China Adopts Labor Contract Law

Posted by Reading Time: 3 minutes

On Friday, June 29, 2007 China’s top legislature, the National People’s Congress (NPC) adopted the labor contract law. The controversial bill gained increased exposure and was all but guaranteed passage after the Shanxi brick kill slavery scandal of early June. The law, which will come into effect on January 1, 2008, won 145 of the 146 votes. One vote wasn’t cast.

The draft, first submitted to the top legislature for deliberation in 2005 and released for public suggestions from March 20 to April 20 last year, will protect workers’ legal rights by demanding a written contract. Under the new law, if employers don’t sign a written contract with their employees within a year after the employees start to work for them, it should be taken as that they have signed a labor contract of no fixed term.

Here we look at several aspects of the new law:

Part-time employees

Following the McDonalds, KFC and Pizza Hut controversy in Guangdong province earlier this year, the new law has added clauses meant to protect part-time employees.

  • The wages of part-time workers should not be lower than statutory minimum wages set by local governments
  • Wages should be paid within 15 days
  • Those who refuse to pay wages will be forced to pay compensation to employees in addition to the wages

Foreign investors can expect more local government oversight of part-time employees: Following the aforementioned fast food scandal, local governments will be keeping closer watch on international companies and how they pay their part-time employees.

Probationary period

The maximum probation period is based on the term of the contract, thus:

  • One month, if contract term is less than one year
  • Two months, if contract term is less than three years
  • Six months, if contract term is more than three years

The new law requires employers to pay their employees at least 80 percent of their contractual salaries during the probationary period.

It is expected that the penalties for violating these rules will increase and that termination of contract during the probationary period without notice or severance will be more difficult. The employer will have to prove that the employer doesn’t fulfill the recruitment conditions set out in the employment contract.

Employers have to be more careful when hiring new staff as they will have less flexibility. Even termination during the probationary period requires sufficient evidence.

Fixed term contracts

The new law only allows two fixed term contracts. Any further contracts must be an open term contracts. After expiration the employer has to agree on an open term contract with the employee.

Employers should consider carefully the length of the fixed term contract and assess the ability of the employee carefully before hiring staff.

Severance payments

An employer must pay severance to any employee whose fixed-term contract is not renewed to the amount of one month of salary for each year served, unless the employee rejects a new contract on equal or improved terms. this is one of the provisions put in place to discourage employers from using fixed-term contracts.

Non-compete clauses

Under the draft law, employees who leave a company are bound to a non-compete agreement for two years following termination. This is a reduction of one year from the previously required three years. Employers are required to pay the equivalent of 100 percent of an employee’s annual salary in order to make the non-competition restriction enforceable.

The new law limits damages an employee must pay to the employer in the event a non-compete clause is breached to three times the employee’s annual salary.

Mass layoffs

A change in the objective circumstances on which the employment contract was concluded is per definition a basis for a mass-layoff. A mass-layoff is defined as the need to lay off more than fifty or more employees or 10 percent of total staff. The employer must explain the circumstances of the layoff to the trade union or to all its employees, giving 30 days advance warning.

Just what constitutes a change in objective circumstances remains unclear. While relocation or corporate reorganization through merger may qualify, downsizing of a company it appears will not qualify. The grey areas in this provision will most likely make it difficult to implement.

Leave a Reply

Your email address will not be published. Required fields are marked *