Chinese Labor Law 2013 Year in Review

By Kevin L. Jones Dec 16, 2013

The many significant changes in labor and employment law and practice in China during 2013 have created challenges for human resource professionals in China. In some areas, new requirements that were meant to provide further clarification have instead created more uncertainties for companies wanting to do the right thing given the lack of enforcement and/or implementing regulations. Several of the more important developments are discussed below.

Use of Dispatched Workers Restricted in July

Dispatched workers are workers that are employed by authorized labor-dispatch agencies and dispatched to work for employers on a contract basis. There is no employment relationship between the companies and the dispatched workers that they use.

Companies use dispatched labor for a variety of reasons. Chief among them: The companies have cyclical needs for labor, they need to get around head count restrictions, or they pay dispatched workers less than employees and/or provide less benefits to reduce labor costs. However, dispatched labor was never intended to be used as a long-term solution to labor needs, and especially not to circumvent the principle of equal pay for equal work.

New amendments to the Employment Contract Law (ECL) that took effect July 1, 2013, were meant to change some of these practices and abuses of dispatched labor. The ECL previously stated that employers should generally use dispatched workers for temporary, auxiliary or substitute positions, but it did not define these categories. The amended ECL now says dispatched workers can be used only for temporary, auxiliary and substitute positions, which are defined as follows:

  • A “temporary” position is one that will last for no more than six months.
  • An “auxiliary” position is one that provides a supporting role to an employer’s core business.
  • A “substitute” position is one where workers are hired to temporarily replace employees who take time off to study or go on leave.

Employers may also face limits on the proportion of dispatched workers that can make up their total workforce, and fines of up to approximately U.S. $1,600 per dispatched worker can be levied against employers that do not comply with the new restrictions.

However, there are millions of workers in China working under labor-dispatch arrangements. Replacing these workers with employees will be an expensive change for employers in China. Human resource professionals have been struggling to determine the best way forward in light of the new restrictions. Fortunately, it appears they have some more time to figure things out.

When a national law is promulgated or amended in China, local governments will issue implementing regulations providing further details as to how the law is to be enacted. So far, most local governments have not done this. Additionally, it appears that local labor bureaus are currently loath to take action against companies that do not comply with the new restrictions—the task is simply too large and the risk of labor unrest too great if companies shed workers instead of taking them on as employees. Some labor bureaus have even indicated to employers within their jurisdiction seeking guidance that they should just wait for the time being.

Labor-dispatch agencies, which are state-owned for the most part, will also be significantly impacted by the changes. They stand to lose a large portion of their revenue base if the new restrictions are strictly enforced. Some have even tried to rebrand their labor-dispatch services as outsourcing services, a form-over-substance change that is unlikely to be accepted in the long term.

Some companies with a relatively small amount of dispatched workers have moved forward with transferring those workers to employees. Those that have done so typically used a labor-dispatch arrangement simply because they were starting operations in China and did not have in-house human resource capabilities.

Notwithstanding the status quo, human resource departments of companies in China that use dispatched labor need to plan a course of action if the new restrictions are eventually enforced.

Guidance for HR Professionals from the Supreme People’s Court

The Supreme People’s Court, the highest court in China, provides guidance to labor dispute arbitration committees and lower courts as to how certain employment-related laws should be applied when hearing labor disputes. This guidance is valuable information for HR professionals as it indicates how certain employment situations need to be structured or handled.

The Supreme People’s Court issued its fourth such guidance in 2013, known as Interpretation 4, which took effect Feb. 1, 2013. Below are key topics the guidance covered:

Compensation for noncompete obligations. Employers are required to pay employees monthly compensation during a post-termination noncompete period in order for that obligation to be enforceable. The law does not provide any guidance as to how much needs to be paid to an employee, and parties are generally free to agree on the amount, with minimum standards set by local regulations or practice. The law also fails to address situations where the parties agree to a post-termination noncompete obligation but fail to agree on the amount of compensation. The Supreme People’s Court has now indicated that in such a case, the employee will be entitled to 30 percent of his or her average monthly wage for each month of the post-termination noncompete period if he or she has complied with the noncompete obligation.

The Supreme People’s Court also indicated that an employee is entitled to terminate a post-termination noncompete obligation if an employer has not paid the noncompete compensation for three months. If an employer wishes to terminate such an obligation early, it must pay the employee an amount equal to three months of the agreed noncompete compensation.

Severance payments upon termination. Employees in China are generally entitled to severance compensation when their employment relationship with an employer ends. The amount of compensation depends on the number of years an employee has worked for the employer and as a general rule equals one month’s salary for each year of service.

However, a situation can arise in an asset acquisition or internal group reorganization where the former employer doesn’t pay severance and the new employer tries to argue that the prior severance liability is not its problem. In such a situation the employee could end up losing his or her accumulated severance entitlement. The Supreme People’s Court has now addressed this situation to ensure that the employee can still receive his or her entitlement. The new employer will now be required to recognize the employee’s years of service with the previous employer.

Therefore, HR professionals of new employers in such situations should ensure that severance liabilities are cashed out at the time of transfer so they take on employees without any historical liabilities. Employees will generally prefer this type of arrangement over having the liability carried forward as they can get the cash earlier.

Requirement to notify labor unions of terminations. The law requires an employer to provide advance notice to the relevant labor union (either the company-level union or upper-level union if no company union exists) if it wants to unilaterally terminate an employee. Human resource departments historically ignored this requirement as the law did not set out any penalties for failing to do so. The Supreme People’s Court has now indicated that the dismissal will be deemed unlawful if an employer fails to notify the labor union. In such cases, employees can seek damages equal to two times the amount of statutory severance compensation an employee would have been entitled to had he or she been lawfully terminated.

New Visa Requirements and Increased Penalties for Illegal Work

China’s new Exit-Entry Administration Law went into effect July 1, 2013. The visa categories have been significantly altered, and the law increased the various penalties and enforcement provisions relating to visa and work-permit-related violations.

Now, it is more important than ever for HR departments to ensure that the foreigners the company has working in China have proper work and residence permits. Foreigners found working illegally can be fined RMB 5,000 to RMB 20,000 and, in serious cases, detained for 15 days. Companies that illegally employ foreigners can be fined RMB 10,000 per foreigner, up to a maximum amount of RMB 100,000. Foreigners who have violated immigration laws may be given a date to voluntarily leave China or forcefully deported. An individual who has been deported will not be able to re-enter China for a period of five or 10 years, depending on the severity of the violation.

Unauthorized employment is defined as the following:

  • Working without obtaining an employment license or work-type residence permit.
  • Working beyond the scope indicated in the work permit.
  • Foreign students working without authorization or beyond the scope authorized.

Additionally, new categories of business-related visas were created:

  • The M visa is for visits to China for commercial business and trade purposes. The new “business visitor” visa replaces the F visa, which is still used but for other purposes.
  • R1 and R2 visas will allow foreigners with specialized/exceptional skills (including professional workers and senior-level managers) to stay in the country up to six months (R2) or up to five years (R1).
  • S1 and S2 visas for dependents, with S1 visas being for long-term stays exceeding six months and S2 visas for shorter-term stays.
  • Z1 and Z2 visas, with Z1 visas applying to foreigners working in China for more than 90 days (requires a residence permit) and Z2 visas applying to foreigners working in China for up to 90 days (does not require a residence permit).

Dependent family members going to China with a primary applicant now need to provide notarized and legalized evidence of their relationship with the primary applicant to obtain residence permits. HR should advise employees to get this done early in the visa/work permit process as the notarization and legalization process can take some time to complete. Additionally, authorities in some cities require applicants to provide a certificate of no criminal record. This certificate also needs to be notarized and legalized if it is issued by a local police department in the applicant’s home country.

Processing times for residence visas have changed from five working days to seven or 15 working days, depending on the location. Authorities will keep an applicant’s passport while they process the application, so it is important to schedule any travel plans of an employee around this time period. A passport is required to check into hotels, travel by train and travel by airline within China, so even domestic travel without a passport is not possible in most cases. Shanghai authorities will issue a temporary travel certificate to allow for domestic travel, but authorities in many other locations refuse to do so.

Kevin L. Jones is a partner and head of Faegre Baker Daniels’ labor and employment practice in China, based in Shanghai.

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