Designing a Labor Contract in China
Aug. 28 – Once a conclusion has been reached concerning the issue of what kind of contract a company wishes to enter into for a particular employee role (direct employment, secondment or outsourcing), the next step will be the drafting of the contract. Normally, employment agencies and outsourcing companies will have their own template for the services they provide, but the company will need to design a labor contract template for its directly hired staff. As the majority of employees are employed on fixed-term labor contracts, this article will concentrate on this type of contract in the explanation below.
The first condition that should be met when employing Chinese employees is for a written labor contract to be completed within one month of the commencement of the employment relationship. If this condition is not observed, under the terms of the Labor Contract Law, an employee may claim double salary for each of the months worked without a written labor contract after the first month. If the situation persists for a period of more than one year, the company is deemed to have provided the employee with an open-term contract.
Secondly, when employing Chinese employees the contract should be drafted in the Chinese language. It is acceptable to include an English translation along with the Chinese text, but note that the Chinese version will take priority in case of any dispute. Therefore, it is advisable that contracts are either drafted in Chinese using a legally-trained professional before translating into English, or drafted in English and then translated into Chinese by a legally-trained professional.
Every local Labor Bureau has a template for a standard labor contract, but it is in Chinese only. It is possible to use this template for all the contracts you enter into, however we would not recommend this in every circumstance. A template designed with specific corporate requirements will offer more protection. We would suggest combining a standard template with a labor contract used in other countries where your company has large operations.
This document should be shown to a professional trained in Chinese Labor Law to add, remove or amend clauses as necessary. Certain clauses inserted into a draft labor contract may be inadmissible under Chinese law. Including such clauses in the final version of a labor contract will only provide a false sense of security to the employer; in the event of a dispute, any such clauses will be deemed illegal by the court.
What information should be included in the labor contract? The following is mandatory:
- Name of the company, address, name of the legal representative or a senior manager;
- The name of the employee together with a valid address and identification number;
- Commencement date and duration of the contract;
- A description of the job and the location where it is to be implemented;
- Working hours, vacation provided and length and frequency of break times;
- Salary details;
- Indication that the employer will contribute social insurance for the employee; and
- Labor protection, labor conditions and protection from occupational hazards.
There may be some other mandatory requirements depending on the location of the company entering into the labor contract. If important mandatory items are not adequately addressed in the labor contract, there is a possibility that the contract may be deemed by the authorities to represent an open-term contract.
There are a number of other clauses that may be beneficial to insert into certain contract templates. Examples are:
- Non-competition clauses
- Confidentiality clauses
- Allowances and benefits (particularly for foreign employees)
- Length of probationary period
- Stock options
We also recommend that some reference be made to the company rulebook in the employment contract. This makes a clear association between the signing of the employment contract by the employee and their observation of the company rules.
In certain cities, once the template has been drafted it should be taken to the local Labor Bureau for verification. If you fail to do this, the validity of some of the clauses may be challenged by your employees in the event of a dispute arising from the implementation of such a contract. Note that the approval should be renewed by the Labor Bureau every time an amendment is made to the template.
Finally, the contract should be chopped clearly using the Chinese entity’s company chop (and of course signed by the employee) before it is considered to be valid. Similar attention should be paid to safeguarding of labor contracts. Not only do such contracts contain confidential information, it could also be costly for the company if the contracts were lost or stolen.
What should be done at labor contract renewal, promotion or transfer?
Upon renewal of a labor contract, a labor contract renewal form should be filled out. It could include the following details:
- Name of employee, position, commencement and expiry date of labor contract;
- A self-evaluation by the employee of their performance;
- An evaluation by the supervisor of the employee’s performance;
- The period covered by the renewal; and
- The document should be signed and stamped by the employee, supervisor and HR department.
When the employee receives a promotion or a transfer, it is normally not necessary to rewrite the employment contract. More commonly the change is registered using a promotion or internal transfer form. This form will usually show the date, previous title and new title. Normally, it will not include any information about new salary details, and the company will reserve the right to place the employee back in the original position if they do not prove suitable during the evaluation period. This way, the company does not incur any immediate liability to guarantee a promoted employee a higher wage if it is discovered they are not suited to the position.
Portions of this article came from “Human Resources and Payroll in China (Third Edition)” which is available on the Asia Briefing Bookstore. A firm understanding of China’s laws and regulations related to human resources and payroll management is essential for foreign investors who want to establish or are already running foreign-invested entities in China. This guide aims to satisfy that information demand, while also serving as a valuable tool for local managers and HR professionals who may need to explain complex points of China’s labor policies in English.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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