China’s employment laws require full-time employees be employed pursuant to a written employment contract. But what happens if an employee is employed without a written employment contract? As with pretty much everything related to China employment laws it varies from place to place. But for the China employer, it will never be good and if you want to minimize your risks and prevent problems you should use written employment contracts (in Chinese) early and always.
Generally speaking, if your China employee works for more than a month without a written contract, she will be entitled to a double monthly wage penalty. And if your China employee works for a year or more without a contract, she will become an open-term employee, which essentially means you must employee her until her mandatory retirement age. In addition to lifetime employment in many locales you will also be liable for a double wage penalty for up to a year’s worth of her salary from the date you should have signed an open-term contract with this employee. In other words, you will end up with an employee for life and you will need to pay her an entire year’s extra in salary.
How is the double wage penalty calculated? In some locations, it is calculated based on the actual wages received by the employee for each month the employee worked without a written contract, not counting any overtime pay, bonus or commission payments. In some locations, the double wage is based on pretty much everything the employee received including all overtime pay, year-end bonuses, and commissions.
What is the statute of limitations for a double wage penalty claim? The statute of limitations is generally one year, but the calculation of this one year depends on the locale. In some places in China, the one year statute of limitations starts running from the day the employer has its employee sign a written contract. In some cities (such as Shanghai) the one year statute of limitations starts running one year from the second month of the date on which the employee starts working without a written employment contract.
Suppose you have an employee who started working for you on January 1, 2018, without a written employment contract? The double wage payment is payable from February 1, 2018 through December 31, 2018 at which time this employee quits. The employee brings a labor arbitration claim in December 2019 seeking double wages. In places that apply the first method for calculating the statute of limitations, the employee will get double her wages for the entire period from February 1, 2018 through December 31, 2018 since December 31, 2018 (in some places, January 1, 2019) will be considered her one year anniversary since her employment commenced and the statute of limitations starts to run from January 1, 2019 and runs through December 31, 2019 (or January 1, 2020). So long as this employee brings her claim by December 31, 2019 (or January 1, 2020), she can pursue her double wage claim.
In locales that adopt the second approach, the employee gets double wages only for the month of December 2018 because her double wage claims for February 1, 2018 through November 30, 2018 will be deemed to have been barred by the statute of limitations because they are more than a month old. This is the law, but because China so favors employees over employers, especially when the employer is a foreign company (even more so when the employer is a U.S. or Canadian company), there is still a decent chance the employee will get a full year of double wages.
Do foreign employers automatically lose every double wage claim not barred by the statute of limitations? Under certain circumstances, if the employee’s own action or inaction was the reason for the lack of a written employment contract, the employer may not have to pay the double wage penalty. For example, in most locales, the employee will not prevail on the double wage claim if 1) the employer can produce evidence proving the employee refused to conclude a written contract; or 2) that the employee is/was a senior manager with authority to conclude a written contract on the employer’s behalf but refused to do so. Though proving the lack of a written employment contract was caused by your employee is theoretically possible, good luck coming up with sufficient proof to convince an arbitration panel of this, particularly one that favors employees over employers and has no great love of foreign companies.
Even in cases where the employee signed a written waiver expressly releasing the employer from any claims related to the employee’s not having a written employment contract, the employer has been found to have to pay the double wage penalty. In these cases, the arbitration panel sided with the employee because they viewed the lack of a written employment contract as trumping everything else, including who (the employer or the employee) caused the situation. Also, the relevant law provides how the employer should handle the situation when its employee refuses to sign a written employment contract or claims such a contract is not necessary. The law provides that when an employee will not sign a written employment contract, the employer should provide that employee with a written notice terminating the employment and so most arbitration panels will award the employee the double wage penalty because the employer failed to act according to law by terminating the employee. The employer should face the adverse consequences that come with employing an employee without a written contract. For these reasons, our China employment lawyers usually advise our clients terminate any employee (pursuant to law and as quickly as possible) that does not cooperate in signing their written employment contract.
When an employment contract expires and the employee continues working for the employer without a new written employment contract, the employer will face the same sorts of risks and problems detailed above. Some Chinese cities provide for limited exceptions for not immediately getting your employee to sign a new employment contract, such as where there is a provision in the expired contract that calls for an automatic contract renewal or where the contract is extended due to a legally required reason, such as for a pregnant employee. However, to be safe, we usually advise our clients to enter into a written agreement regarding the contract extension, especially since many of the auto-renewal provisions we see are not well crafted in the Chinese portion of the employment contract and that is the only portion that legally matters.
Bottom Line: To avoid employment contract problems you should have signed written employment contracts with each of your employees within one month of their starting working for you. You also should make sure that you get new signed written employment contracts from your employees whose contracts will soon be expiring. It should go without saying (but sometimes it seems we do need to say this) that these employment contracts should be well-crafted in Chinese because the Chinese portion is the only portion of the contract that legally matters in China. This means you must do more than “just translate” the English portion. You also want them to be well-crafted in English so that everyone in your company knows exactly what they say. If your company has any employees working without a written contract or working on an expired contract you need to become compliant fast because now is not the time to be messing around with your employees or with the Chinese government. For the big picture on why China compliance has become so important, see How to Do Business in China Without Going to Prison.