Clarifying 2010 Employment Contracts

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By Adam Livermore

Jan. 11 – There has been a great deal of misinformation and misunderstanding of China’s labor laws. However, the Chinese labor contract law is quite clear about the issue above concerning treatment of employees during the probation period, nevertheless it remains just one of several widely-held misunderstandings relating to employment relationships in China.

We note some of these below:

1. Employees reaching the end of their fixed-term contract do not need to be paid compensation when being unilaterally dismissed by the employer.

They do require compensation. An amount equal to one month of salary should be paid for each year of service they provided to the company. The calculation of years of service should commence from January 1, 2008 (when the labor contract law was implemented), so currently the maximum amount of compensation payable to any employee reaching the end of a fixed-term contract will be two months. The calculation of one month of salary is based on the average monthly compensation received by the employee over the previous 12 months, including bonuses and allowances. It is capped at 300 percent of the average social salary for the city in which the employee works.

2. In the event an employer unilaterally terminates an employee’s contract with no valid reason, the liability of the employer is limited to twice the amount of compensation payable under the conditions that the termination was made in accordance with the law.

This common misunderstanding has arisen from Article 87 of the Labor Contract Law, which states that the employer can violate the law and still only be liable for double compensation based on the provisions in Article 47 (which stipulates mandatory compensation standards). However a further study of this law reveals Article 48. This article stipulates that if an employer terminates a labor contract in violation of the law, the employee can require continued performance of the contract. Only in the event that the employee does not demand continued performance, or if continued performance becomes “impossible” may the company pay double compensation to the employee.

We can therefore see that the potential cost to the employer could in fact be far higher. Components would include:

  • Payment of salary for remainder of the contract term (not limited by 300 percent of average social salary provision)
  • Legally stipulated compensation at the end of the contract term
  • Any court costs incurred

3. Not providing employees with written employment contracts can be advantageous to the employer.

In fact the opposite is true. Employers should be aware that the employment relationship is deemed to have started from the first day the employee works at the company, not from the date of signature of the contract.

According to the labor contract law, an employer must ensure that it has completed a written labor contract with every staff member within one month of the employee commencing work. This is important because if such a contract is not in place by the end of the first month the employee shall have the right to claim double salary for the period in which the company remains out of compliance with this regulation.

If the company neglects to complete such a contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous eleven months, they can also claim an open-term contract from the employer. This will mean that the employer loses the ability to release the contract of the employee at the end of the fixed-term contract.

4. Companies may hire all of their employees through agents (a practice known as “paiqian” in China) instead of signing labor contracts directly with employees.

According to Article 66 of the labor contract law, in general only “temporary, substitute and auxiliary” positions should be filled by staff hired through an agency. However no implementation rules have so far been issued by the government to clarify the definition of these terms. We can say that companies which hire a large proportion of their staff through agencies are operating in a gray area of the law. The situation is unclear relating to issues of compliance and potential liabilities.

We can also add that employing all staff in this manner is an unnecessary risk, as there is no effective advantage to hiring senior employees in this manner, and in fact the vast majority of employees will prefer to have a direct contract with their employer.

Adam Livermore is a senior associate at Dezan Shira & Associates and manages the Dalian office, which houses the practice’s national HR and payroll unit. Please contact him for China HR, labor contract and payroll legal and implementation advice.

China Briefing: Managing Your Human CapitalThis article Human Resources in Chinaoriginally appeared in the December 2009 issue of China Briefing magazine, a China HR special issue.

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