Overview of China's labor laws
In China, there are a wide range of government institutions involved in HR processes. While numerous bylaws and regulations are instituted at the local level, the central government also establishes several laws that must be followed.
There are two primary sources of employment law instituted by the central government - the Labor Contract Law (2008) and the Labor Law (1995).
The Labor Law defines the rights and obligations of both parties and protect the legitimate rights and interests of workers while the Labor Contract Law was adopted to ensure efficient implementation of the employment rules and principles mentioned in the labor law.
Other labor laws instituted centrally that investors should take note of when doing business in China include:
- Social Security Law;
- Labor Dispute Mediation and Arbitration Law;
- Employment Promotion Law;
- Labor Union Law;
- Law of the People’s Republic of China on Work Safety;
- Guideline for the Conclusion of Electronic Labor Contracts; and
- Law on the Protection of Rights and Interests of Women.
Here we discuss some basic requirements under China’s labor code that employers should take note of:
- Labor contracts;
- Work hours provisions;
- Compensation and overtime;
- Retirement; and
- Social security.
Types of labor contracts
The labor law requires employers to sign a written contract with their employees within one month, starting from the employee’s first day of work at the company. Failure to do so results in double salary compensation for each month without a contract, and a non-fixed term contract by default after one year without a contract.
An exception to this rule is part-time work, where an oral agreement is considered sufficient.
According to the China Labor Contract Law (2008), there are three types of employment contracts:
The fixed-term contract creates an employer-employee relationship for a fixed length of time and can be used for part-time or full-time work.
Fixed-term contract is the most commonly used type of labor contract in employment relationships.
For workers to qualify for a part-time fixed contract they must have five characteristics:
- The employee may not work for more than four hours per day, or 24 hours per week;
- No probation period is allowed, either the employer or employee may end the agreement at any time;
- The employee is not entitled to severance compensation;
- The employee must be paid at least every 15 days; and
- Part-time employees are not required to have a written contract.
Part-time work could be appropriate for roles where tasks can be completed within a relatively short period of time daily.
Non-fixed term contract
Based on its unrestricted term and limited grounds for termination, the non-fixed term contract effectively guarantees the employee job security until retirement. Specifically, an employee on a non-fixed term contract can only be terminated based on grounds eligible for immediate dismissal, dismissal with 30 days’ notice, or as part of a mass lay-off. During a mass lay-off, employees on non-fixed term contracts must be prioritized over other employees.
Job contracts are defined by the specific task or project an employee is to work on, not the length of time. Once the project is completed, the employment relationship ends, and the company must pay severance to the employee. No probationary periods are permitted under this contract.
The relevant legal framework offers no guidance on what to do when a project is left incomplete, or how employees should be compensated in such a case.
Mandatory clauses in labor contracts
According to relevant laws, the following clauses are mandatory to be included in the labor contracts:
- Name of the company, address, name of the legal representative or a key person-in-charge of the employer;
- Name of the employee together with a valid address and identification number;
- The term of the labor contract;
- Description of the job and the location where it is to be implemented;
- Working hours, rest periods, and off days;
- Salary details;
- Statement that the employer will contribute social insurance for the employee; and
- Labor protection, labor conditions and protection from occupational hazards.
Recommended clauses in labor contracts
For specific situations, a number of additional terms to the labor contract are recommended, including:
- Probation period;
- Non-competition clauses;
- Confidentiality clauses;
- Allowances and benefits (particularly for foreign employees); and
- Reference to the company rulebook or staff manual.
Language of labor contract
All labor contracts should be executed in Chinese language for legal certainty.
The Chinese labor code defines three main work hour systems:
- Standard work hour system;
- Comprehensive work hour system; and,
- Non-fixed (flexible) work hour system.
The latter two systems are considered ‘special work hour systems’, which require special approvals and compliance.
The standard work hour system
The standard work hour system requires that an employee’s workday is not more than eight hours, and an average work week is not more than 40 hours. Most white-collar jobs currently operate according to this system, which equates to a five-day work week, although some domestic companies institute six-day work weeks.
The comprehensive work hour system
The comprehensive work hour system accumulates work hours over a specified cycle (weekly, monthly, quarterly, or yearly). The average number of hours is then determined based on this accumulation period. This system is most suited to work roles with irregular shifts, including seasonal or project-based work.
The non-fixed (flexible) work hour system
The non-fixed work hour system accommodates employees whose working hours are impractical to measure. Employees on such a work hour system will generally be paid as a salaried employee. This salary is a set amount paid per period, often monthly.
Compensation structure under the labor code
A minimum wage is the lowest remuneration that employers can legally pay their employees. Minimum wage doesn’t include overtime payment, allowance for special working environment, as well as different forms welfare, such as social security contributions.
Base salary is the fixed monthly amount that the company guarantees to pay the employee. The employee’s base salary needs to be stated in the labor contract. Employers can also include some one-off payments.
For example, many companies make a 13th month salary payment to their employees around Chinese New Year. Companies should beware including any payments that are separate to the base salary in the labor contract, as they will be legally bound to make the payment. Instead, employers can choose to pay this amount as an annual bonus.
The Chinese Tax Bureau allows foreign staff (including those from Hong Kong, Macau and Taiwan) to deduct certain “allowances” before calculating the tax burden on their monthly salary, provided that:
- In the employment contract (and sometimes also in a board resolution depending on the location of the company), there should be a clear reference to the amount being paid to the employee under the title of each specific allowance; and
- Each month, the employee should produce evidence to show the company that this money was indeed spent on the services described in the contract; this is done using the “fapiao”, or official invoice.
Overtime is paid differently depending on the work hour system adopted by the employer.
Working hours in the standard work hour system are subject to the usual overtime rates:
- For overtime work, not less than 150 percent of the normal wage shall be paid;
- For work on a rest day, and where such rest days cannot be postponed and taken at another time, not less than 200 percent of the normal wage shall be paid; and
- For work on an official public holiday, not less than 300 percent of the normal wage shall be paid.
|Overtime Paymcent under the Standard Work Hour System|
|Time of work||Percentage of hourly salary|
|Extra hours worked on rest days||150%|
|Hours worked on rest days||200%|
|Hours worked on public holidays||300%|
In comprehensive work hour system, overtime is applicable for hours worked above the standard set per cycle. Such rates match those of the standard work hour system for extra hours worked and work on public holidays. However, no rest day is outlined under this system.
|Overtime Paymcent under the Comprehensive Work Hour System|
|Time of work||Percentage of hourly salary|
|Extra hours worked outside of normal shift||150%|
|Extra hours worked on public holidays*||300%|
|*Higher rate applies even if the standard shift for the worker is scheduled on a public holiday.|
Termination and severance pay
Terminating an employee in China is more difficult and often more expensive than in many other countries, since the Chinese Labor Contract Law offers a high degree of protection to workers’ job security.
Employees may resign with 30 days’ notice, but for employers, there are limited grounds for terminating an employee before their contract expires. The employer must notify the labor union of the reasons for the dismissal before terminating a worker, and the circumstances surrounding the termination will determine its legitimacy.
An employer is required to make severance payment to employees upon termination for:
- Termination by mutual agreement and the proposal is put forward by the employer;
- Termination upon 30 days’ notice according to Article 40 of the Labor Contract Law;
- Termination upon bankruptcy/license revoking/permanent dissolution of the company;
- Termination in a mass layoff; and,
- Termination upon the expiration of the labor contract, except where the employer offers the employee a renewed contract on equal or better terms to the expired contract, but the employee refuses to accept it.
Mandatory social security
China’s social security system is made up of six different kinds of insurance:
- Work-related injury;
- Unemployment; and
- Housing fund.
Although both employer and employee are obligated to make contributions, it is generally the employer’s responsibility to correctly calculate and withhold the payments for both parties. Employer’s obligation to make adequate and timely contributions cannot be alleviated or exempted by reaching mutual agreement with employees.
The statutory retirement age is 60 for men, 55 for women in management positions, and 50 for women in manufacturing positions.
Hiring foreign employees
Hiring foreign employees entails several steps and procedures.
To be eligible for working in China, foreigners should meet the following basic criteria:
- Attained 18 years of age, and are healthy;
- Possess the requisite professional skill and the corresponding work experience for the work;
- Have no criminal record;
- Has a confirmed employer in China; and
- Hold a valid passport or any other international travel document.
The administrative procedures for hiring foreign employees depends on the intended working period in China. According to the Administrative Regulations on the Employment of Foreigners in China and the Entry-Exit Regulation, the due procedures for a company to hire foreign employees who will work in China for over 90 days include:
- Applying for Notification Letter of Foreigner’s Work Permit in China;
- Applying for Z-visa or R-visa;
- Applying for Foreigner’s Work Permit; and
- Applying for Residence Permit.
Citizens of Hong Kong, Macao, and Taiwan do not need to go through the administrative procedures for hiring foreign employees – they are under the same treatment as mainland Chinese in employment management.
Fundamental tips for employing staff in China
Mandatory written contracts
All employees must be given a written contract within one month of hiring; if not, the employee is entitled to double salary. Electronic labor contracts are regarded as written contracts as well by satisfying certain conditions.
The range of legitimate grounds for dismissing an employee is considerably wider during their probation period. The employer may also pay only 80 percent of the employee’s contractual salary during this time.
National laws are often intentionally broad, leaving a lot of room for local interpretation or additional legislation. Regulations and practices vary as per city on issues such as minimum wage, work visa policy, social security contributions, and maternity leave.
The simplest of foreign investment vehicles in China, the representative office (RO) is not permitted to directly hire staff in China; instead, they need to use dispatch agencies, the agencies must hold a government-issued special license that allows them to hire employees on behalf of their clients (e.g. Dezan Shira & Associates has dispatch licenses).
Leave during the first year of employment
Employees are not entitled to any mandatory minimum number of leave days if their work tenure is less than one year, except those during major holidays such as Chinese New Year around February, and the National Day celebrations in early October. The work tenure is not limited to the length of time that an employee has worked for their current .employer, but rather refers to their cumulative work years with all previous and current employers.
No at-will termination
Terminating employees in China is both difficult and expensive. Employees may resign with 30 days’ notice, but for employers, there are limited grounds for terminating an employee before their contract has come to an end.
Non-fixed term contract after two fixed term contracts
After an employee finishes their second contract with your company, they shall be offered a lifetime contract as the third unless they want another fixed term contract instead. Such a non-fixed term contract can only be terminated if there are grounds for dismissal.
Severance payments mandated by law
In practice, severance payments are even higher than the law prescribes and can comprise a significant part of overall HR costs.