China Employment Law
The development of employment law in China, with an emphasis on the Labor Contract Law, and possible future amendments to this law and associated regulations.
Employment Law in China
The law surrounding employment relationships is extremely important in every society, as it directly relates to the functioning of businesses itself, which in turn links directly to the smooth operation of the economy. Therefore, issues such as employment contracts, negotiation procedures, compensation, safety in the workplace, protection from discrimination, wage regulations, professional training, working hours, labor disputes, social insurance, and legal responsibilities are highly important in the formation of laws regarding employment, and must be observed in order to assist in the development of economic growth.
In China, the Labor Law of the People’s Republic of China, effective since 1995, and the Labor Contract Law of the People’s Republic of China, effective since 2008, both provide as the primary source of employment law. However, in order to further encourage growth and maintenance of healthy businesses for the long-term success of the economy, reasonable amendments must be made for the continuous improvement and effectiveness of the relevant employment laws in China.
Applicable employment laws
China employs a large and complex system in relation to the regulation of employment, including many pieces of promulgated legislations and supplementary guidelines. Some of these include the following:
1. Labor Law of the People’s Republic of China;
2. Labor Contract Law of the People’s Republic of China;
3. Employment Promotion Law of the People’s Republic of China;
4. Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration;
5. Law of the People’s Republic of China on Work Safety;
6. Labor Union Law of the People’s Republic of China;
7. Implementing Regulations for the Law of the People’s Republic of China on Employment Contracts; and
8. Opinion on Several Questions Regarding the Implementation of the Labor Law of the People’s Republic of China.
Labor Law and the Labor Contract Law
The Labor Law, enforced since 1995, contains wide provisions in relation to general labor regulations, including labor contracts, dispute resolution, professional training, and wage guidelines. As well as private companies, the Labor Law provides for state-owned enterprises and their employees, and employment by foreign-invested enterprises, such as wholly foreign-owned enterprises and Sino-foreign joint ventures. In accordance with Article 1, the Labor Law is formulated in order to protect the legitimate rights and interests of laborers, readjust labor relationships, establish and safeguard the labor system to suit the socialist market economy, and promote economic development and social progress. Additionally, as a supplement to the Labor Law in accordance with Article 106, which provides for the governments of provinces, regions or municipalities to implement measures for the system of labor contract, there are various regulations that seek to further provide guidance on the Labor Law.
The promulgation of the Labor Law was impressive on the part of the Chinese government to develop and cater to its market economy, as well as ensure uniformity of regulations and compliance in China in relation to employment relationships. However, the system contained many issues including mainly lack of efficient and effective enforcement at the local level, fear of employer retribution, lack of knowledge, or pure intended violations of the law, which resulted in the persistence of abuses of employee rights. Therefore, employment concerns such as lack of employment contracts, working overtime without the required payment, and unsafe working conditions persisted to contribute to high levels of labor unrest in China.
Consequently, the National People’s Congress published the Labor Contract Law in 29 June 2007 to enact significant changes to the legal framework surrounding employment in China. While the Labor Law remains the foundation of basic labor laws in China, the Labor Contract Law seeks to provide better implementation of fundamental employment principles through the enforcement of specific penalties, limitation of fixed-term contracts, and greater protection for employees hired through agencies. For example, Article 12 includes provisions for fixed-term labor contracts, labor contracts without a fixed term, and labor contract that set the completion of specific tasks as the term to end contracts.
Specifically, the Labor Contract Law seeks to provide for labor contracts without a fixed term under Article 14, stating that where an employee proposes or agrees to renew or conclude a labor contract, a labor contract without a fixed term shall be concluded unless the employee proposes to conclude a fixed-term labor contract under the following circumstances:
1. the employee has worked for the employer for 10 full consecutive years;
2. the employee has worked for the employer for 10 full consecutive years and has attained the age which is less than 10 years up to the statutory retirement age where the employer initially adopted the labor contract system or where a state-owned enterprise re-concludes the labor contract due to restructuring purposes;
3. the labor contract is to be renewed after two fixed-term labor contracts have been concluded consecutively, and the employee does not apply under any of the circumstances contained in Article 39 (1) and (2), which states the employer may dissolve the labor contract where the employee does not meet the recruitment conditions during the probation period, and the employee has seriously violated the rules and procedures of the employer, and Article 40, which gives provisions for circumstances when an employer may dissolve a labor contract pursuant to a 30 day notice given. Also, if an employer fails to sign a written labor contract after the lapse of one full year from the date of when the employee first began work, it shall be deemed that the employer and the employee have concluded a labor contract without a fixed term.
Therefore, especially under Article 14 (3), the Labor Contract Law provides for further employee rights by stating that a labor contract without a fixed term would be automatic following a failure by the employer to otherwise sign a written labor contract.
Furthermore, the Labor Contract Law seeks to give further rights to employees by regulating the terms for probation, which all employers must follow. Firstly, in Article 19, it gives guidance on what the length of a probation period should be, by stating that if the term of a labor contract is not less than 3 months but less than 1 year, the probation period shall not exceed on month. If the term of a labor contract is not less than 1 year but less than 3 years, the probation period shall not exceed 2 months. A labor contract with a fixed term of 3 years or more or without a fixed term shall have a probation period that shall not exceed 6 months. A labor contract that sets the completion of a specific task as the term to end the contract or with a fixed term of less than 3 months, no probation period shall apply.
Then, in Article 20, the Labor Contract law ensures those working during the probation period are paid adequately, by stating that the wage of an employee during the probation period shall not be lower than the minimum wage for the same position of the same employer or lower than 80% of the wage stipulated in the labor contract, and it may not be lower than the minimum wage of the locality where the employer is located. Finally, under Article 21, an employer may not dissolve a labor contract during a probation period unless Article 39 and 40 (i) and (ii) apply. Therefore, the Labor Contract Law has recognised the vulnerability of employees during probation periods, such as being taken advantaged of as free labor, or providing significant lesser rights as they are in the stage of being ‘tested’.
Finally, the Labor Contract Law seeks to enforce further employee rights and obligations by ensuring employees may dissolve the labor contract under Article 38 in the following circumstances where an employer:
1. has failed to provide labor protection or work conditions as stipulated in the labor contract;
2. has failed to timely pay the full amount of remuneration;
3. has failed to pay the relevant social security premiums;
4. has failed to maintain rules and procedures that are in line with any laws or regulations and therefore impairs the rights and interests of employees;
5. has failed to ensure a valid labor contract due to the circumstances outlined in Article 26; or
6. any other circumstances prescribed by other laws or administrative regulations that authorise employees to dissolve labor contracts.
Also, Article 38 states that where any employer forces any employee to work by the means of violence, threat, or illegally restraining personal freedom, or an employer violates the safety regulations to order or forces any employee to perform dangerous operations that endanger the employee's personal life, the employee may immediately dissolve the labor contract without notifying the employer in advance. Therefore, Article 38 specifically caters to the right of employees to dissolve a labor contract under unreasonable conditions, which allows employees to maintain a power of position in relation to employment contracts. In relation, Article 39 provides for circumstances where an employer may dissolve the labor contract:
1. the employee does not meet the recruitment conditions during the probation period;
2. the employee seriously violates the rules and procedures set up by the employer;
3. the employee causes any severe damage to the employer because the employee has seriously neglected his duties or seeks private benefits;
4. the employee simultaneously enters an employment relationships with other employers which seriously affects his completion of tasks, or the employee refuses to make any ratification after an employer has attempted to bring notice of this issue to the employee;
5. the labor contract is invalidated due to the circumstances outlined in Article 26; or
6. the employee is under investigation for criminal liabilities according to the law.
The conditions under which an employer may dissolve a labor contract are reasonable ones, and do not seek to violate any employee rights of interests, but merely seeks to advance the business of employers.
Finally, the Labor Contract Law provides for economic compensation, regulating that an employee must be paid under the following circumstances:
1. the employee dissolves the labor contract in pursuance of Article 38, stated above;
2. the employer proposes to dissolve the labor contract, and it reaches an agreement with the employee on the dissolution through negotiations;
3. the employer dissolves the labor contract according to Article 40, which provides for circumstances, such as the employee is sick to the extent the employee cannot resume its original position and the employee is incompetent for its position, in which an employer may dissolve a labor contract pursuant to a 30 day notice and an additional month wages;
4. the employer dissolves the labor contract according to Article 41;
5. the termination of a fixed term labor contract according to Article 44 (i), which states that a labor contract may be terminated if the term of a labor contract has expired, unless the employer refuses to renew the contract even though the conditions offered by the employer are the same as or better than those stipulated in the current contract;
6. the labour contract is terminated according to Article 44 (iv), which states that a labor contract may be terminated if the employer is declared bankrupt, and (v), which states that a labor contract may be terminated if the employer’s business license is revoked or the employer is ordered to close down its business; or
7. other circumstances as proscribed in other laws and administrative regulations.
The Labor Contract Law is significantly more comprehensive to adjust for provision of terms relating to employee rights and interests. Overall, it increases individual employees’ rights and interests, strengthens the enforcement structure, and promotes the development of the Chinese market economy.
In July 2013, amendments were made to the Labor Contract Law in order to address issues surrounding labor dispatching or outsourcing, which is a form of employment arrangement where an individual is hired through a labor dispatch agency. Under the previous Labor Contract Law, a dispatched employee was assigned to a temporary, auxiliary or replaceable position, although no definition was provided in relation to ‘temporary, auxiliary or replaceable’, resulting in many companies employing personnel for long-term positions. Therefore concerns arose in relation to labor dispatch agreements, as it was frequently used, especially by foreign companies, to escape obligations otherwise owed as an employer under the Labor Contract Law.
These legal obligations include allowing a minimum of two years for a fixed-term labor contract and a possibility for an open-ended labor contract, a 6-months term for probation, severance payments, and a comprehensive insurance package. As a result of the concern for widespread abuse of the labor dispatch arrangement, the government arranged for the enactment of certain amendments, which included:
1. Restrictions in the use of labor dispatch services by providing definitions of the following terms:
a. temporary: a position not lasting more than six months;
b. auxiliary: a position providing supporting services to the employer’s primary business functions; and
c. alternative: a position substituting a vacancy of an employee who is unable to work for a period of time because of leave or vacation;
2. Enforcement of the ‘equal pay for equal work’ principle, which in now included in Article 63, which states that dispatched workers shall enjoy the right of equal pay for equal work as the workers of the receiving unit do, and if a receiving unit has no workers holding the same kind of posts, labor remuneration shall be determined in light of that paid to the workers holding the same or similar posts at the place where the receiving unit is located;
3. Increase of severe penalties, now included in Article 92, which states that where a labor-dispatching unit violates the provisions of the Labor Contract Law, the administrative department of labor and other competent departments concerned shall order it to rectify. If the circumstances are serious, a fine shall be imposed on it to be no less than RMB 1,000 but not more than RMB 5,000 for each person, and its business license shall be revoked by the administrative department for industry and commerce. If harm is caused to the dispatched workers, the labor-dispatching unit and the labor-receiving unit shall bear joint and several liability for compensation; and
4. Increase in capital requirement of the Agencies, now stipulated in Article 57, which states that a labor dispatching unit shall be established in accordance with the relevant provisions in the Companies Law of the People’s Republic of China, and its registered capital shall not be less than RMB 500,000.
As a result of the 2013 amendments, the Labor Contract Law tightened its loopholes to ensure foreign companies were not abusing its provisions to engage in mistreatment of employees’ rights and obligations. Therefore, the amendments reflect the long-term trend of China of its efforts to tighten regulations to increase protection for employees all over China.
Recently in November 2015, in the Nanjing Intermediate People’s Court, an employment contract between a dispatch agency and its dispatched employee was held invalid, and was found to be a de facto employment relationship instead. The court, after examining the relevant employment contract and the type of work undertaken, found that the role of the dispatched employee was not a substitute job and nor did it fulfill the criteria of a temporary or auxiliary position. Therefore, the company had failed to meet the legal requirement that companies may only engage dispatch employees in temporary, auxiliary or substitute positions. Therefore, this indicates the court’s willingness to undertake the role of an enforcing authority in order to ensure full compliance with the Labor Contract Law.
China’s 13th Five-Year Plan
On 5 March 2016, during China’s 12th National People’s Congress, the report on China’s progress in relation to employment-related issues was delivered, with some key points including:
1. China’s GDP reached RMB 67.7 trillion, which was an increase of 6.9% from the previous year;
2. 13.2 million new job were created in the previous year;
3. Increase of subsistence allowances, benefits for entitled groups, and basic pension benefits; and
4. Implementation of the reform of the Communist Party of China and Government employee’s pension system, including an improvement in the wage system.
Therefore, due to the government’s careful planning and implementation, there has been good progress in relation to employment-related issues in China, furthering China’s economic interests.
In line with the 13th Five-Year Plan, the objectives in relation to employment-related issues for 2016-2010 include the increase of the average number of years of schooling from 10.23 to 10.8 years, the creation of fifty million new jobs, narrowing the income gap, and the increase of the proportion of percentage of middle-incomes in relation to the whole population.
As part of this, the specific goals for 2016 include the following:
1. the creation of ten million new jobs;
2. the maintenance of the registered urban unemployment rate to be at or under 4.5%;
3. the reform of the enterprise personnel management system;
4. the creation and establishment of a remuneration system, which outlines remuneration in accordance with ranking, such as senior personnel and corporate executives, in order to facilitate more competitive selection and recruitment;
5. the pursuance of a proactive employment policy;
6. the encouragement of business startups, especially in relation to the massive numbers of graduates, with 7.65 million college graduates in 2016 alone; and
7. the increase of basic pension benefits.
Trade Union Law
On 1 January 2016, the Implementing Measures of the Trade Union Law of the People’s Republic of China in Beijing (the ‘Measures’) became effective, no doubt set in motion by the Chinese government’s plans to maintain a reasonable employment rate and further employee’s rights and interests. In particular, the Measures seek to strengthen the position of the trade unions. Firstly, the Measures provide that any layoff plans must be communicated to all staff through staff representatives or staff congress, and in turn, the companies must listen to trade union’s or employee’s opinions on any layoff plans. This compensates for the lack of provision in the Labor Contract Law in relation to transparency over layoff plans, and creates a procedural burden on Beijing companies while at the same time enhancing the powers of trade unions.
Also, the Measures provide for the funding of trade unions, stating that where employees have organised a trade union, the company shall contribute 2% of all staff salaries from the previous month to a trade union organisation fund. Therefore, this enables the functioning of trade unions in any company, and thereby increases employees’ powers in the workplace. Furthermore, the Measures give further powers to employees by stating that a company may not refuse or delay collective bargaining for any reason, except where justifiable, to engage in collective bargaining with employees.
Finally, the Measures include an impressive enforcement mechanism to ensure full compliance for the benefit of trade unions and employees in the workplace. For example, where a company has breached the provisions of the Measures, the relevant government bodies may order the company to correct the offending conduct, where any refusal to correct a breach will be accordingly recorded by the Labor Bureau and the administration for industry and commerce in the company credit information system.
Therefore, China is increasingly giving more power to trade unions and employees in order to protect their rights and interests, as it recognises the importance and the role that employees play in the economy.
Draft Opinions of the Labor Contract Law
The Draft Opinions Regarding the Implementation of the Labor Contract Law (the ‘Draft Opinions’) was issued by the Ministry of Human Resources and Social Security in June 2015 for public comments. Although not formally issued yet, the Draft Opinions seeks to clarify various aspects of the Labor Contract Law, including providing guidance on the construction of internal rules, termination of employment contracts, and the granting of open-ended labor contracts.
Firstly, the Draft Opinions sought to provide guidance in relation to the formulation of internal rules and regulations. For example, in relation to dispatch agreements, the Draft Opinions stipulated that when formulating internal rules and regulations involving the rights and interests of dispatched workers, companies must first solicitor opinions from those dispatched workers, or invite dispatched workers representatives to participate in relevant discussions. Also, the Draft Opinions stated that in relation to enforcing new internal rules and regulations, companies must duly inform new employees of these new rules that may directly impact employees’ interests, therefore emphasising on principles of transparency and honesty in the functioning of a successful workplace.
Secondly, in relation to termination of labor contracts under the Labor Contract Law, the Draft Opinions state that employers must terminate employees within one year of knowing, or within one year of when they should have known, that they have a right to terminate under Articles 39 (2)-(6) of the Labor Contract Law. Further, the Draft Opinions provide that employers may not terminate employees merely on the basis of their performance rating.
Finally, Article 14 of the Labor Contract Law states that an employee may enter into an open-ended contract after having completed two fixed-term labor contracts or after having worked ten consecutive years. The Draft Opinions clarify in relation to these provisions that:
1. the employer must enter into an open-ended labor contract upon the expiry of the second fixed-term labor contract;
2. an employee working beyond the term of their second fixed-term labor contract must be given an open-ended contract, unless chosen otherwise by the employee;
3. the employee must be given an open-ended labor contract if the employment term exceeds ten years doe to any statutory medical treatment period, even if the original employment term was less than ten years; and
4. an employee entitled to an open-ended labor contract, but who opts to enter into another fixed-term labor contract, will again be entitled to enter into an open-ended labor contract upon expiry of the fixed-term labor contract.
Therefore, the Draft Opinions clearly emphasise on principles of transparency and honesty in the workplace, especially in relation to having open discussions with representatives of employees in relation to any internal rules and regulations, and providing favourable treatment to long-term employees by granting open-ended labor contracts.
Labor market flexibility and total factor productivity
In accordance with the 13th Five-Year Plan and to adapt to the slower growing economy, the Labor Contract Law must be developed accordingly to reflect the current reality. Currently, there are many restrictions placed on employers for the benefit of employees, however such an imbalance may cause the significant lowering of the labor market flexibility and total factor productivity, which is a mechanism used to determine how efficiently and intensely inputs are utilised in production, indicating ultimately the efficiency and effectiveness of the working economy.
There has been progress made in relation to give companies breathing space in the form of lowered corporate economic cost, including an introduction of a policy by the Guangdong province to reduce the overall payment rate of unemployment insurance benefits from 2% to 1%, the payment rate for companies from 1.5% to 0.8%, and the individual payment rate from 0.5% to 0.2%, effective as of 1 March 2016. Also the Jiangsu government has recently introduced a similar plan which seeks to allow a reduction of 0.5% in the overall payment rate of unemployment insurance benefits, as well as introductions of preferential policies for enterprises, including the following:
1. businesses temporarily incapable of paying social insurance charges may be given a moratorium of up to six months as long as they provide effective guarantees;
2. adjustments to the local minimum wages rates;
3. allowances paid to struggling businesses to minimise the occurrence of lay-offs; and
4. establishment of a special fund to support the provision of training of employees.
There are many factors contributing to the lowering of the labor market flexibility and total factor productivity, including the recruitment system, which fails to adequately link with labor productivity to ensure new recruits are sufficiently earning in accordance with their labor output. Also, China’s household registry system, though originally established with good intentions in relation to limit the influx of from the countryside and movement between cities, the system unintentionally imposes barriers to labor mobility by preventing people moving to areas where their skills can be better utilised or where there are jobs which better match their skills. Therefore, there is a need to improve labor mobility and reduce the mismatching of skills in the workforce, which could result in an increase of labor market flexibility and total factor productivity.
Also, the provisions surrounding the terms of the contract are very much in favour of the employee, for example in relation to a contract without a fixed term, which limits the ability of a company to terminate the labor contract. The Labor Contract Law provides for three types of employment contracts, including fixed-term labor contract, labor contracts without a fixed term, and labor contracts for the completion of specific tasks. In accordance with Article 14 of the Labor Contract Law, parties are deemed to have an open-ended labor contract when they have worked for the company for ten consecutive years, which introduces restrains on the employer’s ability to recruit and terminate in accordingly to the business’ needs.
Also, in accordance with Article 41, in a situation where the employing unit must commence lay-offs, those with open-ended labor contract have priority given to them. Therefore, due to such protection given to employee, companies may find themselves trapped with long-term employees whether or not they are a true benefit to the company, potentially leading to a decrease in a business’ productivity and efficiency.
Finally, costs of training new recruits are extremely high for companies in every industry. Training is a benefit and an investment for the company; however, the employee’s current state of mind often involves an ambitious hunger for better opportunities in order to achieve a higher status and standing in society. Therefore, loyalty is low on the agenda for such employees, resulting in high attrition rates, causing companies to lack motivation in the training of their employees, which in turn then result in poor performance. Overall, this results in a low total factor productivity in China.
In this context, there have been several proposals made to amend the Labor Contract Law, including the following:
1. allowing restrictions to be placed on the employee’s right to resign;
2. amending or reconsidering Article 14 of the Labor Contract Law in relation to allowing employees to gain an open-ended labor contract after having worked ten consecutive years to obtain more balance in the employer and employee relationship;
3. placing fewer restrictions on the use of alternative working arrangements, including temporary contracts, hourly paid roles, and labor dispatch agreements; and
4. reconsidering or adjusting employer social insurance contributions to ensure employers are not being detrimentally impacted by such responsibilities.
Therefore, in order to foster economic growth, the pressures faced by many employees must be lessened. The right balance must be achieved in the employer-employee relationship to further the economic interests of China.
Laws surrounding employment and employment-related issues are of high importance in China, where the economy is shifting and currently going through a period of slower economic growth. As a result, relevant laws must be adjusted and adapted to reflect the current economy state for the benefit of China and its citizens. There have been many significant updates in relation to the employment law of China, however, the balance of the employer-employee relationship must be maintained carefully to ultimately increase market flexibility and labor productivity, which will further China’s interests as the second largest economy in the world.
ABOUT THE AUTHOR: Yu Du and Joyce Chng
Yu Du and Joyce Chng are 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.