On March 4, 2020, the Ministry of Human Resources and Social Security released the “Letter on the Formation of Electronic Contracts Related Issues” (“the Letter”) endorsing the use of electronic labor contracts at the height of the COVID-19 outbreak in China.
This was the first time that electronic recruitment contracts were formally addressed by central authorities since the outbreak and assisted in clarifying the legitimacy and wide-spread use of the online labor contracts.
In this article, we explain five of the key steps and considerations for employers when executing their labor contracts online in China.
The legitimacy of electronic labor contracts in China
The Letter specifically promotes the use of an electronic labor contract that complies with government announcements and PRC Labor Contract Law. Beginning January 1, 2021, electronic contracts will also be subject to the articles within China’s Civil Code.
Within China’s impending Civil Code, the legitimacy of the electronic contract is endorsed and addressed in two articles – firstly, stating that digital exchange or email can be deemed as a contract in written form (Article 469), and secondly, that the contract, whether it is in the form of letters or digital exchange, “shall be established at the time of execution of the letter of confirmation.”
It is important to note that for an electronic contract to take effect, it must be agreed upon by both parties.
Taking these points together, there are five main considerations for businesses when forming and executing a contract.
Key legal and security considerations
1) Choose an appropriate contract management platform
The employer should choose an appropriate contract management platform – either through building their own or purchasing a third-party electronic signing platform.
According to Article 5 of the “Regulations on the Online Formation Process of Electronic Contracts (Draft for Soliciting Comments)” the electronic contract formation system should have the following functions:
- Can generate contract text that meets legal format requirements;
- Can support multiple methods, including text, video or audio, for online negotiation and contract text modification;
- Real-time backup of contract information and negotiation information can be realized, and the backup information can be traced and copied;
- Able to verify the authenticity and integrity of the content of the contract by electronic signature or other means; and
- Can access the storage services of third-party electronic contract storage service providers.
In addition, the Electronic Signature Law reinforces this by stating that contracts should ensure that “Data Message is in Written Form” (Chapter 2) and that the contract is signed with a “Reliable Electronic Signature” (Chapter 3).
Olivia Wang, Business Advisory Services Associate, Dezan Shira & Associates Shenzhen Office, further breaks down what type of platform should be used to establish electronic contracts. Wang notes that the chosen platform should be able to support features, such as electronic signatures, trusted timestamps, encryption and hash value verifications, tamper-proof technology, and appropriate evidence collection methods.
2) Determine the identity of the parties
Before moving on to the terms of the agreement, it is important to identify and verify the identity of the parties to the contract. This is a critical step when signing an electronic labor contract, as the usual checks and verifications that exist with contracts signed in person are not available with digital contracts.
Therefore, when choosing a contract management platform, a critical feature that is needed is one that has an inbuilt identity registration and verification system.
It is important for both parties to be able to manually upload or verify their information, including names, domicile, legal representative, or main person in charge of the employer, address, resident ID or other valid ID number, and contact information as well as other information relevant to the nature of the contract.
When the information is uploaded, it is important that the chosen system uses appropriate methods of identity verification methods on the respective parties. The most common types of verification include facial recognition, mobile phone verification, bank card verification, security questions, or username / password verification.
3) Negotiate the terms
After the basic content of the contract has been agreed upon, both parties may begin negotiating the terms of the contract in accordance with the provisions of the PRC Labor Contract Law.
Article 3 of the PRC Labor Contract Law is a particularly critical provision that should underpin the nature of the contract negotiation process. Article 3 of the PRC Labor Contract Law states that “the labor contract shall follow the principles of legality, fairness, equality and voluntariness, consensus through consultation and good faith.”
In short, this means that the two parties should both reach a fair agreement on the main terms of the labor contract.
Under Article 17 of the PRC Labor Contract Law, every contract should have the follow clauses:
- Basic information as described above;
- The terms of the labor contract;
- Work content and work location;
- Working hours, rest and vacation;
- Labor remuneration;
- Social insurance;
- Labor protection, working conditions and protection against occupational hazards; and
- Other matters that should be included in the labor contract as required by laws and regulations.
4) Sign the contract
The labor contract will become effective once the employer and employee have signed or sealed the text of the labor contract. For electronic contracts, this can be done through an electronic signature or an electronic chop.
According to the “Electronic Signature Law,” employers and workers should use “reliable electronic signatures” when signing electronic labor contracts, which is comprised of the following characteristics:
- The electronic chop creation data must be exclusively owned and controlled by the signatory at the time of signing;
- Subsequent alterations to the electronic chop and any relevant data made must be detectable; and
- Signatory must properly keep and retain all electronic chop creation data.
In practice, it is a good idea to select a third-party organization to provide independent electronic authentication services of the signatures.
5) Verify, encrypt, and secure the contract
After completing the electronic contract, an auxiliary verification of the full text of the electronic contract should be conducted to ensure that the contract has not been tampered with when it was signed.
Employers can choose a variety of different methods, including auxiliary encryption or confidential technical facilities like QR codes, time stamps, watermarks, and SMS notifications.
This point is emphasized by Article 11 of the “Regulations on Several Issues Concerning the Trial of Cases in Internet Courts,” issued by the Supreme People’s Court.
In practice, the more widely used and recognized encryption technology are blockchain or trusted timestamps.
Finally, once everything is signed and verified, the final version of the electronic contract should be securely backed up in the employer’s system, or on the third-party storage system.
Under Clause 3, Article 4 of the “Regulations on the Online Formation Process of Electronic Contracts (Draft for Soliciting Comments),” if the electronic contracts are signed through the employer’s own system, then this contract shall storage at the third party’s storage system.
Wang explains that in this way, both parties are able to check the signed contract at any time during the contract term – via online or offline methods. The full content of the electronic contract should be backed up, including the contract terms, signing time, subject information of both parties, signature information, and any modifications made to the contract content. The storage period of the electronic contract shall not be later than five years from the date of conclusion of the contract.
For further advice on how to prepare an electronic labor contract in accordance with Chinese laws, please feel free to contact us at firstname.lastname@example.org.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
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