Employers will soon face dramatic changes in how they hire and manage their workforce in China. After 11 years, the Chinese government and people felt that the People’s Republic of China’s current labor contract law did not provide the necessary protections and stability for its employees and employers, especially under China’s reformed economic system.
Although there is much debate on whether the revised contract law adequately addresses these concerns, there is a general consensus that the revised contract law, expected to go into effect in the first part of 2007, contains its own ambiguities and challenges.
The following highlights some of the monumental changes to the draft contract law and provides tips on how employers can prepare for these changes.
Non-compete agreements
Under the draft law, the maximum non-compete restriction is two years, a geographic restriction must be included, and it must be limited to geographic areas where real competition is or may arise.
The draft law clarifies that monetary consideration must be paid to an employee, in order to enforce the non-compete. Monetary consideration is defined as no less than the employee’s annual salary. The term “salary“ is not defined and employers are left with the question of whether salary includes bonuses and employer-paid benefits to the employee. The draft law currently does not have exceptions for payment of the non-compete consideration should the employee: (1) violate the terms of his/her employment agreement; (2) resign his/her employment; or (3) be employed for a very short period of time. The draft law is silent as to whether full payment must be made immediately upon termination of the employment contract or whether payment can be made over a period of time. It is clear that in the event of a breach of the noncompete agreement by the employee, damages are capped at three times the amount paid to the employee by the employer.
Probationary periods
Probationary periods can now last one to six months, depending on job classification. The following are the delineated job classifications, with maximum time periods:
• Non-technical – one month
• Technical – two months
• High/senior technical – six months
The draft law does not define which job positions fall within each job classification.
Training
The draft law defines employee training as “technical full-time training” and presents challenges for employers. This definition fails to recognize many informal means of training that are valuable to employees, such as on-the-job training. In addition, repayment of training expenses upon termination of the employment contract is only allowed if the employer-provided training satisfies all of the following: (1) training is full-time; (2) it is off-the-job technical training; and (3) such training lasts for a period of six months or more. Additionally, it appears that such full-time, off-the-job technical training must be conducted for the employer by a professional training company.
Trade unions
Under the draft law, trade unions have a much greater role in monitoring and approving employment changes in the following areas.
Mass layoffs
When an employer plans to terminate more than 50 employees, it must establish a change in the company’s objective circumstances and negotiate the terms of the lay-off with the trade union or, if no union, the entire staff of the employer. Employers will now be required to retain employees with longer service histories.
Company rules
Essentially, every employer policy, rule and procedure that governs its employees must be discussed and approved by the union or employee representative. The term “employee representative” is new and remains undefined in the draft law.
Termination of labor contract
Employers must seek permission of the trade union prior to termination of any labor contract, even if for cause. This timing issue could create obstacles for employers who are faced with the need to immediately terminate an employee for criminal or other conduct against an employer’s interest.
Severance pay
Severance is payable in the event a fixed term contract expires and the contract is not renewed. Fixed term contracts cannot be terminated early, except for cause or mass layoffs. In both instances, employers must seek permission of the trade union.
If an employee succeeds in establishing unlawful termination, the employee is entitled to severance pay that is equivalent to two months’ salary for every year of service.
This could present a problem for employers if an employee chooses not to renew his/her fixed term contract. The current language of the draft law seems to imply severance would be due.
Contract mandates
The new contract law specifically provides that ambiguous terms are to be construed against the employer.
Likewise, there are specific provisions mandating that all employees must have an employment contract. The mere existence of an employment contract will be construed in favor of the employee.
Preparing for Change
• Know when the final labor contract law becomes enacted and takes effect.
• Know if any current employment contracts and/or non-compete provisions will need to be adjusted once the final labor contract law takes effect.
• Familiarize yourself with the important provisions that will impact your daily hiring/firing needs.
• Refine your internal human resource function to account for the new administrative steps that all employers will need to follow when employing/managing employees in China.
• Create a checklist of all employer obligations under the new law by category and designate someone to monitor compliance when business changes are made that will or could affect the workforce.
• Adjust your business schedule and budget to account for the added time and expense it will take to consider and negotiate labor contracts, change and implement employee policies and work rules, and terminate unskilled labor.
• Educate your executive team, front line managers and human resources staff of the new employer obligations and penalties associated with failing to comply with the new employer obligations.
With these steps, employers in China should be in good shape to face the new labor contract law and all the changes it is expected to bring to the Chinese workforce.
Christine Liu McLaughlin is an attorney in Godfrey & Kahn’s Employment Law Practice Group in the firm’s Milwaukee and Waukesha offices. She can be reached at (414) 287-9232 or cmclaughlin@gklaw.com. The firm has an office in Shanghai, PRC.
