China Employment Law
This article provides a summary of the most important laws in China governing the relationship between an employer and an employee. The discussions apply to wholly foreign-owned entities, local domestically owned entities, as well as the employment of foreigners and locals.
Generally, the employment by a foreign invested entity or a local Chinese entity of Chinese local persons is governed by a number of laws including the PRC Labor Law (the Labor Law) passed by the 8th National People's Congress Standing Committee at the 8th session on 5 July 1994 and amended in 2009, the PRC Labor Contract Law (the Labor Contract Law) passed by the 10th National People's Congress Standing Committee at the 28th session on 29 June 2007 and various social insurance/payment laws including the PRC Social Insurance Law (the Social Insurance Law) passed by the 11th National People's Congress Standing Committee at the 17th session on 28 October 2010. These laws are drafted or formula ted by the Ministry of Human Resources and Social Security of the People’s Republic of China (MOHRSS). This Article is focused on various key legal issues relevant to the employment of Chinese citizens in China.
The Labor Law and the Labor Contract Law provide the fundamental provisions for setting out the obligations and rights of employers and employees in an employment relationship in China. Both of these laws require an employment contract to be in writing; otherwise an employer can be liable to compensate employees under Article 82 of the Labor Contract Law. Contrary to popular belief, there isn’t any legal requirement for the form and language to be used in an employment contract, but we recommend that bilingual contracts be used where an employer is a foreign managed entity, and Chinese language versions be used where an employing unit is locally managed. It is not necessary to register an employment contract with any government department in China any more – in the past, all employers had to register relevant information regarding their employees with various labor and social security administrative departments in accordance with Article 2 of the PRC Notification of the Ministry of Labor and Social Security on the Establishment of Employment Recordal System published by the former Ministry of Labor and Social Security on 22 December 2006. This Notification hasn’t been repealed, but the recordal departments do not exist any more.
For an enforceable employment agreement to exist under Chinese law, Article 17 of the Labor Contract Law needs to be followed – it requires that an employment contract must include the following provisions in order to be valid:
1) Employer's name, residence, legal representative or major principal
2) Employee's name, residence, identity card number
3) Time limit for the employment contract
4) Work requirements and place of work details
5) Work time, rest and vacation details
6) Remuneration details
7) Social security obligation details, and
8) Workplace health and safety information
Standard form employment agreements are available for local labor bureaus, which largely comply with Article 17, but they should not be relied on without expert legal advice, especially for senior managers and persons involved in creative work.
Other laws set out provisions that must not be included in an employment agreement in China. For example, the PRC Law on the Protection of Women’s Rights and Interests amended at the 17th meeting by the 10th National People's Congress Standing Committee on 28 August 2005, some clauses such as discriminatory provisions, life and death provisions, limitations marriage and child rearing provisions and margin provisions are forbidden in any employment contract.
Article 2 of the Labor Contract Law provides that the establishment of an employment relationship between employers and employees, as well as the conclusion, performance, alteration, discharge or termination of an employment contract, shall be governed by the Labor Contract Law. Presumably this impliedly prohibits parties to an employment agreement choosing a foreign law for the governing law clause for a local employment agreement, however it should be noted that reasonable arguments could be raised for using a foreign law as a governing law in an employment agreement relating to expatriates working in China.
Regarding dispute resolution issues, Article 5 of the PRC Labor Dispute Mediation and Arbitration Law approved at the 31th meeting by the 10th National People's Congress Standing Committee on 29 December 2007 requires that any and all employment law disputes must be arbitrated by the relevant local Labor Dispute Arbitration Committees.
On 28 October 2010, the 11th National People's Congress Standing Committee approved the PRC Social Insurance Law (the Social Insurance Law) at the 17th session. The established social insurance system in China regarding an employment relationship consists of basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance and maternity insurance (Article 2). In response to these insurances, the national government departments and local governments have issued corresponding national, provincial and municipal management regulations and implementation measures.
In addition, the State Council amended the Administration Regulations on Housing Accumulation Funds which was issued by the State Council in 1999 on 24 March 2002. According to it, both employers and employees are required to contribute to the housing fund each month in China.
Social insurance is seen as a very important legal obligation for employers in China, but it is also a complicated area as well with contribution requirements changing from time to time, and varying from place to place within China. It is also an area that has attracted controversy, with employees occasionally discovering that employers have not been contributing to the relevant social insurance funds as required, or accounts being used for improper purposes. It is an area that will continue to attract close scrutiny from the government and legislature in China.
Article 23 (1) of the Labor Contract Law provides that:
“An employer and employee may have such terms stipulated in an employment contract as keeping business secrets of the employer confidential and keeping confidential the matters relating to its intellectual property rights. With regard to an employee who has a confidentiality obligation, the employer may have stipulated competition restrictions and payment of financial compensation to him/her on a monthly basis during the term of the competition restriction after the employment contract is revoked or terminated, in the employment contract or confidentiality agreement. If an employee breaches the stipulation on competition restriction, he/she shall pay penalties to the employer as agreed upon.”
In addition, Article 24 of the Labor Contract Law provides that the persons that can be made subject to a non-competition restriction include senior managers, senior technicians and other persons who are placed under confidentiality obligations when working for an employer.
Article 10 of the PRC Anti-unfair Competition Law approved at the 3rd meeting by the Eighth National People's Congress Standing Committee on 2 September 1993, also places a general prohibition on trade secret theft and disclosure.
In accordance with the second paragraph of this Article, an agreed non-competition clause shall include a content of providing economic compensation to the employee. It is quite often in the reality that a non-competition agreement provides the non-competition obligations of the employee only. It is often asked as to whether a non-competition clause that does not include a compensation provision will impact on the enforcement or validity of the non-competition provision, the local competent authorities gave different answers. The Shanghai Higher People's Court has said that “an non-competition agreement without economic compensation is still binding” according to Article 13 of the Opinions to the Problems of the Application of the Labor Contract Law issued by the Shanghai Higher People's Court on 3 March 2009. The Jiangsu Province Higher People’s Court and Labor Dispute Arbitration Committee of Jiangsu Province have a different view, as per Article 13 (1) of Guidance on the Trial of Labor Dispute Cases issued by the Office of Jiangsu Province Higher People’s Court on 14 December 2009.
It should be noted that Article 10 of the exposure draft of the Interpretation (IV) of the Supreme People’s Court of Several Issues on the Application of Law in the Trial of Labor Dispute Cases published by the Supreme People’s Court in 2011, states that a non-competition agreement shall be not binding on an employee, if economic compensation is not provided. As this Interpretation is likely approved soon, we should keep it in mind as concluding a non-compete agreement in the future.
The Labor Contract Law is largely silent as to intellectual property ownership provisions in an employment relationship. The section of any relevance is Article 23 (1) which allows for provisions concerning confidentiality to be dealt with in an employment agreement.
Given the range of Chinese intellectual property laws that can apply to the employment-based creations, it is important for employers to conclude employment agreements (or separate intellectual property ownership agreements) clearly dealing with these kinds of issues. For example, Article 11 of the PRC Copyright Law, provides that an employer is the owner of a work created by an employee, as long as the work is created according to the intention and under the supervision and responsibility of the employer. Article 16 of the PRC Copyright Law provides that “A work created by a citizen in the fulfillment of tasks assigned to him by a legal entity or other organization shall be deemed to be a work created in the course of employment. The copyright in such work shall be enjoyed by the author, subject to the provisions of the second paragraph of this Article, provided that the legal entity or other organization shall have a priority right to exploit the work within the scope of its professional activities. During the two years after the completion of the work, the author shall not, without the consent of the legal entity or other organization, authorize a third party to exploit the work in the same way as the legal entity or other organization does.” Clearly complications can arise if employment agreements do not expressly deal with intellectual property ownership issues.
Article 6 of the PRC Patent Law provides that “An invention-creation, made by a person in execution of the tasks of the entity to which he belongs, or made by him mainly by using the material and technical means of the entity is a service invention-creation. For a service intention-creation, the right to apply for a patent belongs to the employing entity. After the application is approved, the entity shall be the patentee. For a non-service invention-creation, the right to apply for a patent belongs to the inventor or creator. After the application is approved, the inventor or creator shall be the patentee. In respect of an invention-creation made by a person using the material and technical means of an entity to which he belongs, where the entity and the inventor or creator have entered into a contract in which the right to apply for and own a patent is provided for, such provisions shall apply.” Further, the Patent Law provides for employees to be entitled to compensation for inventions that are created during their employment.
China employment law has come a long way in the last ten years, from a largely vague and neglected area, to a much more structured and streamlined area of the law. The Chinese government is continuing to improve the laws in this area as well, announcing new labor dispatch laws and potential amendments to the Labor Contract Law as well. The next ten years promise to be eventful for employment law specialists, as employees become more aware of their rights, and the stakes associated with enforcing covenants in employment agreements become higher.
ABOUT THE AUTHOR: Xia Yu and Matthew Murphy
Xia Yu is an Associate with MMLC Group. Matthew Murphy is a Partner with the MMLC Group.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.