In China, the legal status of individuals who provide profitable labour service may be summarised into the following four categories:
The first three categories are known as employees and governed by the employment laws and regulations which impose substantial mandatory regulations on their employers, eg, minimum wage and working hours protection. Service contractors, being different from employees, function in the legal domain of non-employment civil relationships, where the mutual agreement between service provider and receiver is highly respected.
Among the three categories of employees, material difference still can be found with respect to statutory entitlement, working standards, termination condition etc. Full-time employment is the standard form of employment applicable for most regular positions while, for temporary, auxiliary and replaceable positions, employees can be hired by labour service agencies and dispatched to work at where they are needed as dispatched employees. Part-time employment is supplementary to the other forms of employment, and widely used for positions that require a high degree of flexible labour, such as housekeepers or cleaners.
In China’s judicial practice, disputes may arise where service contractors claim their employment status as that of employees and request the corresponding entitlement to the legal benefits. Concerned with this potential dispute, companies in China tend to engage individual service providers with caution.
From the angle of contract terms, the contracts for full-time employment can be divided into three types:
Full-time employment contracts, including contracts with dispatched employees, should be executed in written form within one month of the date that the employee initially provides service. Before the end of the contract term, the termination of full-time employment contract is strictly regulated by law.
In contrast, part-time employment contracts can be established orally, and there is no need to set a contract term as the law allows part-time employment contracts to be terminated by either party with immediate effect.
Pursuant to the statutory requirements, full-time employment contracts in China shall include the following terms:
On top of the mandatory terms, employers and employees in China may opt to incorporate further terms into employment contracts including probationary periods, performance targets, professional training, confidentiality obligations, non-competition obligations, IP protection mechanisms and additional employee benefits.
In consideration of different working patterns of different jobs, three types of working hour systems are designed for full-time employees in China:
Part-time employees have a unique working hour system as they are compensated by the hour. Specifically, each employer shall not use the same part-time employee for more than four hours per day, on average, or more than 24 hours per week.
The Chinese labour laws require an employees’ monthly wage to be no lower than the local municipal minimum monthly wage. The municipal minimum monthly wage and minimum hourly rate (applicable for part-time employees) are updated and publicly announced by each local government on a yearly basis. In addition to a base salary, other popular forms of compensation adopted by many employers in China include the 13th month salary, year-end bonus, sales commission and allowances.
In addition to minimum monthly wage requirements, Chinese labour laws mandate the minimum compensation standards for overtime work. Specifically, the lowest compensation standards are 150% (working days), 200% (rest days) and 300% (public holidays) of an employees’ normal salary rate.
Employers in China are under no obligation to increase employees’ compensation, but the reduction of an employees’ salary will not be put into effect without the employees’ consent or under the special circumstances provided by the Provisional Regulations on Wage Payment, promulgated by the former Ministry of Labour and local municipal governments. An example would be the withholding of alimony according to judgment or order of the court.
Public Holiday Entitlement and Statutory Annual Leave
There are 11 days of public holidays in China. In addition to public holidays, full-time employees are entitled to statutory annual leave as long as they have been continuously employed for one full year, accumulatively, with all former and current employers.
The length of statutory annual leave is calculated based on employees’ accumulative employment years. Therefore, employees’ statutory annual leave would be, per annum, either five days (one to ten years accumulative employment), ten days (ten to 20 years accumulative employment) or 15 days (20 or more years accumulative employment). Both public holidays and statutory annual leave are treated as paid days for employees.
Maternity Leave, Birth Leave and Breastfeeding
Female employees in China are entitled to a maternity leave of 98 days. Additionally, if the new birth does not violate China’s family planning regulation, postpartum employees will be entitled to birth leave, the length of which is subject to the local regulations of each city (eg, 30 days in Shanghai). Before the new-borns turn one year old, their mothers can take one-hour paid breaks each working day for breastfeeding.
During the maternity leave and birth leave period, China’s social insurance fund will provide female employees with a maternity allowance. If a female employees’ actual salary standard is higher than the maternity allowance, the employers shall provide the difference, ensuring the compensation standard is not unfavourably changed due to giving birth.
Employees may take paid sick leave when they are suffering from illness or non-work-related injury. The sick leave period is called a medical treatment period. The statutory medical treatment period applicable for each employee is calculated based on employees’ accumulative years of service, accrued with former and current employers, and ranges from three months to 24 months. Employers may unilaterally terminate employees if they need to take sick leave beyond their statutory medical treatment period.
During sick leave periods, employers are required to make sick leave payments to the employees based on the standard agreed in the employment contract or as indicated in employers’ internal sick leave policies. These shall be no lower than the standard prescribed by the local government regulations in different cities of China. Take Beijing as an example, sick leave pay is 80% of the local minimum monthly wage.
In China, an employees’ confidentiality obligation to employers is not explicitly stipulated by law, but is imposed by the principles of good faith and loyalty. The confidentiality obligation applies both during and after employment. However, in practice, it is quite difficult to hold employees liable for any breach of their confidentiality obligation solely based on this general principle. In order to protect the business' secrets and other confidential information, many Chinese employers choose to explicitly stipulate, in employment contracts or confidentiality agreements, a detailed scope of the information that the employers deem confidential, in addition to general reference to employee’s confidentiality obligations.
Under PRC Labour Contract Law, employer and employee may agree on non-competition restrictions in the employment contract or confidentiality agreement, stipulating that, after the termination or ending of the employment contract, the employer shall pay financial compensation to the employee on a monthly basis during the non-competition restriction period.
If the employee breaches the non-competition restrictions, he or she shall pay liquidated damages to the employer, as stipulated in the non-competition agreement. In addition, the personnel subject to competition restrictions shall be limited to the employer’s senior management, senior technicians and other personnel with confidentiality obligations.
The scope, territory and term of non-competition restrictions shall be agreed upon by the employer and the employee, and the term of non-competition restriction shall not exceed two years. In the restricted period, the employee cannot work for a competing employer that produces the same type of products or engages in the same type of business as his or her current employer, or establish his or her own business to produce the same type of products or engage in the same type of business.
As mentioned, if an employee performs the agreed non-competition obligation, the employers shall provide financial compensation to the employees on a monthly basis. If the financial compensation is not agreed in the employment contract or the non-competition agreement, the national default compensation standard is 30% of the employee’s average monthly salary of the 12 months prior to the termination of his or her employment.
This default compensation standard sets the statutory guideline, however, employer and employee may agree on a higher or lower standard based on local government regulations. For example, Shenzhen provides a higher level of compensation at 50% of the employee’s average monthly salary from the 12 months prior to the termination of employment.
When employees breach the non-competition obligation, employers are entitled to claim the agreed liabilities for the breach, which usually include continued performance of non-competition, payment of liquidated damages, refund of the paid financial compensation and recovery of actual losses suffered by the employers beyond the amount of liquidated damages.
Apart from the financial liabilities for employees’ breach, it is difficult to enforce non-competition obligations under current judicial practice in China. There are two major reasons for this:
It is difficult to find the legal definition of non-solicitation obligation in any PRC statutes, let alone the statutory remedy for any breach of this obligation. However, regardless of this legislative blankness, the non-solicitation obligation is widely used in labour practice in China, as the very existence of a non-solicitation obligation satisfies the general business needs of the employers.
The non-solicitation obligation is usually phrased to make clear that employees shall not directly or indirectly solicit, induce or encourage any others to leave their employment, or any customers to end their business relationship with the employers, both during employment and for a certain period after the termination of employment.
Due to the lack of a legal basis for non-solicitation, it may be still premature to conclude on the validity of the non-solicitation clause. Based on analysis of previous cases, Chinese courts have explored the validity of the non-solicitation clause by weighting different factors in different cases, eg, whether the employees have accepted the non-solicitation clause after sufficient explanation or notification, or whether the burden on employees was unreasonably onerous.
In light of this, it is no wonder the enforceability of the non-solicitation clause is weak under current PRC judicial practice. In theory, employers can claim for recovery of financial losses suffered due to an employee breach of non-solicitation. However, due to the difficulty in providing evidence on the existence of solicitation and the financial losses connected, it is unlikely for employers to succeed in a claim against a violation of non-solicitation obligation.
A comprehensive legal system on data privacy hasn’t yet been well established in China, though there are some general rules on protection of personal information scattered in the existing PRC statues.
Under the regime of employment regulation, employers in China have the right to collect employees’ personal information related to performance of employment including name, gender, ID number, contact details, education background and work experience. Employers are also under legal obligation to keep employees’ personal information confidential and use such information only for the purpose of employment.
In practice, to avoid dispute on use of personal information, employers in China usually request written acknowledgment from employees, authorising use of personal information for employment purposes, upon commencement of employment.
It is worth noting that, since online HR system are widely used by employers in China to collect and store employees’ personal information, employers should also comply with the PRC Cyber Security Law when using an online system to process employees’ personal information. The relevant rules posed by the PRC Cyber Security Law are summarised as follows:
China has formulated recommended national standards for the protection of personal information. The Information Security Technology – Personal Information Security Specification, as a recommended national standard, provides guidance for employers to collect and process personal information.
Although this technical standard is not compulsory, it does provide a best practice reference for employers when collecting and processing employees’ personal information. An example from the Personal Information Security Specification would be that employers shall not collect personal information from illegal sources, shall minimise amount of information collected, shall collect personally sensitive information with the clear consent of the subjects and take measures to control access to personal information.
China is a country with one unified sovereignty but multiple legal jurisdictions. Therefore, it is necessary to mention two points of note to the subject of foreign workers under the PRC employment regime before going any further. In August 2018, the PRC State Council decided to cancel the work permit requirement allowing Hong Kong, Macao and Taiwan residents to work in mainland China, which signifies that these groups of residents will be granted almost the same employment standards as mainland residents when working in the mainland.
As for national identification of individuals, the PRC Nationality Law prescribes that a Chinese national is deemed as having lost Chinese nationality once foreign nationality is obtained. In view of these aspects, foreign workers, as discussed below, will not refer to China’s Hong Kong, Macao and Taiwan residents but will include individuals who lose their Chinese nationality.
The use of foreign workers is regulated in China and subject to pre-approval by the authorities of the State Administration of Foreign Experts Affairs ('SAFEA'). Under PRC immigration laws and regulations, foreign workers shall apply for and obtain work permits and residence permits to have legitimate working and residential status in China. Failure to obtain valid work permits and residence permits may subject the foreign workers to penalties including warnings, fines, ordered exit from China within a prescribed time, detention or even deportation.
The threshold requirements for a foreigner to work in China are as follows:
The detailed standards to determine whether a foreigner is qualified to work in China will be discussed in 4.2 Registration Requirements.
The registration requirements for foreign workers to work in China differ based on the working period. Where foreign workers are to complete short-term tasks (ie, less than a 90 day stay in China) at a subsidiary company, branch company or representative office in China, or to install, repair or provide guidance on use of certain machineries at plants in China, they may apply for business visas to enter China and be exempt from obtaining a work permit.
Where the required working period exceeds 90 days, foreign workers are legally obligated to obtain both the work permit and residence permit. To obtain the work permit and residence permit, foreign workers usually establish either of the following two kinds of legal relationship:
For the second approach listed above, the foreign workers may not establish an employment relationship with Chinese entities governed by PRC Labour Contract Law and retain their original offshore employment, which is the reason this approach is preferred by multinationals in most cases.
To implement the international assignment effectively, two more conditions need to be satisfied:
Upon establishment of the legal framework, the personal profiles of a foreign worker need to be submitted for review to the SAFEA authority in China which administrates the granting of work permits to foreign applicants. During the review process, the SAFEA authority in China examines the specific conditions of the applicants against the permissible standards for granting a work permit. The most widely fulfilled standard to obtain a work permit from the SAFEA authority is that the foreign workers hold a bachelor degree or higher and have already accrued two years of working experience in relation to the position they are about to serve in China.
If the foreign workers are to receive extremely high salary in China, ie, higher than six times the municipal average monthly salary announced in the working city, it will be quite easy for these foreigner workers to apply for and obtain work permits.
Among the permissible standards for granting a work permit, the SAFEA authority in China uses a point-based system to ensure a comprehensive evaluation of foreign applicants. The point-based system accurately quantifies foreign workers’ conditions from the aspects of overall employment years, working periods in China, salary standard, educational background, current age and Chinese language proficiency. Take educational background as an example, bachelor’s degrees, master’s degrees and doctoral degrees respectively score 10, 15 and 20 points in the point-based system. If the final score of a foreign worker is over 60 points, then the applicant will be deemed qualified to obtain the work permit.
After foreign workers have successfully obtained the work permit, a residence permit must be applied for at the exit-entry administration authority in China. The residence permit will be issued to foreign workers once the exit-entry administration authority verifies that valid work permits are held. By bearing the residence permit, foreign workers are entitled to multiple entries into China with no limitation on each single period of stay, as long as the residence permit is within its validity period.
Under PRC Trade Union Law, the Chinese trade union is the organisation spontaneously founded by workers and the All-China Federation of Trade Unions ('ACFTU') is the leading body of trade unions in China. According to the Articles of Association of the ACFTU, the Chinese trade union is a working class mass organisation led by the Communist Party of China, a bridge and link between the Party and the workers, an important social pillar of the state power, and a representative of the interests of members and workers .
From PRC law prospective, trade unions and other employing entities are the bridge and bond that connect employers and employees. The employers consult the trade unions about their policies and other issues relating to employees, meanwhile, opinions, suggestions or requests collected from the employees are fed back through trade unions to the employers as reference for employers’ decision-making.
Trade unions also play a part to relieve social pressure by harmonising the relationship between the employers and employees should a potential dispute arise between them. As required by PRC Labour Contract Law and Trade Union Law, when employers intend to unilaterally terminate employees, the reasons for such termination shall be notified to the trade unions in advance and the trade unions retain the right to demand employers make rectification if any violation of the applicable laws is discovered.
To implement the duties of representing and safeguarding the interests of employees, the trade union supervises the daily operation of the employee representative assembly and consults the employers on various employment matters. The participation of trade unions in collective consultation on various employment related decisions is also mandated by law in China. When employers plan to formulate or amend policies that have a direct impact on employees' immediate rights and interests, these policies shall be presented to the trade union, or all employees, for discussion. After the proposal or opinions being collected during the discussion process, the trade unions or employee representatives shall be consulted based on equal negotiation.
The PRC Trade Union Law prescribes that enterprises and other employing entities shall establish internal trade unions if the number of trade union member exceeds 25. Under current practice in China, although trade unions have not been established in every company, especially in foreign invested companies, enterprises with large number of employees are frequently lobbied to form trade unions by officials from the ACFTU local district branch or local labour department.
Under PRC regulations on employee representative bodies, the Employee Representative Assembly and the Employee’s Assembly (collectively referred to the 'ERA') are the basic forms in China for enterprises to practice democratic administration and functions, being the body through which employees can exercise their right to participate in democratic administration.
The general duties of an ERA include advice and supervision on employment related matters as well as democratic appraisal of enterprise development plans. The rules and policies that have a direct impact on employees' immediate rights, interests and redundancy plans shall go through consultation with, and be reviewed by, the ERA. In addition, the ERA performs its duties by supervising employers’ performance of the collective agreements, contribution to employees’ social insurance and satisfactory protection for labour safety etc.
With respect to the composition and operation of the ERA, there have been no uniformed national rules applied to all kinds of organisation. The Regulations of the Workers' Congress of Industrial Enterprises Owned by the Whole People apply to state-owned enterprises only. The local governments of provinces and cities (such as Shanghai, Gansu and Tibet) have issued their own regulations on how the ERA should be convened and held. Under these local regulations, trade unions shall help and guide the companies to elect employee representatives based on the number of total staff. The number of employee representatives should not be less than 30 people, and the ERA should be held at least once a year.
Under PRC labour laws and regulations, collective agreements refer to written agreements concluded through a collective consultation between employers and their employees on matters of remunerations, working hours, rest days and leaves, labour safety and hygiene, vocational training, social insurance and welfare benefits.
During the consultation for collective agreements, both employers and employees shall have an equal number of, and no less than three, representatives with one chief representative appointed on each side. The consultation representatives for the employees shall be selected by the trade unions. Where there are no trade unions established, the consultation representatives shall be elected by a majority of the employees.
The collective agreements shall be signed by the chief representatives of both sides. After the execution of the collective agreements, the agreement should be filed for review by the labour administration department. If there is no objection from the labour administration department after 15 days have passed, the collective agreements take effect and the employers and all their employees become legally bound. The labour remuneration and other employment conditions agreed in individual employment contracts with employees shall not be less favourable than those agreed in the collective agreement.
If a dispute arises in the course of a consultation for a collective agreement, either party may submit a written application for co-ordination to the labour authority, or the labour authority may directly intervene to co-ordinate when it deems as necessary. Labour disputes arising from the performance of the collective agreements can be resolved through labour arbitration proceedings. The trade unions initiate the labour arbitration or litigation proceedings against the employers if any violation of the collective agreement and infringement upon employees’ rights is discovered.
As the general philosophy of China’s employment laws is quite pro-employee, termination of employment by employers is highly regulated. Employers can only unilaterally terminate employees if a statutory condition appears. When a labour arbitration tribunal or court in China decides that a termination decision made by an employer is wrongful, the employer will be liable to pay double the statutory severance to the employee, or even reinstate employment (see 7.1 Wrongful Dismissal Claim).
Termination for Cause by Employer
An employer’s legitimate termination in China can be affected when the employees:
Termination with Thirty Days’ Notice by Employer
Under PRC Labour Contract Law, termination by prior 30-day notice is only allowed under the following statutory scenarios, ie, illness or non-work-related injury, incompetency and change of objective circumstance which renders the employment contract no longer performable. To implement employers’ termination by notice, certain procedures must be fulfilled by employers prior to the termination.
Termination due to employee’s long-term sick leave
In the case of long-term illness, employees are legally entitled to the statutory medical treatment period ('SMTP') and employers are forbidden from terminating the employees for illness during the SMTP. Upon employees’ exhaustion of their SMTP, if they are unable to serve in their original positions or the alternative positions arranged by employers, the employers may terminate the employees by serving a 30-day notice, or by paying the employees one-month salary in lieu of notice.
Termination due to employee’s incompetency
If employees are deemed as incompetent by their employers, the employers are required to either change their job positions or provide training. If the employees remain incompetent after their job positions are changed or training has been provided, the employers may proceed with the termination by serving the employees with a 30-day notice or paying them one-month salary in lieu of notice.
Termination due to change of objective circumstance
In cases of the material change of objective circumstance rendering the original employment contract no longer performable, employers are obligated to negotiate with the employees for the amendment of their original employment contract. If no agreement is reached after the negotiation, employers may terminate the employees by providing the employees a 30-day notice or paying them one-month salary in lieu of notice. The objective circumstances can include workplace relocation, asset transfer, or change of business modal or product structure etc, which in practice are mostly under the discretion of labour arbitrators and judges.
If the employers fail to observe the procedural requirement before terminating the employees, the termination will likely be deemed as wrongful.
Termination by Employee
Under PRC Labour Contract Law, where an employer displays any of the following circumstances, its employees may terminate the employment contract without informing the employer in advance:
Employees may even terminate the employment contract, without any notice, in two exceptional conditions which include where employees are forced to work by means of violence, threat or illegally restrained personal freedom, or where the employers violate safety regulations and order employees to perform dangerous operations that are life-threatening.
In addition to the termination avenues mentioned above, the employers in China may also pursue employment termination by evoking mass redundancy and undergoing the correspondent procedures. There are two thresholds for employers who wish to initiate the mass redundancy:
Under Article 41 of PRC Labour Contract Law, the applicable situations for employers to evoke mass redundancy include:
As mass redundancy usually involves termination with a large number of employees, the procedures for mass redundancy are strictly reviewed by the authorities of local labour administration department.
Before employers lay off their employees, they should report to the labour administration department of the Human Resources and Social Security Bureau ('HRSSB') of the municipal, district or county level, and the following procedures should be implemented:
If there are retention opportunities, the following employees shall be prioritised:
The labour administration department of the HRSSB should provide a written response within fifteen days of accepting the report from the employers. Employers can carry out the layoff plan only after receiving the written response from the labour authorities.
On one hand, under PRC Labour Contract Law, employers in China are only allowed to terminate employees with a 30-day notice under the scenarios mentioned in 6.1 Grounds for Termination. Even if employers and employees agree on termination with an alternative period of notice for no reason, the agreement will be deemed invalid and the employers cannot terminate the employees for no reason by serving them the agreed notice in contradiction with the statute.
On the other hand, employees are entitled to terminate their employment relationship by serving a 30-day notice, or a 3-day notice during the probationary period, to their employers.
PRC Labour Contract Law prescribes certain special conditions under which employees may terminate employment with immediate effect, without notice (see 6.1 Grounds for Termination)
For terminations effectuated by notice or under mass redundancy, the employers are required to pay severance based on employees’ years of service with the employers at the rate of one month's wage for each year of service. Any period more than six months but less than one year shall be counted as one year. Any period less than six months shall be paid with one half of an employees’ monthly wage.
If an employees’ monthly wage is greater than three times the average monthly wage of the locality, as published by the local government, the rate of severance payable shall match, ie, be three times the average monthly wage of the locality, and the severance will be capped at 12 months.
However, this only applies for the period after 1 January 2008, when PRC Labour Contract Law became effective. For periods prior to 1 January 2008, severance is based on the number of years the employees have worked for the employers at the rate of one month’s wage for each year the employee has worked. Each period less than a full year will be counted as a full year and there is no cap on the monthly amount to be paid. The payment of statutory severance is due once the terminated employees have completed any handover requested by employers.
Under PRC Labour Contract Law, an employer may terminate an employee with immediate effect in the case of an employee’s material violation of employer’s internal rules, which is the same as dismissal for (serious) cause leading to a summary dismissal. To implement a summary dismissal, employers serve a written termination notice to employees in which the employees’ misconducts are explicitly specified. In addition, employers are under a legal obligation to notify trade union regarding any summary dismissal.
Employees who are summarily dismissed in China are able to make a claim, to the labour arbitration commission or court, that they have been wrongfully terminated. If the employees succeed in the claim of wrongful termination, they will be entitled to either double severance pay or reinstatement of employment, based on the employees’ choice (See 7.1 Wrongful Dismissal Claim).
During the labour dispute resolution process, the employers will bear the burden of proving the summary dismissal is legitimate and take the adverse consequences if the proof regarding the summary dismissal is deemed insufficient by labour arbitration commission or court. As such, to mitigate the potential risks, employers in China are usually counselled to use summary dismissal with substantial prudence and collect solid or at least admissible evidence on employees’ misconducts before implementing the summary dismissal.
Under PRC Labour Contract Law, employers may enter into a mutual termination agreement with employees. Excepting very limited statutory circumstances, employers may propose a mutual termination agreement at any time within the term of the employment contract.
In practice, termination through mutual agreements is one of the best ways to exit an employment relationship between employer and employee with no requirement on prior notice and the least potential legal risk of being sued by employees. However, the employer shall provide statutory severance to the employees if the mutual termination is proposed by employers.
Employers in China are prohibited from terminating certain employees by notice or through mass redundancy. These employees include:
Additionally, employers cannot terminate or end an employment contract with the full-time chairman, vice chairman and commission members of the trade union during their term. Their employment contract shall be extended to match their office term. For a part-time chairman, vice chairman or commission member whose contract term is shorter than their office term, the contract term shall be automatically extended to the end of their office term.
If employees in China believe they are wrongfully dismissed, they may resort to either of the following two remedies according to PRC Labour Contract Law:
Pursuant to PRC Labour Law, Employment Promotion Law and relevant regulations, employees shall not be discriminated against due to their nationality, race, gender or religious belief both during the process of recruitment and the performance of established employment.
Recent regulative momentum in China demonstrates that employers are forbidden to exert discriminatory standards against female candidates due to their marital status or pregnancy during the process of recruitment. Any employer that releases recruitment information that is found discriminatory against females may be subject to a warning or even a fine from the relevant labour authority.
In China, the aggregate number of disputes arising from discrimination is rather small compared with disputes on employers’ wrongful dismissals or underpayment of labour remuneration. Among the decided cases related to discrimination, quite a few disputes occur where employees dispatched by a labour service agency claim for equal treatment with employees that are directly hired by employers regarding remuneration and other beneficiary entitlements. In addition, in recent years special cases have been seen where employers are ruled as wrongful to place employees diagnosed as HIV carriers on compulsory leave.
In anti-discrimination cases, the grieved employees usually bear the burden of preliminarily proving the existence of the discrimination. The remedy available for such employees is not mandated by law but ruled on a case-by-case approach, including rectification of discrimination, compensation for mental suffering or formal apology from employers. Where employers are found to have committed wrongful dismissal due to discrimination, employees are entitled to the statutory remedies mentioned in 7.1 Wrongful Dismissal Claim.
According to PRC Mediation and Arbitration Law on Labour Dispute, employment disputes usually go through two stages of judicial procedures which are knows as labour arbitration and labour litigation. The employment disputes at labour arbitration and labour litigation are respectively heard by the labour arbitration commission and the Chinese courts. In practice, if either party to the dispute is dissatisfied with the award given by the labour arbitration commission, they may promptly proceed to initiate labour litigation, otherwise the arbitral award will become effective and enforceable.
In short, labour disputes shall first be submitted to the labour arbitration commission, this being a pre-condition for initiating labour litigation. The labour litigation stage may include two legal proceedings, ie, the first instance and the second instance. If either party to the dispute is dissatisfied with the judgement of the first instance, they may further appeal to a higher court for the second instance, and the court of second instance issues the final judgement of the dispute.
However, the PRC law limits the employers, but not the employees, from initiating labour litigation following the labour arbitration award for two kinds of cases:
This limitation on the employers’ right to further initiate the labour litigation is one of the key demonstrations of preferential treatment for employees in China. This arrangement is believed to facilitate an efficient resolution of employment disputes for employees whilst preventing employers from unduly prolonging the contentious period and delaying the performance of their obligations to employees.
Employers and employees may choose to solve employment disputes via mediation before heading into a labour arbitration. The mediation institutions in China include:
The settlement agreements reached between employers and employees during the mediation process, witnessed by mediation institutions, are legally effective. However, parties to these settlement agreements are unable to apply for court enforcement of such agreements without reviewing the substance of the original dispute.
As provided by the Regulation on Labour Security Supervision, an employee who believes that an employer has infringed upon his or her lawful rights or interests under employment law may make a complaint to the authority of labour security administration. The authority of labour security administration is responsible for accepting reports and complaints on violation of labour security laws, regulations or rules and lawfully investigating, correcting and punishing the violations.
In PRC judicial practice, the prevailing party in labour disputes will not be supported in recovering legal fees accrued during the contentious period. However, there is an exception to this practice. Pursuant to the local regulation in Shenzhen, when employees succeed in a labour case they may claim an attorney’s fee from the employer with the amount capped at RMB5,000.
Facing new economic climates and innovative developments in the business sector, China’s employment law legislation and judicial practice have constantly evolved to respond to the changes. We have selected several employment law areas that are particularly noteworthy for employers, and this article is aimed at sharing our insights with the reader. Note that, although the areas may not be connected to each other, each area represents a new trend and development in employment law and practice.
The areas that this article is trying to cover include: new green card policies, the current redundancy situation in the market, new non-compete cases, social insurance reform and boundaries between employees and contractors in the gig economy.
New Policies on Green Cards for Foreigners Working in China
The point of having an employment-based green card for foreigners working in China (employment-based permanent residence permit) is that it is no longer necessary to apply for a work permit in order to work in China (otherwise foreigners will need to apply for both a work permit and a residence permit). It was widely acknowledged that obtaining a Chinese green card was difficult.
According to the Annual Report on Chinese International Migration, China has only issued approximately 10,000 green cards since 2004 (when China’s "green card” was first issued) to 2016, and 1,576 of those were issued in 2016. By comparison, according to the United States Department of Homeland Security, the US issued about 14 million green cards from 2004 to 2016. In 2016 alone, the US issued 1.18 million green cards.
In recent years, China has ushered in measures to lower the requirements for applicants who wish to apply for an employment-based green card by expanding the scope of foreigners who wish to apply for one. In July 2019, the National Immigration Administration issued 12 immigration-friendly policies, which were implemented nationwide from 1 August 2019. The implementation of these policies is a crucial step in further expanding the scope of eligible foreign applicants for employment-based green cards.
For employers, it is particularly noteworthy that one of the policies further lowered the conditions for eligible foreigners who wish to apply for an employment-based green card.
The previous policy dictated that, in order to apply for an employment-based green card, an applicant had to satisfy certain conditions, some of which were quite onerous. For example, one of the requirements was that the applicant employee had to have been employed as a deputy GM, or higher, in a high-tech company.
The new requirements are less onerous and the scope of eligible applicants is now wider. For example, as long as an applicant can meet the following requirements, the applicant is considered eligible under PRC laws to apply for an employment-based green card if he or she:
With these new policies and trends, it is expected that China will likely widen the scope of green card eligibility further in the future. This will be beneficial for employers in China, who will have more options and greater freedom when it comes to hiring employees. At the same time, more pressure may be placed on domestic employees who will face competition from more and more foreigners.
Employment Termination – Redundancy as an Example
Due to market changes, several sectors in China saw large-scale redundancy projects in 2018 and early 2019.
Article 41 of the PRC Employment Contract Law governs the concept of “economic lay-off” (commonly known as redundancy). It provides that, under certain circumstances (eg when there is a major change in the objective economic situation making employment contract performance no longer possible), an employer should inform and consult the trade union or all employees 30 days in advance of a lay-off, provided that the employer needs to lay off 20 employees or more or at least 10% of the total number of employees. Following the consultation, the employer can lay off employees upon filing a lay-off plan with the local labour bureau. Note that, under PRC laws, the burden of proof to establish an lawful unilateral termination lies with the employer. If the termination is considered to be unlawful insofar as the arbitration and litigation proceedings are concerned, the employee can demand either double severance pay or reinstatement with back pay. So, under Article 41 an employer must prove that a statutory situation has arisen which entitles the employer to lay off employees. In practice, failure to provide supporting evidence will result in the unilateral termination being considered unlawful.
Article 41 of the PRC Employment Contract Law provides for several situations where the redundancy process can be invoked. These statutory situations include: (i) restructuring pursuant to the Enterprise Bankruptcy Law; (ii) serious difficulties in production and/or business operations; (iii) switching production models, introducing major technological innovations or changing its business mode but still needing to reduce its workforce after amending employment contracts; and (iv) when there is a major change in the objective economic situation which makes contract performance no longer possible. As to the specific requirements of each situation, Article 41 remains silent. In practice, employers will need to test the water according to local precedents.
In the current market, more and more employers are trying to resort to the number (iv) situation above. Most of the cases involving employers using the number (iv) situation have taken place in major cities such as Beijing and Shanghai. We have carried out extensive case research in both Beijing and Shanghai and, according to the research results and our experience, in Beijing more situations may be considered by the court to be situations that can meet the requirements of the number (iv) as compared to Shanghai.
In Beijing, generally speaking, situations that can be considered as major changes to the objective economic situation under Article 41 can include; (i) decreasing the cost of employment; (ii) separation of business operations; (iii) a change of national policies; (iv) termination of outsourcing services and; (v) office relocation. From our own experience and research results, it appears that the courts in Beijing also take into consideration whether the filing of a layoff plan with the local labour bureau has been considered an important factor when judging the legality of the redundancy.
In Shanghai, however, there are only limited circumstances that can be considered as major changes to the objective economic situation under Article 41 (ie only relocation of office due to policy changes and serious operational difficulties). This is mainly due to the strict standards held by the local authorities and the courts. It appears that the labour authorities and courts in Beijing are more open to the idea of redundancy, whereas in Shanghai, due to their strict standards, employers may have to choose other grounds to execute redundancies.
It is also noteworthy that, back in 2008 when an economic crisis was sweeping across the globe, there were some cases in China where employers successfully resorted to Article 41(4) for redundancy, using economic hardship as the background. Having seen the increase in redundancy projects resorting to Article 41(4), especially considering the ongoing trade war between China and the US, it will be interesting to see whether more employers will use Article 41(4) and, more importantly, whether the economic hardship caused by the trade war will come into play.
Under PRC laws, an employer and an employee who are subject to confidentiality obligations may agree on a non-compete clause for a period of up to two years following the termination of the employment relationship to prohibit the employee from competing with the employer. To compensate such an obligation, the employer should pay the employee non-compete compensation in monthly instalments. If the employee breaches his or her non-compete obligations, the employer can demand that the employee pay agreed liquidated damages.
It is noteworthy that employers are becoming more aware of their right to demand the payment of liquidated damages from their ex-employees and ex-employees are becoming more aware of the need to protect themselves from claims from previous employers. The overall trend is that there are more and more employment dispute cases based on non-compete clauses and the law has started to see cases involving ever-greater amounts of liquidated damages.
In a case initiated by a leading Chinese tech company against its former senior developer, the company requested the developer to pay a sum of RMB19.4 million as liquidated damages for breaching non-compete obligations. The amount of liquidated damages in this case set a record and caused heated discussion in the industry.
The developer, as an employee who had access to key trade secrets and other important confidential information during work, entered into a confidentiality and non-compete agreement with the company in which some restricted stocks of affiliated companies were granted in compensation for the non-compete obligations. In the agreement, it was clearly stipulated that, should the developer breach those obligations, the developer must return all of the income generated from the restricted stocks during the course of his employment.
It later turned out that the developer established a company that developed a number of programmes similar to the programmes developed by his previous employer. After being sued by the company, the developer argued that the company did not pay him non-compete compensation on a monthly basis after the termination of the employment relationship, therefore he was not subject to any non-compete obligations and need not pay liquidated damages to the company.
The court ruled, however, that as the granting of restricted stock to the developer had been expressly stipulated in the agreement as compensation for accepting the non-compete obligations, the paying back all the income received from restricted stocks had been expressly stipulated as liquidated damages for breaching the non-compete obligations. Therefore, the agreement was a valid agreement.
Now that employers are waking up to their rights, taking into account the fast-growing competition between competitors in the market, it is likely that more industries are likely to witness non-compete dispute cases involving greater liquidated damages and more complicated evidence.
This trend presents new challenges for employers trying to go after ex-employees for breaching non-compete agreements. Such challenges involve the better design of non-compete agreements and on gathering and organising evidence on the competing actions of ex-employees. From another angle, when an employer is preparing to employ a new employee, it now becomes ever more important to dig a little deeper into the possibility of the new employee being subject to non-compete obligations with his or her ex-employer.
Social Insurance Reform
On 20 July 2018, the CPC Central Committee and General Office of the State Council announced the Plan for Reform of the State and Local Tax Collection and Administration Systems (“Plan”). The Plan provides that from 1 January 2019 social insurance contributions, namely contributions of basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance, and maternity insurance shall be under the control of tax bureaus.
Prior to the reforms, social insurance authorities were solely responsible for examining and collecting social insurance contributions in most cities in China. While in some cities the local tax bureaus only collected social insurance contributions on behalf of the social insurance authorities, the social insurance authorities were still responsible for examining social insurance contributions.
As this new rule becomes effective nationwide, in addition to collecting social insurance contributions, the tax bureaus shall also be responsible for examining key information relating to employers’ social insurance declarations, including the number of employees, the amount of the employees’ salaries, the base for social insurance contributions, periods of contribution etc. Since the tax bureaus are now responsible for examining both tax and social insurance contributions, it is likely that an employer’s failure to comply in either aspect will result in an audit of both. Having all of this information under one roof provides for greater transparency. Moreover, unlike other departments, tax bureaus have the capacity to impose penalties. In a nutshell, this presents a challenge for employers in terms of social insurance and tax compliance.
For years, it has been regularly seen in practice that employers avoid or underpay social insurance contributions so as to reduce the costs of employment. In most cases, this was done through methods such as understating the headcount or using a smaller base for calculating the social insurance contribution (eg the local minimum salary is used as the base for calculating contributions, with salaries in excess of that sum being paid to employees in cash). These practices were and are illegal under PRC laws. However, due to the low possibility of these practices being tracked down and a lack of enforcement by the authorities, these methods have been adopted by some employers. Going forward, however, employers will have to report salaries accurately and headcount data to the tax authorities.
Considering the heavier reporting responsibilities, and in order to incentivise employers to follow the strict reporting requirements better, according to the Comprehensive Plan for Reducing the Social Insurance Contribution Rates issued by the General Office of the State Council, the employers’ contribution rate of basic pension insurance for urban employees was reduced on 1 May 2019. In places where the employer’s pension insurance contribution rate is higher than 16%, the rate may be reduced to 16%. In the places where unemployment insurance contribution is at the rate of 1%, employers can keep contributing at this rate until 30 April 2020. In terms of work-related injury insurance, the contribution rate reduction will be extended to 30 April 2020. This reduction of contribution rates for social insurance will further relieve the burden on businesses and improve the business environment.
Gig-related Workers: Independent Contractors or Employees?
With the rapid development of the “gig economy”, the legal relationship between app-based platform operators such as Didi transportation (an online taxi-booking platform), Meituan delivery (food delivery service-providers), Shansong express (door-to-door same-day delivery services) and workers who provide on-demand services to customers through such platforms, has raised the profile of highly disputed issues which have attracted heightened attention.
On the one hand, companies tend to classify such workers as independent contractors so as to avoid establishing an employment relationship. On the other hand, however, workers constantly bring lawsuits requesting that labour arbitration commissions and courts recognise the existence of an employment relationship. In response to this issue, legislation has been enacted which, together with recent cases, will shed light on this issue.
Regarding the relationship between online taxi-booking platform companies (“Platforms”) and drivers, the Ministry of Transport effectuated the Interim Measures on the Management of Operation and Services of Online-booking Taxis (“Measures”) on 1 November 2016. These Measures provide that Platforms shall enter into various forms of employment contracts or agreements with drivers based on factors such as working hours and service frequencies. These agreements can be civil agreements as well as employment contracts, depending on the management needs of the Platforms.
It is noteworthy that in the draft of Measures published on 10 October 2015, Platforms were required to enter into employment contracts with drivers. Per this requirement, Platforms shall fulfil various obligations as employers, such as salary payments, holiday entitlements, social insurance and housing fund contributions etc. This will increase the human resource costs for Platforms dramatically. In the process of soliciting opinions for the draft, the argument that the acknowledgement of an employment relationship with a Platform will increase the economic burden of such a Platform (which does not accord with the spirit of the gig economy) played a decisive role in removing this requirement from the later effective Measures. The effective Measures made it clear that Platforms were not necessarily employers.
There have been some recent cases on this issue and the focus of arbitrators and judges has been on the following major factors: to what degree are the service providers are under the Platforms’ management?; how do they receive remuneration from their services?; and whether the services provided constitute a part of the Platforms’ regular business.
In a case in Beijing in 2018, the plaintiff, a designated driver, provided driving services through the Platform operated by the defendant. The court found that the plaintiff and other drivers downloaded and installed a mobile application through which the defendant could locate the drivers. When drivers were willing to provide services they kept the app open, when not they went offline. The drivers and the Platform split the service fees paid by customers in an agreed manner. The defendant did not provide a base salary payment to the plaintiff. On a few occasions, the Platform issued instructions to the plaintiff, such as ordering the plaintiff to expedite services. However, during the nine-month time of service the plaintiff only delivered around 18 services per month.
It was held that, despite the fact that the Platform supervised and instructed the plaintiff to a certain degree and considering the low frequency of service being provided and the flexibility of the plaintiff to decide whether to work or not there was lack of management on the part of the defendant. To constitute an employment relationship, the employee’s subordination to the employer has to be continuous and stable. In this case, the management of the plaintiff was not sufficient to establish an employment relationship under PRC law. In addition, it was held that the defendant did not provide base salary payment and only split the income with the plaintiff, so it was more of a co-operation between them.
This opinion was also echoed in a similar case heard in Shenzhen in 2018. It was held that, since the nature of the Platforms’ operation was that the individual service-provider usually worked in a flexible way without accepting direct orders from the Platform, the relationship does not accord with the requirements of an employment relationship and hence the individual service provider should not be considered an employee of the Platform.
Thus, from the two recent cases above, it can be seen that the current judicial practice is on the same page as the requirements of the Measures. Judges will look into the operations and management of the Platforms to determine how much control a Platform has over the work of individual service providers.
China’s employment law and practice, much like China’s economy, is constantly evolving in order to cope with the fast pace of economic development. Many issues, such as green cards and redundancy policies will have a profound impact on the employers’ daily operations.
The trends and developments summarised in this article are, however, only a small part of the greater picture and we can anticipate that in the near future there will be more trends and developments of employment law and practice that will require the employers’ attention.