Employment Law - Chinese Law Spurs Reforms

By Andreas W. Lauffs Jun 1, 2008
HR Magazine, June 2008Employment contracts must now define more working conditions.

Employment law in China has undergone marked changes in recent years. China's Employment Contract Law -- which was effective Jan. 1 -- provides additional reforms, clarifying exactly what must be included in mandatory employment contracts for citizens of the People's Republic of China (PRC).

The National People's Congress enacted the Employment Contract Law (also known as the Labor Contract Law) on June 29, 2007, to address increasing labor unrest and widespread media reports of employer abuse of employee rights.

Common problems have included employers extending working hours beyond statutory limits and without required overtime pay, delaying payment of wages, providing unsafe working conditions, and keeping employee identifications to prevent employees from leaving. These problems, combined with mass layoffs at state-owned enterprises, have contributed to increasing levels of labor unrest and have become a major concern for the Chinese Communist Party.

While the Labor Law of the PRC, enacted Jan. 1, 1995, remains in effect, the Employment Contract Law provides significant changes to the existing legal framework.

Mandatory Contractual Provisions

Employment law in China requires employment contracts to be in Chinese, though they may be accompanied by contracts in other languages, and to set out basic mandatory terms. If there is any conflict between the two versions, the Chinese version will take precedence.

The Employment Contract Law requires employment contracts to include:

  • The name, domicile and legal representative or main person in charge of the employer.
  • The name, domicile and number of the resident ID card or other valid identity document for the worker.
  • The employment contract's terms.
  • The place of work.
  • The job description.
  • Working hours.
  • Rest and leave policies.
  • Compensation.
  • Social insurance information.
  • Protection for employees from occupational hazards.

The Chinese Ministry of Labor and Social Security issued guidelines in December 2006 requiring employers to report certain information about new or renewed employment contracts to local labor bureaus. (For more information on the guidelines, see "Employer Notification to Local Labor Bureaus," below​)

Employers may add supplemental explanations concerning the mandatory terms and other terms in an employee handbook.

While the Labor Law and Employment Contract Law require employment contracts to be in writing, Chinese law recognizes the concept of "de facto employment relationships." Where an employment relationship in fact is deemed to exist, employers generally owe most of the same duties to employees as under the Labor Law and where a written contract is in place.

Such duties include employers' obligation to participate in China's social insurance scheme, including five funds:

  • Old age pension insurance.
  • Basic medical insurance.
  • Occupational accident insurance.
  • Unemployment insurance.
  • Maternity insurance.

Employers and employees must contribute to the funds in accordance with rates determined by local authorities. However, in practice, expatriates may not be able to participate because of the limitations of local bureaucratic mechanisms for the implementation of the social insurance scheme.

Special rules apply to representative offices established by foreign companies that are not considered to be independent legal entities (unlike subsidiaries) and that cannot engage in direct revenue-generating business activities, but rather can engage only in promotional and liaison work on behalf of the foreign companies. Foreign companies with representative offices may not directly employ their staffs. Instead, they obtain Chinese-national staffs through arrangements with labor service companies, such as the Foreign Enterprise Service Corp. Non-Chinese staff members of representative offices usually are employed by the foreign parent company and assigned to work at the representative offices.

Under the Employment Contract Law, if an employment contract is not signed with a Chinese employee within a month of when the employee starts working, the employee is entitled to double the wages that should be paid to someone in that position.

Restrictions on Termination

The Employment Contract Law, while making some changes to the termination grounds that existed under the Labor Law, does not change the fundamental principle that there is no employment at will in China. An employee can demand reinstatement in the event of unlawful termination.

In addition, if such an employee does not want to continue working for an employer or if reinstatement is not possible, the employer must pay the employee double the amount of severance that would be due had the employee been lawfully discharged.

While employees generally may resign on 30 days' prior notice to the employer, an employer may terminate an employee in China with no notice and no severance only if:

  • The employee has not satisfied the employment conditions during the probation period.
  • The employee seriously violates the company's rules or regulations.
  • The employee commits serious dereliction of duty or graft resulting in major harm to the company's interests.
  • The employee is prosecuted for a criminal offense.
  • The employee has established an employment relationship with another employer, and that relationship materially affects the completion of the worker's tasks with the first employer or the employee refuses to rectify the matter.
  • The employee uses deception or coercion or takes advantage of the employer's difficulties, causing the employer to conclude an employment contract or to make an amendment contrary to the employer's true intent.

For three other statutory termination grounds, an employer must provide 30 days' prior written notice and severance:

  • If the employee has fallen ill or sustained a nonindustrial injury and, at the end of the medical treatment period, can engage in neither the original work nor other work.
  • If the employee is incompetent and remains incompetent after training or transfer.
  • If performance of the original employment contract becomes impossible because of a major change in the objective circumstances the employment contract was based on, and consultations between the parties fail to produce agreement on the contract's amendment.

Under China's Labor Union Law as well as the Employment Contract Law, an employer must notify the labor union prior to any termination, regardless of the reason. A union itself has no power to order a company to reverse its termination decision. If union officials conclude that a termination is unlawful, they can advise the employee of this and assist the employee in bringing a claim against the employer in front of a labor arbitration panel.

There are no independent unions in China, and all unions must belong to the All-China Federation of Trade Unions, a government-controlled organization with branches at the provincial, city and district levels.

China also permits layoffs with 30 days' notice to a labor union about the layoffs and submission of a redundancy plan to the local labor bureau, if an employer either:

  • Has serious difficulties in its production or operation.
  • Is undergoing restructuring through the Enterprise Bankruptcy Law.
  • Switches production or introduces a major technological innovation or revision to its business method, and after the amendment of employment contracts still needs to reduce its staff.
  • Experiences other major changes in economic circumstances relied on at the time the employment contracts were signed.


Under the Employment Contract Law, severance also needs to be paid at the end of a fixed-term contract, unless an employee refuses to renew the contract even after being offered the same or better terms as in the current contract or if the employment contract automatically ends as a result of bankruptcy or a company having its license revoked or being ordered to close down.

Severance payments equal one average month's wages for each year of service to the employer. Under the Employment Contract Law, for any period of service that is less than six months, the employee is entitled to half a month's wages. For six months to a year of service, the employee shall receive a full month's wages.

To calculate the average month's wage, take the total amount of compensation paid to the employee during his or her final 12 months of employment -- including base salary, overtime, bonuses, subsidies, allowances and commissions -- and divide this amount by 12. (For information on calculating overtime pay, see "Overtime in China," below​)

In addition, under the Em­ploy­ment Contract Law, if an employee's monthly wage exceeds 300 percent of the average monthly wage in the municipality where he or she works, the employee's average monthly wage amount (for severance calculation purposes) will be capped at 300 percent of the local average monthly wage and he or she would be entitled to only a maximum of 12 months' wages as severance.

Rules for Expats

The employment of expatriates by Chinese companies is governed by Chinese law, though at this point it is unclear whether expatriates are subject to all the same mandatory labor standards as PRC nationals. Expatriates in representative offices usually can be hired with employment letters governed by foreign labor laws.

The Foreigner Administration Regulations apply to expatriates coming to work in China for foreign-invested enterprises or representative offices. Under these regulations, expatriates generally must obtain a single-entry work visa to enter China. They then must register with the Public Security Bureau, undergo a health screening, and obtain a multiple-entry work visa, a work permit and a residency permit. The expatriate's employer in China must help the employee complete the required steps to obtain these documents.

Similar rules apply to Chinese individuals with permanent residency abroad, including in Hong Kong, Macau and Taiwan.

Law's Effect

The overall effect of the Employment Contract Law will be to further increase individual employee rights.

The restriction on the use of fixed-term contracts combined with the statutory restrictions on firing employees can be seen as at least a partial return to the "iron rice bowl" system with its emphasis on guaranteed job security for employees. The new law and its interpretation within the context of local practice will play important roles in the development of China's labor market.

The author is an attorney with Baker & McKenzie LLP in Hong Kong and may be contacted at andreas. lauffs@bakernet.com.

Web Extras

SHRM articles:
New Chinese Labor Law Adds Distance to Communist Past, U.S. Admiral Says
(SHRM Online Global HR Discipline Area) 

China: Land of Opportunity and Challenge
(HR Magazine)

Web sites

Unofficial translation of the China Employment Contract Law 
(Baker & McKenzie translation on Law Professor Blogs Network)

Translation of the China Labor Law 
(Asian Legal Information Institute)

The U.S.-China Business Council

Employer Notification to Local Labor Bureaus

Under national guidelines issued by the Chinese Ministry of Labor and Social Security in December 2006, employers should report the following information to local labor bureaus within 30 days of hiring new employees or renewing employees' contracts:

  • The number of total employees it is hiring.
  • The employees' names.
  • The employees' sexes.
  • The employees' identification numbers.
  • The contract terms for each employee.

Within seven days of the end of an employment relationship, employers should report:

  • The number of employees being terminated.
  • The employees' names.
  • The length of time the employees worked at the company.

If an employer changes its name, legal representative, form of organization or organization code, it should report this to the labor bureau within 30 days of the change. Implementation of these national guidelines varies by locality. For example, while Shanghai has implemented this reporting system, Beijing so far has not.

Employers also may need to notify local social insurance and tax bureaus regarding hires and terminations, depending on local policies.

Overtime in China

The Employment Contract Law does not change the basic framework for calculating overtime in China.

Under Chinese regulations, the standard working hours system for employees is eight hours per day and 40 hours per week.

With government approval, an employer may institute the Comprehensive Working Hours System or the Flexible Working Hours System. Under the Comprehensive Working Hours System, an employer may require employees to work longer hours without paying overtime as long as the average hours worked in a certain period do not exceed the limit on total hours for that period. If the limit is exceeded, overtime must be paid.

Under the Flexible Working Hours System, an employer may require certain staff, such as high-ranking managerial and sales staff, to work more than 40 hours per week without paying overtime. This is analogous to exempt status under the Fair Labor Standards Act in the United States. The concepts are similar, with the difference being that in China, flexible working hours apply only to overtime requirements and not exemption from minimum wage requirements, and government approval is necessary and granted at the government's discretion. Local rules also may have specific provisions for alternative working hours systems.

While Saturdays and Sundays typically are rest days in China, an employer may arrange for employees to take rest days on any other days as long as total working hours do not exceed

40 hours a week and employees may take a rest day of at least one whole day each week.

Under the standard working hours system, employees who work more than eight hours per day or 40 hours per week are entitled to the following compensation:

  • Overtime on workdays -- 150 percent of normal wages.
  • Overtime on rest days -- compensatory leave or 200 percent of normal wages.
  • Overtime on statutory holidays -- 300 percent of normal wages.

Before requiring employees to work overtime, employers must consult with the employees and any labor unions. Overtime generally should not exceed one hour per day, or three hours per day under special circumstances, or 36 hours per month.


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