China’s labor law – The reality for overseas investors

Posted by Reading Time: 4 minutes

Drafting an employment handbook a sensible step to take to minimize liabilities and identify terms

By Chris Devonshire-Ellis and Richard Hoffmann

Jan. 18 – Much has been made of the new Labor Contract Law in China, with regrettably a lot of hot air from excitable “China” lawyers as well. Harem scarem stories of a massive increase in costs, comments about rapacious Chinese law firms eager to sue foreign investors for breach of contract on behalf of Chinese employees, even comments predicting the end of foreign investment into China, or perceiving a tightening of labor regulations as a retrograde step back to hard line communism have all been commonly circulated. The reality is that the Chinese government have moved to protect employee abuse – rampant in China over the recent 15 years – and stepped up the protection of workers. It is not unreasonable and the new regulations, while needing to be taken into consideration, are not unreasonable either. Here we take a look at several common misperceptions over the new labor law and clear them up, as well as provide some sensible advice over how to handle the issue.

Chinese law firms queuing up to sue FIEs in breach
This is untrue. Most labor in China is hired by Chinese businesses. Additionally, the average wage in China is US$1,000 per annum. The likelihood of large lawsuits being brought against FIEs is small unless it involves issues for companies simultaneously dismissing thousands of employees at one time and in breach of their employment contract. The incentive for local law firms to work on behalf of an aggrieved individual employee whose contract has been wrongfully terminated, with a severance pay of just a few thousand RMB in dispute is patently false. In any case, labor unions are the first port of call in labor disputes and it would be them, and not a law firm who would generally be involved in settling any disputes prior to any need for legal action.

A significant impact on labor costs
There is a minimal impact on labor costs. Severance must be paid to employees whose contracts are terminated however this was previously largely the case in any event. The new law however does add “termination” to previous fixed term contracts which previously just closed off the employment without compensation. Now a severance is due. But unless contracts are terminated no additional cost burden falls upon the employer. How many companies are actively looking to fire numerous staff? Unless you are, the financial fallout from this law is negligible.

No ability to dismiss employees
This is incorrect. Employees can be dismissed for offenses. While true that the scope for dismissal has been better defined within the new law; employees can still be terminated for a variety of acts, including theft, constant inability to perform and so on. Such additional terms of employment should however be noted in the company employment handbook and signed off by the employee. It is after all, the duty of the company and not the State to determine the terms of engagement in specific businesses when these go beyond that of legal provisions.

Huge impact on all FIEs
The impact is actually minimal, and only affects employers in China. While true the new law affects all FIEs, those in compliance will not face any major obstacles. For those FIEs whose employees are engaged via FESCO, FESCO will be redrafting their employment terms with you to be legally compliant with the new law. It would be wise to review FESCO’s contracts if you need to add specific extra clauses concerning termination or other compensations.

Discriminates against FIEs
Incorrect. The new labor law equally affects Chinese employers as well as foreign invested employers.

No written contract in place means no employment liability
Incorrect. Employment is deemed if a verbal agreement has occurred and the employee is physically engaged on the premises. Obviously all personnel need to be accounted for and contracted. For part-time employees, the new labor contract law does not apply to personnel that are engaged for less than four hours a day (24 hours a week). They may still be engaged with triggering the new employment law stipulations.

No written contract in place means the employee cannot be terminated
As mentioned earlier, if employment is deemed then employees are subject to labor law protection. However this does not protect them from disciplinary or criminal issues, guidelines of which can be identified within the company employment handbook in addition to the labor law.

It probably makes sense to review existing employment contracts to assess liabilities, cater for any redrafting, and also to review new employment contracts to be offered to future staff. Employers do have leeway in the dismissal procedures for terminating staff, however these should be correctly identified and signed off by the employee. Constant late attendance for example can remain a dismissal offense if identified as such with definitions and disciplinary procedures contained within your businesses employment handbook. If you do have have one – you should start to think about drafting this and getting it in place.

Largely the new employment law brings a great deal of common sense into China’s labor law and does tighten up on employment practices. However FIEs that treat Chinese employees with respect and dignity as a matter of corporate policy are unlikely to have issues with the new law. A review however of contracts and the introduction into the company of an employment handbook to properly specify the terms of employment is recommended.

Credits and contacts
Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates, and Richard Hoffmann Senior Legal Associate. Both are based in the firm’s Beijing offices. Both sit on the American Chamber of Commerce Legal Committee. To view our December issue of China Briefing, which contains further comment on the new labor law and how it affects foreign investors in China, please click here.

For specific advice or comments concerning corporate matters, liability, risk and compliance matters relating to the new labor law in China, including contract reviews and employment handbook provisions and drafts, please contact Chris and Richard at