Hiring Someone on the Ground in China – Structuring Labour Contracts 

Structuring China labour contracts requires careful consideration of contract type, probation, termination, severance, and discretionary clauses. This article outlines the key legal and practical considerations for FIEs hiring employees in China. 

Hiring an employee on the ground in China requires careful consideration of cost exposure, flexibility, and legal risk for the life of the employment relationship. Administrative decisions, such as contract type, renewal provisions, and the inclusion of discretionary clauses, can carry binding statutory consequences that can catch a company unawares. This article sets out what FIEs should consider when structuring labour contracts in China, and where the most common missteps tend to arise. 

Types of labour contracts and their implications 

There are three types of labour contracts in China: fixed-term, which has a set expiry date; non-fixed-term, which has no expiry date; and task-based, which is effective until a given task or project is completed. 

The choice of labour contract has implications for a range of factors, including probation periods, administrative flexibility, contract renewal, and costs and risks in the event of termination. 

Fixed-term contracts 

Fixed-term labour contracts are by far the most common form of employment for new hires in China. This type of contract offers employers greater flexibility and lower procedural risk than open-ended contracts. 

Non-fixed-term contracts 

Non-fixed-term contracts, or open-ended contracts, are generally only granted after an employee has worked for an employer for a certain amount of time. Under China’s Labour Contract Law, employees on a fixed-term contract have the right to request to switch to an open-ended contract (upon the contract’s expiry), provided they haven’t broken any rules. For FIEs, this applies when: 

• The employee has worked continuously for the employer for 10 full years;
• The employee has concluded two consecutive fixed-term employment contracts and seeks to renew it.

Moreover, if the employer does not conclude a written employment contract with an employee within one year of the employee’s start date, the employment relationship will be deemed to be an open-ended contract.

While open-ended contracts are mostly provided on this statutory basis to long-term employees, they can also be used as part of a competitive employment package when recruiting for senior, highly skilled, or in-demand roles that are difficult to fill, as a sign of commitment and incentive to a sought-after candidate. 

Task-based contracts

Task-based contracts are concluded for an employee to fulfil a specific and task-bound project, defined by the specific project or task rather than duration. In theory, the contract terminates once the project or task has been completed. However, it can be difficult to determine the exact end point of a given task or project, so these contracts can be tricky to enforce. Moreover, disputes can easily arise from disagreements surrounding uncompleted tasks, including disagreements over compensation and termination. 

A fixed-term contract can in many cases fulfil the requirements of a task-based contract, such as for seasonal workers, while providing more flexibility for employment terms. For this reason, companies generally avoid task-based contracts.  

Contract terms 

There are a range of statutory clauses that must be included in a labour contracts, such as the terms of the labour contract; job description and location, working hours, rest periods, and off days, salary details, a guarantee of social insurance contributions for the employee, and labour protection, conditions, and protection from occupational hazards. 

In addition to these terms, there are a range of discretionary clauses that may be advisable depending on the circumstances. 

Probation periods 

Probation periods are a standard practice in China for all employees, regardless of seniority, and is an expected part of the employment contract. A probation period allows companies and employees to evaluate role fit and provides companies with a lower compliance bar for terminating an employment contract. Wages are also generally set at 80 percent of the salary agreed upon in the contract, thus helping to reduce the initial cost of hiring. 

Both fixed-term and open-ended contracts can include probation periods, with lengths varying depending on the length of the contract (in the case of the fixed-term contract). Probation periods are not permitted for task-based contracts. 

Non-compete clauses 

Non-compete clauses are enforceable under China’s Labour Contract Law, as are post-termination non-compete restrictions. However, these are only permitted for certain members of staff, namely, senior management, senior technical personnel, and other employees with confidentiality obligations. 

Employers are required to pay monthly compensation to employees for the duration of any post-termination non-compete restriction periods agreed upon in the labour contract. This period can be a maximum of two years. 

As compensation during a non-compete restriction period is tied to the duration of the period itself, it is recommended that such agreements are applied only to employees who actually have access to and deal with confidential material. An employer can request a court to invalidate a non-compete clause if they did not actually come into contact with the confidential material. 

Post-termination non-compete restrictions must also be defined narrowly, limited to only a specific industry scope, geographic area, and duration that is proportionate to the confidential material that the employee had access to. A clause defined too broadly is vulnerable to being contested and overturned in court.

See also: Non-Compete Agreements in China: A Guide for Foreign Employers

Confidentiality clauses 

Unlike non-compete clauses, confidentiality clauses are not limited to certain types of employees, but are also enforceable under the Labour Contract Law. This means these can be implemented universally across all labour contracts that a company enters into. They are also not tied to any compensation requirements and are standard practice in Chinese employment contracts. 

FIEs hiring any employee who has access to business information, client data, pricing, internal systems, or any other sensitive information or knowledge are advised to include confidentiality clauses. 

Allowances and benefits 

Companies can provide employees with allowances and benefits, such as additional annual leave, supplementary commercial medical insurance, meal or transport subsidies, and performance bonuses, above what is required at a statutory level. These are discretionary and are usually provided in competitive market segments. Employees filling in senior or in-demand roles may anticipate these additional benefits, as do many foreign employees.

A 13th-month bonus is not required by Chinese law, but it is a common benefit offered by many employers, particularly larger domestic companies and multinationals. Whether it is discretionary or guaranteed depends on the employment contract, company policies, and established practice. Where provided, it is often paid before the Chinese New Year (Spring Festival) holiday, although payment timing varies by employer. 

It is common for FIEs in particular to provide annual leave days above the statutory minimums to mid-to-senior local talent in competitive labour markets, as well as seconded foreign employees and local foreign hires. Relocation packages are also routinely provided for employees moving to China for the position. 

Reference to staff handbook 

A properly adopted staff handbook is a crucial operational document for FIEs, and should be referenced explicitly in all employment contracts to ensure enforceability. The staff handbook is the primary method for establishing internal disciplinary rules, performance standards, and grounds for termination that go beyond the bare statutory framework. Provided it is legally sound, a handbook can provide substantial evidence in the event of termination or other disciplinary action, as it defines the scope of “recruitment conditions”, rule violations, and other grounds for termination. 

Note that under the Labour Contract Law, a staff handbook must be adopted through a consultation process with the labour union or employee representatives, and must be properly publicised and communicated to employees. There should also be documented acknowledgement and receipt by the employee. Rulebooks drafted by foreign parents may therefore not be applicable in a Chinese subsidiary, unless it has undergone this statutory procedure.  

How Dezan Shira & Associates can help 

Correct structuring of labour contracts from the outset is one of the most effective ways to manage employment risk in China. However, getting it right requires in-depth knowledge of local labour laws and regulations, as well as local workplace culture and employment practices. Dezan Shira & Associates‘ HR and payroll professionals help FIEs structure compliant labour contracts, from selecting the right contract type and drafting enforceable discretionary clauses to navigating termination, severance, and staff handbook requirements. Get in touch with our team to ensure your China hiring practices are built on a compliant and defensible foundation.