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China’s Standing Committee of the 10th National People’s Congress has passed a new Employment Contract Law (New Law) (劳工合同法) that replaces the existing Labour Law. The New Law goes into effect on January 1, 2008.

Drafted amid some controversy, the New Law introduces a number of changes to the rights and obligations of employers and employees, including greater protections for individual employees in some areas and the strengthening of collective rights through various organizational bodies. While these changes are significant, they do not radically alter China's employment law environment.

Unfortunately, some provisions of the New Law remain vague, and the exact scope of the New Law is similarly unclear. It is widely expected that further implementation rules and notices will be issued in the coming months to offer the public more guidance.

We set out below a brief summary that discusses the significant changes introduced by the New Law and compares them to the provisions of the current Labour Law.

Written Contract Rules Stronger

Under the current Labour Law, all individual employment contracts must be concluded in writing and signed by each employee. The New Law strengthens this position by stipulating that:

• if there is no written contract signed within one month from the commencement of employment, the employee is entitled to double his or her normal wages; and 
• if no written contract is signed between the employer and the employee within one year of the commencement of employment, an open-term contract is deemed to have been signed.

However, the above provisions do not apply to part-time employees.

Probation Periods Shorter

Under the existing Labour Law, the maximum allowable probation periods for new employees vary depending on the length of the contract term, with up to six months probation allowed for contracts having a term of at least three years. The New Law shortens the allowable probation periods as follows:

During the probation period, wages may not fall below certain minimum levels or less than 80 percent of the wage agreed upon in the employment contract.

Changes in Number of Fixed-Term Contracts and Open-Term Contracts

The current Labour Law does not limit the number of fixed-term contracts that can be signed between an employer and employee. The New Law, though, imposes a number of changes to the current regime.

First, it provides that, under certain circumstances, if an employer and employee enter into a fixed-term contract on two consecutive occasions, then the subsequent contract to be concluded must be an open-term contract. Should an employer insist on a fixed-term contract when the employee is entitled to an open-term contract, a double wage must be paid to the employee.

Second, the New Law stipulates that, upon the expiration of a fixed-term contract, an employer must pay severance to employees whose fixed-term contracts are not renewed, except when the employee rejects an extension of the fixed-term contract containing terms that are at least equal to the terms currently enjoyed by the employee.

More Specific Criteria in Creating Company Rules

Company rules (such as those concerning compensation, work hours, insurance, leave, work safety, and hygiene) are enforceable under the existing Labour Law so long as they: (i) do not violate any laws or regulations; (ii) are publicized to employees; and (iii) are passed by a "democratic process" (which is not explained in the Labour Law).

The New Law goes further than the Labour Law by providing more specific criteria under which an employer can formulate, or revise new company rules. These criteria require that:

• the new company rules are formed in consultation with the employees;
• the new company rules are discussed in negotiations with the labour union or employee representative; and
• the new company rules are publicized or communicated to the employees.

Shorter Terms for Non-Compete Covenants

The New Law shortens the maximum term for non-competition restrictions from three years to two years. It also limits the application of non-competition restrictions to key employees such as senior management, senior technicians, and other employees who have confidentiality obligations.

Furthermore, the New Law also states that compensation paid as consideration for non-competition restrictions must be paid in monthly installments after termination of employment; the current Labour Law has no such requirement.

More Limits to Summary Dismissals

Under the existing Labour Law, employers may not terminate an employee "at-will." Instead, an employer may only terminate an employee with immediate effect and without severance payment under four circumstances:

• the employee violates the employer's code of conduct; 
• the employee commits dereliction of duty; 
• the employee commits a criminal offense; or 
• the employee is terminated during his/her probationary period.

The New Law adds two additional conditions to the list above:

• a material conflict of interest is created as a result of the employee’s employment with another employer; or
• the employee uses deception or coercion to cause the employer to sign the employment contract.

Additional Grounds for Collective Dismissal

Under the current Labour Law, collective dismissals (i.e., mass lay-offs) are only permitted in the event of (1) a change of "objective circumstances" at the company (including the sale of major assets or relocation of a plant) and (2) "serious difficulties" encountered in production or operations, such as financial instability leading to the inability to pay wages.

The New Law expands upon the Labour Law by setting out additional grounds for collective dismissals. These include:

• changing mode(s) of production;
• introducing a major new technical innovation; 
• introducing a revision to the company's business method; and 
• a "major" change in the company's "objective economic circumstances," rendering it unable to meet its obligations under its employment contracts.

The New Law also requires that employers follow certain procedures. The employer must explain the collective dismissal to the employees and labour unions and must submit the redundancy plan to the local government labor administration bureau if the employer wishes to (i) dismiss 20 or more employees; or (ii) dismiss fewer than 20 persons, but those persons represent 10 percent or more of the employer's workforce.

In regard to retaining certain workers following a collective dismissal, priority of retention must be given to those employees who:

• have concluded "relatively long-term" fixed-term employment contracts; 
• have concluded open-term employment contracts; or 
• are the sole income-earners in their families or have to care for an elderly person or a minor.

Termination Payments

Under the Labour Law, when employees were terminated with notice, they were entitled to severance pay of one month's wage for each year of service. This was calculated by determining the total earnings of the employee in the twelve months prior to termination and dividing that figure by twelve.

The New Law limits this calculation by stipulating that, if the monthly wage is greater than "three times the average monthly wage" of employees in the employer's area (as published by the municipal government), then the rate of severance pay cannot exceed that average wage. In any event, the severance pay calculation cannot cover a period of more than 12 years of work.

Unlawful Termination

In the event that an employee is unlawfully terminated by his or her employer, the New Law stipulates the employee shall be entitled to request reinstatement. Should reinstatement not be feasible, the employee shall be entitled to double severance.

Secondment

While the current Labour Law lacks detailed rules governing secondment or temporary employment arrangements, the New Law explicitly states that secondment arrangements should only be used to fill temporary, secondary, or substitute positions. The New Law also requires that initial employment contracts for secondees should be for no less than two years.

During a secondment, secondees are entitled to the following:

• equal pay for equal work; and 
• the right the join the labour union of the staffing agency or company contracting for the secondee.

Allowable Part-Time Hours Decrease

The New Law decreases the maximum number of working hours for part-time employees from five (5) hours per day or thirty (30) hours per week to four (4) hours per day or twenty-four (24) hours per week for the same employer. Moreover, the compensation for part-time employees may not be lower than the minimum hourly wage rate prescribed by the "People's Government of the place where the Employer is located." Finally, the New Law stipulates that the payment cycle for part-time employees may not exceed once every 15 days.

Conclusion

The New Law introduces a number of significant changes to China’s existing employment law regime.

As the New Law will apply to employees of foreign invested enterprises in China, we recommend that companies doing business in China review their current employment policies prior to 2008 in order to ensure consistency with the New Law.