employment term was expiring soon and there were no laws requiring the employee be retained beyond the last date of the contract and the employer was not otherwise required to enter into an open-term contract upon the expiration of the contract. In other words, a clean non-renewal notice could relatively easily achieve the employer’s goal and it did. In these situations, all the employer had to do was pay the employee statutory severance for not renewing the contract — a small cost compared to keeping them for another term and possibly converting them to lifetime employees. The terminations went smoothly. We have also had times where we have had to tell the foreign company that terminating any employee was simply too risky.
What constitutes a good China employment contract? A good China employment contract must be written from the perspective of Chinese laws and from the laws of the locale in which your employees are based. In other words, you should not use an employment contract for a China-based employee that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employment agreement. You also should not use the same contracts for Shanghai that you use for Shenzhen.
Consider this: An employer and a Chinese employee sign an employment contract which provides that the employee can be terminated without cause so long as the employer pays a certain amount of severance. The employer employs the employee for a few years and when things are good, both sides are good. Then the employer decides to lay off the employee and verbally informs the employee of its unilateral decision and its intent to pay the severance specified in the contract. The employee says, “I do not agree to the termination.” The employer refers to the provision noted above. The employee says, “yeah but that provision is illegal, so it is not enforceable against me.” The employer assumes the parties can contract around termination, but many China employment laws simply cannot be contracted away.
Agreements like this can and often do cause big trouble for foreign employers, especially when they make an improper termination decision. Most of the time when our China employment attorneys are called in to help in this sort of situation, the employers do not even realize the extent of their problems because they think that by following their own employment contract they have done everything right. All this stems from the employer’s having failed to use a proper employment contract in the first place.
Last but not certainly not least, an employment contract, regardless of how well-written it is, must be current. If it is not current it could subject the employer (not the employee) to all sorts of risks and problems. I will talk about more about this in the later part(s) of the series. For now, just remember that you should not have an employee on your payroll without a current written contract. If you have an employee or employees whose contract is about to expire, you should take the time to at least consider and answer this question: should you renew the employee’s contract for another term?
Bottom Line: Avoiding China employment law problems requires you have a current China-centric and localized employment contract with all your China employees.