The employment laws and regulations in China continued to evolve with technical advancements and social developments over the last 12 months. The top three changes or updates in relation to employment practice have been selected.
Confirmed Validity of Employment Contract in Electronic Form
The Ministry of Human Resources and Social Security (MOHRSS) officially confirmed the validity of employment contracts concluded in electronic form. The MOHRSS also prescribes that, for an electronical employment contract, the employers shall ensure that the generation, transmission and storage of the contracts satisfy the requirements stipulated in the PRC Electronic Signature Law and other applicable laws.
The Legislation of the PRC Civil Code
China’s first Civil Code has been voted to pass and is expected to further refine the Chinese legal system and the rules of conduct in the civil and commercial fields. Though employment laws and regulations are not included in the Civil Code, certain new rules within it will still have implications for employment practice. For example, the Civil Code imposes legal obligation on data privacy and sexual harassment, which will be applied in the form of employers’ obligation to protect employees’ personal information and prevent sexual harassment in workplace. The PRC Civil Code will come into effect as from 1 January 2021.
Employee Sharing Mode Obtained Official Support
The COVID-19 pandemic has caused various restrictive measures to be adopted, such as social distancing, suspension of public transport and city lockdowns. Due to drastically reduced people flow, traditional retailers in China such as catering service and shopping malls have suffered serious business difficulty and manpower surplus. Contrarily, online retailers that offer delivery services experienced a boom in demand, creating business success and an increased need for manpower.
Against this backdrop, the employee sharing mode has emerged to optimise manpower allocation among different employers. Specifically, the employee sharing mode allows employers to retain their employment relationship with their idle employees and temporarily share them with a third party which reimburses the employer for the use of the employees.
The MOHRSS openly recognised the legality of the employee sharing mode, guiding the collaborative companies to execute civil agreements for detailed arrangements and stressed that employees shall not be shared for a profitable purpose.
After the outbreak of the COVID-19 pandemic, the Chinese government has acted promptly to cope with this public health emergency and promulgated a series of regulations and policies to ensure employment stability and harmonise employment relationship. Specifically, the MOHRSS issued two important circulars which clarify employer and employee’s rights and obligations during the pandemic period.
The MOHRSS circulars on employment relationship during pandemic, employment stability and work resumption can be viewed as permanent regulative instruments to cope with the COVID-19 pandemic. While the travel ban is believed to be a temporary measure by the Chinese government which may be lifted after the pandemic becomes more under control on a global scale.
The MOHRSS Circular on Employment Relationship during Pandemic
In January 2020, the MOHRSS first issued the circular to regulate employment relationships during the COVID-19 pandemic, which stipulates that, for employees who fail to work because they are confirmed, suspected or close contacts of COVID-19 cases, employers shall pay a normal salary during the quarantine and medical observation period. The employers shall also pay a salary to employees who cannot work due to quarantine or other emergency measures adopted by the government. In addition, employers are restricted from terminating the employment of said employees by invoking the Article 40 or 41 of the PRC Employment Contract Law.
The MOHRSS Circular on Employment Stability and Work Resumption
In February 2020, the MOHRSS issued the circular on support of employment stability and work resumption, which provided guidance for employers in China to handle employment and resume work during this special time. This circular advises employers to explore arranging work from home, adopt flexible working hours to avoid large gatherings of people, adjust salary or rotate shifts with the consensus of employees, and implement suspension of operation and production for employees who are unable to resume normal work after the exhaustion of all leave.
The Travel Ban
The COVID-19 pandemic also impacted PRC immigration regulations. The Ministry of Foreign Affairs and the National Immigration Administration Bureau jointly announced the travel ban in March 2020, which suspended entry into China by foreign nationals who hold visa or residence permit other than the diplomatic, official, courtesy or category C visas. The exception to this travel ban is that foreign nationals may apply for visa at Chinese embassies or consulates if they come to China to engage in necessary economic, trade, scientific or technological activities or fulfil emergent humanitarian needs.
China's employment laws do not distinguish between blue collar and white-collar workers. Whether they are employed as senior managers (such as general manager) or workshop machine operators, they are uniformly subject to China's employment laws in terms of wage, working hours, holidays and leave, employment contract terms, conditions of termination, etc. In China, there are three types of employees:
Among the three categories of employees, material difference can be found with respect to statutory entitlements, working standards, termination conditions, etc. Full-time employment is the standard form of employment applicable for most regular positions. For temporary, auxiliary and replaceable positions, individuals can be hired by labour service agencies and dispatched to work where they are needed as dispatched employees. Part-time employment is supplementary to other forms of employment and widely used for positions that require a high degree of flexible labour and can be compensated on an hourly basis, such as housekeepers or cleaners.
From the angle of contract terms, contracts for full-time employees can be divided into three types:
Employers shall sign written employment contracts with full-time employees within one month from the date of commencement. Failure to do so may cause double salary penalty imposed on the employers. Termination of a full-time employment contract is strictly regulated by law.
In contrast, part-time employment contracts can be established orally and termination is generally at-will, therefore, contract term for part-time employment contract can either be definite or indefinite.
Pursuant to statutory requirements, full-time employment contracts in China shall include the following terms:
In addition to these mandatory terms, employers and employees in China may opt to incorporate other terms including probationary periods, performance targets, professional training, confidentiality, non-competition, IP protection obligation, contractual benefits for employees, etc.
In consideration of various working patterns of different jobs, three types of working hour systems are designed for full-time employees in China.
Standard Working Hour System
Employees work no more than eight hours per day and no more than 40 hours per week. The employer may extend the working hours after consultation with trade unions and employees. The extended working hours shall not exceed an additional three hours per day and 36 hours per month.
Flexible Working Hour System
Since certain jobs, such as senior managers, sales promotion or field work, cannot be performed within fixed working hours, flexible working hour system provides a solution by allowing employees to arrange their working hours based on actual needs of their duties. Except in some cities, employees under the flexible working hour system are not entitled to overtime compensation or comp-day. In most cases, implementation of flexible working hour system is subject to employees’ consent, employers’ commitment to preserve employees’ basic right to rest and pre-approval by the local labour authority.
Comprehensive Working Hour System
This caters to the jobs which have intensive workload only within a certain period, such as fishing and harvesting. Under the comprehensive working hour system, working hours may be calculated by month, quarter or even by year. Within each unit period, if the total working hours exceed the norms posed by the standard working hour system, employees will be entitled to overtime compensation. Like the flexible working hour system, employers are also required to obtain employees’ consent and pre-approval from the local labour authority before applying the comprehensive working hour system.
Part-time employees have a unique working hour system as they are compensated based on 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.
China adopts minimum wage requirement in all cities and employers must pay their employees no less than the minimum wage published by the local municipal government of each city in China. If employees are put on idle status due to business reasons, employers are required to pay 70% to 100% minimum wage to the employees from the second month of idle status. Specific payment standards are determined by local governments.
In addition to monthly base salary, other forms of compensation usually adopted by employers in China include the 13th month salary, year-end bonus, sales commission and allowances. The 13th month salary and the year-end bonus are normally paid before the Chinese New Year Holiday. Besides the minimum wage requirement, China’s employment laws also mandate minimum compensation standards for overtime work. Specifically, the lowest compensation standards are 150%, 200% and 300% of an employee’s normal hourly rate for overtime respectively on weekdays, rest days and public holidays.
Under PRC employment laws, employers are not mandated to increase employees’ wage, but reduction of employees’ wage is strictly restricted. If an employer intends to reduce an employee’s wage, it will not take effect without the employee’s consent unless under special circumstances prescribed by the Provisional Regulations on Wage Payment. For example, employers may withhold the individual income tax and social insurance contribution from employees’ wage.
Public Holiday Entitlement and Statutory Annual Leave
There are 11 days of public holiday in China. In addition to public holidays, full-time employees are entitled to statutory annual leave if 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. 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 leaves 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 a birth leave, the length of which is subject to the local regulations of each city (eg, 30 days in Shanghai). Before the newborn turns one year old, working 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.
Employees may take paid sick leave when they are suffering from illness or non-work-related injury. The sick leave period, during which employees are protected from termination, is known as the statutory medical treatment period (SMTP). With the exception of Shanghai, the SMTP is calculated based on employees’ accumulative years of employment, accrued with all former and current employers, and ranges from three to 24 months.
During sick leave periods, employers shall provide sick leave pay to the employees based on the standard agreed in the employment contract or indicated in employers’ internal policies. These standards shall not be lower than the default standard prescribed by the local government of different cities in China. Take Beijing as an example: sick pay shall not be lower than 80% of the local minimum monthly wage.
In China, the confidentiality obligation owed to employers is not prescribed by statutes but is imposed by the principle 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 confidentiality obligation by only referring to this general principle. To better protect trade secrets and other confidential information, many Chinese employers choose to explicitly stipulate, in employment contracts or confidentiality agreements, a detailed scope of information that employees shall hold confidential.
Like the confidentiality obligation, the non-disparagement obligation does not draw direct legal basis from Chinese statues but can be inferred from the principle of good faith and loyalty. In practice, many employers in China incorporate the non-disparagement obligation into the employment contracts with employees or their internal policies. The provision on non-disparagement obligation is usually phrased to prohibit employees from making any statement or disclosing any information that derogates or damages the reputation or interests of the employers, their affiliated companies, or other employees.
If non-disparagement obligation has been incorporated into employers’ internal policies, any violation of this requirement could be sanctioned by employers according to the policies by imposing disciplinary measures. In general, employees will not be bound by the non-disparagement obligation after the employment, unless the employer and the employee reach agreement on the post-employment non-disparagement obligation.
In addition, except for where a service term follows employer-sponsored training or a non-competition obligation is arranged, PRC Employment Contract Law does not allow liquidated damages to be agreed between employers and employees. In that sense, employers may only pursue employees’ liabilities for breach of non-disparagement in terms of recovery of actual losses or other remedies available under tort laws.
Under PRC Employment Contract Law, employers may agree on post-employment non-competition restrictions in the employment contract, or in a separate non-competition agreement with the senior management, senior technicians and other employees who have confidentiality obligations.
The scope, territory and term of non-competition restrictions could be agreed by the employer and the employee upon negotiation, and the maximum term of non-competition restriction is two years.
During 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 their former employer, or establish their own business to produce the same type of products or engage in the same type of business.
If an employee performs the agreed non-competition obligation, the employer shall provide monthly compensation to the employees during the restricted period. If the compensation standard is not agreed, the national default compensation standard shall apply, which is 30% of the employee’s average monthly salary in the last 12 months prior to the termination of employment and no lower than the local minimum monthly wage.
Breaching Non-competition Obligations
When employees breach the non-competition obligation, employers are entitled to claim the agreed liabilities for breach, which usually include continued performance of non-competition, payment of liquidated damages, refund of the paid 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 specific performance of non-competition obligation under current judicial practice in China for two major reasons below:
It is difficult to find the legal definition of non-solicitation obligation in PRC statutes, let alone the statutory remedy for breach of this obligation. However, regardless of this legislative blankness, the non-solicitation obligation is widely used 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 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 non-solicitation clauses. Based on analysis of existing precedents, Chinese courts have explored the validity of non-solicitation clauses by weighing different factors, eg, whether the employees have accepted the non-solicitation clause after sufficient explanation or notification, and whether the restriction imposed on employees has been unreasonably onerous.
The enforceability of the non-solicitation clause is still weak under current PRC judicial practice. In theory, employers can claim for recovery of financial losses suffered due to an employee’s breach of non-solicitation. However, due to the difficulty in providing evidence on existence of solicitation and the financial losses connected, it is very difficult for employers to succeed with a claim for employees’ violation of non-solicitation obligation.
Under PRC Employment Contract Law, employers in China have the right to collect employees’ personal information which directly relates to the performance of employment contract, including name, gender, ID number, contact details, education background, work experience, etc. According to the newly promulgated PRC Civil Code, personal information is defined as the information which can independently identify individuals or identify individuals through combination with other information, including name, birth date, ID card number, biometric information, address, telephone number, email address, health information, and travel information.
Under PRC Civil Code, the form of processing personal information includes collecting, storing, using, editing, transmitting, providing, and disclosing of personal information. Under the context of employment relationship, employers are known as the information processor which shall follow the mandatory principles, conditions, rules, and restrictions in relation to collecting and processing employees’ personal information.
The Mandatory Principles and Conditions
Employers, when processing employees’ personal information, shall comply with the mandatory principles of legitimacy, justification and necessity without excessive processing and follow the conditions below:
The Rules and Restrictions
In addition to the mandatory principles and conditions, as the processor of employees’ personal information, employers shall also follow the rules and restrictions as below:
Protection of personal information
In addition, China has also promulgated the Information Security Technology – Personal Information Security Specification, which is a recommended national standard for the protection of personal information and provides guidance for employers and other personal information processors on the process of personal information. Although this national standard is not compulsory, it does provide a best practice reference for employers in collecting and processing employees’ personal information.
The liability for illegally processing personal information will not be limited to civil liabilities and administrative penalties, and criminal liability will also be incurred under certain circumstance.
In practice, to avoid dispute on processing personal information, employers in China usually ask employees to sign a consent form to obtain the employees’ authorisation to process their personal information for employment purposes.
The use of foreign workers is highly 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 work and residential status in China. Failure to obtain work permits or residence permits may subject both the employer and the foreign workers to penalties including warnings and fines; the foreign workers may also be ordered to exit from China within a prescribed time, be kept under detention or even face 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 5.2 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, 90 days’ stay in China or less) 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 a work permit and residence permit. To obtain these, foreign workers usually establish one of the following two kinds of legal relationship:
For the second approach listed above, the foreign workers may retain their original offshore employment without establishing an employment relationship with Chinese entities which is mandatorily governed by the PRC Employment Contract Law. This is the reason why this approach is often preferred by multinationals.
Implementing international assignment
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 which administrates the granting of work permits to foreign applicants. During the review process, the SAFEA 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 is the holding of a bachelor or higher degree and two years of working experience in relation to the position they are about to serve in China.
Among the permissible standards for granting a work permit, the SAFEA uses a point-based system to have a comprehensive evaluation of foreign applicants. The point-based system quantifies foreign workers’ conditions from the aspects of total employment years, working periods in China, salary standard, educational background, current age and Chinese language proficiency. Take educational background as an example, a bachelors, masters and doctoral degree respectively score ten, 15 and 20 points under the point-based system. If the final score of a foreign worker is over 60 points, the applicant will be deemed qualified to obtain the work permit.
After having successfully obtained the work permit, the foreign worker must apply for a residence permit at the exit-entry administration authority in China. The residence permit will be issued to the foreign worker once the exit-entry administration authority verifies that valid work permits has already been granted. With 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.
The Role of Trade Unions
According to PRC Employment Contract Law, trade unions are the bridge and bond which connect employers and employees. Employers shall consult with trade unions on the internal policies and other issues relating to the direct interest of the employees; accordingly, opinions, suggestions or requests collected from the employees are relayed to employers, through trade unions, as reference for their decision-making.
Trade unions also play a part to relieve social pressure by harmonising the relationship between employers and employees if a potential dispute arises. As required by PRC Employment Contract Law and Trade Union Law, when employers intend to unilaterally terminate employees, they shall notify trade unions of the reason for the termination in advance and the trade unions reserve the right to demand employers make rectification if any violation of the applicable laws is discovered.
Safeguarding Employees and Internal Trade Unions
To fulfil 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. When employers plan to formulate or amend policies which have a direct impact on employees' immediate rights and interests, these policies shall be presented to the employee representative assembly, or all employees, for discussion. After the proposal or opinions being collected during the discussion process, the trade unions or employee representatives shall be additionally consulted on an equal footing.
The PRC Trade Union Law prescribes that companies and other employing entities shall establish internal trade unions if the number of trade union member exceeds 25. Under current practice in China, the obligation to establish trade union is not strictly enforced, employers 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 Constitution, state-owned enterprises shall practise democratic management through Employee Representative Assembly, the Employee’s Assembly (collectively the "ERA") and other forms according to the laws. The legislation body of Shanghai issued the ERA Regulation in 2017 which apply to all enterprises including private and foreign invested enterprises. The ERA are the basic forms in China through which employers practice democratic administration and for employees to exercise their democratic rights.
The general duties of an ERA include advice and supervision on employment related matters as well as democratic appraisal of employers’ development plans. The rules and policies which have a direct impact on employees' immediate rights, interests and mass redundancy plans shall consult 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, the Regulation on Democratic Management of Enterprises specifies that the number of employee representatives should not be less than 30 people, and the ERA should be held at least once a year. The local legislative bodies of provinces and cities (such as Shanghai) have issued their own regulations on how the ERA should be convened and held with more detailed rules. At present, the ERA mainly exists in state-owned enterprises.
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 majority of the employees.
The collective agreements should be filed for review by the labour administration department after execution. If there is no objection from the labour administration department within 15 days, the collective agreements will take effect. The labour remuneration and other employment conditions agreed in individual employment contracts with employees shall not be less favourable than those contained in the collective agreements.
Labour disputes arising from the performance of the collective agreements can be resolved through labour arbitration and litigation proceedings. The trade unions may initiate labour arbitration or litigation proceedings against the employers if any violation of the collective agreement and infringement of employees’ rights is discovered.
As the general philosophy of China’s employment laws is quite pro-employee, employment termination is highly regulated. Employers can only unilaterally terminate employees if a statutory condition appears. When a labour arbitration tribunal or court decides that a termination made by an employer is wrongful, the employer will either be liable to pay double the statutory severance or reinstate employment depending on the employee’s claim (see 8.1 Wrongful Dismissal Claim).
Termination for Cause by Employer
Employers are entitled to terminate employment with immediate effect if the employees:
Termination with 30 Days’ Notice by Employer
Under PRC Employment Contract Law, termination by a prior 30-day notice is only allowed under the following three statutory scenarios:
Also, certain procedures must be fulfilled by employers prior to the termination by notice.
Termination due to expiry of SMTP
When employees contract illness or non-work-related injury, they are entitled to the SMTP, during which employers are forbidden from terminating them for medical treatment or recovery. The length of SMTP is determined by employees' employment years. Upon the exhaustion of the SMTP, if the employees are unable to resume work 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 evaluated as incompetent by their employers, the employers are required to either change their job positions or provide training. If the employees are still evaluated as incompetent after change of position or training, the employers may proceed with the termination by serving a 30-day notice or paying them one-month salary in lieu of notice.
Termination due to change of objective circumstance
If material change of objective circumstance renders 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 a 30-day notice or paying the employees one-month salary in lieu of notice.
Workplace relocation, merger and acquisition and asset transfer usually amount to material change of objective circumstance. For other situations, the judicial bodies will determine the application of material change of objective circumstance on a case by case basis.
Termination by Employees
Under PRC Employment Contract Law, where an employer displays any of the following circumstances, its employees may terminate the employment contract with immediate effect:
Employees may even terminate the employment contract, without notice to the employers, under two exceptional conditions where employees are forced to work by means of violence, threat or illegal restriction of personal freedom, or employers violate safety regulations and order employees to perform dangerous operations which are life-threatening.
In addition to the terminations mentioned above, the employers may also pursue employment termination by evoking mass redundancy and undergoing the correspondent procedures. There are two thresholds for employers to initiate the mass redundancy:
Pursuant to the Article 41 of PRC Employment Contract Law, the applicable situations for employers to evoke mass redundancy include:
As mass redundancy usually involves termination of employment with many employees, the local labour authority will review whether the two thresholds have been fulfilled and whether the mass redundancy has been implemented by following the required procedures. In the mass redundancy, the employers shall follow the steps as below:
Under PRC Employment Contract Law, employers in China are only allowed to terminate employees with a 30-day notice under the three statutory situations mentioned in 7.1 Grounds for Termination. If employers and employees agree in writing on other situations that apply termination by notice, such agreement is deemed as invalid and not enforceable.
From the perspective of employees, they are entitled to terminate employment relationship by serving a 30-day notice, or a three-day notice during probationary period, to the employers.
For terminations by notice, through mutual negotiation or under mass redundancy, employers are required to pay severance to employees, which is calculated based on employees’ years of service with the employers at the rate of one month's wage for each year of service. The period of more than six months but less than one year shall be counted as one year and compensated with one full month of wage, while a period less than six months shall only be compensated with half a months' wage.
If an employee's average monthly wage in the last 12 months prior to the termination is greater than three times the average monthly wage of the locality, as published by the local government (the “City Cap”), the City Cap shall be used as the monthly wage for severance calculation, and the compensable service capped at 12 years.
These rules are prescribed in the PRC Employment Contract Law, which took effect from 1 January 2008. Different cities in China have followed different rules to calculate severance for service years accrued before 2008, some of which directly apply PRC Employment Contract Law, while others chose to apply local regulations or regulations which were effective before 2008.
Under PRC Employment Contract Law, an employer may terminate an employee with immediate effect if the employee materially violates employer’s internal rules or policies (“summary dismissal” or “for cause”). To implement a summary dismissal, employers shall serve written termination notices to employees in which misconducts are explicitly specified and internal rules quoted. In addition, employers are under a legal obligation to notify trade union regarding any summary dismissal.
Employees who are dismissed for cause in China can file complaints to the labour arbitration commission or court, claiming that they were wrongfully terminated. If the employees succeed in the claim, they will be entitled to either double severance pay or reinstatement of employment, based on employees’ choice (See 8.1 Wrongful Dismissal Claim).
In the labour dispute resolution proceedings, employers bear the burden of proof and take the adverse consequences if the proofs are deemed insufficient by the labour arbitration commission or court. To mitigate the potential risks, employers in China are advised to use summary dismissal with prudence and collect solid and admissible evidence on employees’ misconducts before implementation.
Under PRC Employment Contract Law, employers may enter into mutual termination agreements with employees and there’s no specific procedure/formality requirement for signing them. Employers may propose and achieve mutual termination agreements with employees at any time during or even after employment, except in very limited circumstances. The releases incorporated in the mutual termination agreements are generally enforceable unless one party can sufficiently prove serious misunderstanding or obvious unfairness.
In practice, termination through mutual agreements is the most ideal way to end an employment relationship because this approach has no legal requirement of prior notice and, from a cost-efficient perspective, they can avoid potential dispute resolution proceedings for both parties. In most cases, employers provide ex-gratia payments on top of statutory severance to the employees in exchange of mutual termination.
Employers in China are prohibited from terminating certain employees by notice or through mass redundancy. These employees include:
Additionally, the employment contracts with full-time chairman, vice chairman and commission members at the basic level of trade union shall be extended to match their office terms. For a part-time chairman, vice chairman or commission member whose contract term is shorter than their office term, the term of his or her employment contract shall also be automatically extended to the end of the office term. The exceptions are circumstances where the trade union leaders have serious misconduct or have reached statutory retirement age during their term.
Termination in violation of PRC employment laws is referred to as wrongful dismissal. In judicial practice, the grounds for a wrongful dismissal claim could be classified into the following two categories:
If employees in China believe they are wrongfully dismissed, they may resort to either of the following two remedies according to PRC Employment Contract Law:
Under PRC Employment Law and Employment Promotion Law, employees shall not be discriminatorily treated due to their nationality, race, gender, or religious belief during recruitment process and performance of employment. Further, employers are forbidden to exert discriminatory standards against female candidates due to their marital status or pregnancy during the recruitment process. Any employer that releases recruitment information with standards that are found discriminatory against females will be subjected to a warning or fine from the labour authority.
In China, the total number of claims related to discrimination is small. Among the decided cases, quite a few disputes occur where employees dispatched by labour service agencies claim for equal treatment with employees who are directly hired in respects of remuneration standard and other beneficiary entitlements. In addition, individual case has been seen in recent years where an employer was ruled as wrongful to place the employee on compulsory leave due to employee’s diagnosis as HIV carrier.
In cases related to discrimination, the grieved employees usually bear the burden to provide preliminary proof on the existence of discrimination. The remedies available for such employees include rectification of discrimination, compensation for mental suffering and formal apology from the employers. Where employers are found to have committed wrongful dismissal due to discrimination, employees are entitled to the statutory remedies mentioned in 8.1 Wrongful Dismissal Claims.
According to PRC Mediation and Arbitration Law on Labour Dispute, except for special circumstances, employment disputes go through two stages of judicial procedures known as labour arbitration and labour litigation. Employment disputes in labour arbitration proceedings and labour litigation proceedings are respectively heard by the labour arbitration commissions and the people’s courts. In practice, if either party to the dispute are dissatisfied with the award given by the labour arbitration commission, such party will proceed to initiate labour litigation within 15 days upon receipt of the arbitral award, otherwise the arbitral award will become effective and enforceable.
In most cases, labour disputes are first submitted to the labour arbitration commission, this being the pre-condition for initiating labour litigation. If the labour arbitration commission fails to render its award before the time limit, 45 or 60 days from acceptance of the case, either party may directly initiate the labour litigation.
The labour litigation 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, the party may further appeal it to a higher court for the second instance, and the court of second instance will issue the final judgement on the dispute.
However, PRC Mediation and Arbitration Law on Labour Dispute limits the employers, but not the employees, from initiating labour litigation following the labour arbitration award for two kinds of cases:
This limitation on employers’ rights to further initiate 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 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, if one party fails to perform its obligations under the settlement agreement, the other party is unable to apply for the court’s direct enforcement of such agreement. The dispute over performance of the settlement agreement needs to be resolved through judicial process.
As provided by the Regulation on Labour Security Supervision, employees who believe that their employer has infringed upon their lawful rights or interests under labour security laws and regulations may make a complaint to the authority of labour security supervision. The authority of labour security supervision is responsible for accepting reports and complaints on violations of labour security laws and regulations and lawfully investigating, correcting, and punishing the violations.
According to PRC judicial practice, the prevailing party in labour disputes usually will not be supported in recovering legal fees accrued during the contentious period. However, there is an exception to this practice. Under a local regulation in Shenzhen city, when employees succeed in labour cases, they may claim and recover attorney’s fee from employers with the amount capped at RMB5,000.
COVID-19 swept across the world and created a plethora of issues for both employers and employees. China’s employment law and practice quickly responded, and the following employment law and practice developments have been selected as those that are particularly noteworthy for employers.
The developments this article covers include – redundancy using “economic layoff” under PRC laws, developments of employer-friendly interpretations of employment laws during COVID-19 and electronic signatures.
Redundancy Using Economic Layoff Under PRC Laws
Since early 2020, many businesses have been nearly stifled by the mandatory quarantine measures adopted in response to COVID-19. Many employers have taken cost-saving measures such as reduction of salary, arranging for unpaid leave, and as the situation continued to deteriorate, some employers started to execute redundancy projects. It is noteworthy that most of the employers when doing redundancy will consider the possibilities of resorting to “economic layoff” under the PRC laws as one of its redundancy plans.
Article 41 of the PRC Employment Contract Law contains the requirements for economic layoff. According to Article 41, when the production and operation of an employer face severe difficulties, and if it is necessary for the employer to terminate at least 20 employees, or if the employer terminates fewer than 20 employees but they account for at least 10% of the number of all employees, the employer should inform and consult the trade union or all the employees 30 days in advance of the layoff. Prior to layoff, it is also required that the employer should file the economic layoff plan and other required documents to the local labour bureau, and if the filing is accepted by the local labour bureau, the employer can then proceed to unilateral termination based on economic layoff.
Prior to COVID-19, it was rare that employers were able to pull off economic layoff for redundancy. The main reasons were the relatively complicated procedures required and the foreseeable difficulties of obtaining from the local labour bureau an acceptance letter for the submitted filing. During the COVID-19, however, employers have grown much more interested in exploring the possibilities of utilising economic layoff, in that the number of employees involved is considerably larger and employers may not as usual have the reservoir of cash required for implementing a generous mutual termination plan for the employees.
The new developments in using economic layoff can be better demonstrated in the analysis of each of its four requirements below.
An employer needs to have a required economic circumstance
There are four economic circumstances under economic layoff that will allow an employer to conduct economic layoff under Article 41, and an employer must fall into one of the circumstances in order to be considered eligible.
In the current practice, many employers would try to fit into the category of “major change in objective economic circumstances” using the COVID-19 influence as the supporting background in the filing to the local labour bureau. The reason is that most other categories under Article 41, such as severe difficulties in operations, have stricter thresholds for eligibility in practice. For example, in some cities it is required that an employer should have been in a deficit for the last three years in a row before being considered having severe difficulties in operations.
The definition of major change in objective economic circumstances is, however, unclear under PRC laws and, in practice, whether an employer can be considered eligible under the influence of COVID-19 would largely depend on the discretion of the local labour bureaus. This being said, compared with trying to fit into other categories under Article 41, most employers in practice are still choosing to test the water with major change in objective economic circumstances. In Beijing, the local labour bureaus are willing to consider accepting filings submitted by employers under major change in objective economic circumstances, provided that the local labour bureaus consider an employer’s situation to be serious enough for invoking Article 41.
At least 20 or 10% of employees should be on the list of redundancy
Under Article 41, if there are fewer employees than required to be made redundant, then an employer will not be able to successfully submit a filing to the local labour bureau for economic layoff. On this requirement, employers in practice often do not have problems assessing their eligibility, in that all the numbers in the equation are certain and easy to judge.
In practice, the question is whether every employee to be made redundant must be unilaterally dismissed by an employer using economic layoff – what if employers trying to mitigate the risks of unilateral termination choose to negotiate with the impacted employees for mutual termination in the first place and would only conduct unilateral termination using economic layoff for those who refused mutual termination? Can the employees willing to accept mutual termination be considered constituting part of the quantity of employees required under economic layoff? Most people in practice would argue that it does not make sense to rule out the employees who are willing to accept mutual termination offered by an employer, and these employees should be considered eligible to constitute part of the quantity of employees required under economic layoff. The rationale is that, employers should not be punished for trying to reduce the risks of unilateral termination of economic layoff by firstly offering the impacted employees a chance to accept mutual termination.
In practice, there is currently no decisive opinion widely supported by the local labour bureaus, arbitrators and judges. It appears that some local labour bureaus are willing to accept economic layoff filings submitted by employers offering mutual termination solutions to their employees as the first step of their economic layoff plan, while some local labour bureaus interpret Article 41 rigidly and require that employers should try to offer mutual termination first and can then submit a filing for the rest employees.
Prior consultation with a trade union or all employees 30 days in advance
Prior to COVID-19, the form of consultation can be relatively simple – an employer can try to hold a trade union meeting or a meeting involving all the employees if there is no trade union and secure the evidence of the meeting having taken place (eg, meeting minutes bearing trade union chop or employees’ signatures). During the COVID-19, however, due to the compulsory quarantine measures, it has been very difficult to hold any meetings, not to mention an organised meeting with a trade union or all the employees of a company, particularly if there is a large trade union or a company with hundreds of employees or more.
On this point, considering the difficulties of organizing meetings, some employers have resorted to the choice of organising online meetings using tools such as Zoom, and recorded the meetings to be used as evidence for submission to the local labour bureaus. The local labour bureaus in different cities in practice tend to have different attitudes for using online meetings to complete the consultation procedures. The reason is that if online meetings are used, it would then not be possible for employers to obtain the trade union’s seal or all the employees’ signatures which are usually required by the local labour bureaus.
In practice, some local labour bureaus, such as some of the bureaus in Beijing, are willing to accept video conference as a form to complete consultation. Some others, however, are still insisting that employers must hold a meeting with the trade union or all the employees. It is noteworthy that, with the easing of COVID-19 quarantine measures in China, it is now not so difficult to organise meetings and more and more local labour bureaus are only willing to accept sealed or signed meeting minutes as evidence for consultation.
Filing to the local labour bureau should be accepted
Under Article 41, and in practice, if the filing submitted by an employer to the local labour bureau is not accepted, the employer will not be able to proceed to laying off employees using economic layoff. Note, however, that acceptance of filing by the local labour bureau does not guarantee the lawfulness of economic layoff (the local labour bureau for acceptance will not carry out substantive examination of the materials). It has been seen that even if a filing had been accepted by the local labour bureau and later on when employees challenged the economic layoff through legal proceedings, arbitrators and judges still considered the economic layoff to be wrongful. However, that being said, in practice, if the filing to the local labour bureau is accepted, this can drastically increase the success rate of economic layoff when employees challenge it through arbitration and litigation.
Filing during COVID-19
During COVID-19, when examining a filing submitted by an employer invoking the circumstance of major change in objective economic circumstances, the local labour bureaus have been looking at the economic layoff statement explaining the background and circumstance for economic layoff, the redundancy list containing details of each employee to be laid off, the economic layoff plan explaining the schedule of layoff and calculation of severance, the meeting minutes demonstrating that the details of layoff have been discussed with employees and other relevant documents as deemed necessary by the local labour bureaus.
With many constantly evolving factors and requirements in practice, economic layoff is actually a quite research-worthy topic. During COVID-19, many employers have been trying to test where the boundaries of Article 41 are and as a result each city has been able to present their own interpretations according to their actual situations.
It is noteworthy that, with the COVID-19 gradually fading away in China, the attitude of the local labour bureaus towards Article 41 just may change as quickly as the transition from the end of 2019 to early 2020 was.
Developments of Employer-Friendly Interpretations of Employment Laws During COVID-19
As widely acknowledged, PRC employment laws have always focused more on the protection of employees’ rights in comparison with employers’ business interests. In practice, it is particularly so with most arbitrators and judges interpreting laws in favour of employees. During COVID-19, however, the governments and courts in many cities and provinces, such as Beijing, Shanghai and Guangzhou, published guidance documents to guide arbitrators and judges over certain employment issues.
These documents have been followed in employment arbitrations and litigations, and in many ways, they tend to tip the scales in favour of employers. Out of the many provisions contained in the local guidance, we picked the following three examples to demonstrate the now more balanced forces of employers and employees.
Under PRC laws, it is required that an employer and an employee can only agree on the employee’s probationary period once. If a second probationary period has been agreed, the agreement should be considered invalid and unenforceable. For example, in this second employment agreement, the employer is not permitted to agree a second probationary period with the employee. This rule appears to be simple and clear.
However, in practice the situation is more complicated. Some employers in practice would choose to agree with an employee on extending the employee’s original probationary period by a period of time. The question then becomes – should the extended probationary period be considered a second probationary period breaking the rule above so that employers should be banned from doing so? The answer is clear in practice. With limited exceptions, most arbitrators and judges in China would think that under no circumstances can an employer agree with an employee on an extension of the original probationary period, and the nature of the extension is actually a second probationary period.
Changing situations due to COVID-19
During COVID-19, the situation has changed. Some cities in China, including some of the cities which previously interpreted the probationary period rule very strictly and in favour of employees, have already published guidance documents or have, through employment dispute cases, interpreted the single probationary period rule in favour of employers under the influence of COVID-19.
For example, in Beijing, the arbitration commission and high people’s court together published a guidance document in April 2020 (Beijing Guidance), explaining the one probationary period rule under COVID-19. In the Beijing Guidance, it is said that, if due to the COVID-19 an employee cannot return to work, an employer can take flexible approaches to assess an employee’s performance during probationary period (eg, through online means as due to COVID-19 the employee cannot come to office). If, however, the employee’s performance cannot be assessed using flexible approaches, the employer and the employee can agree to postpone the probationary period so that the employer can have extra effective time to observe the employee’s performance. It was explained in the Beijing Guidance that the postponed probationary period agreed should not be considered an extension of the original probationary period, so that it has not broken the one probationary period rule.
Salary standard if an employee cannot resume working due to COVID-19
The financial pressure created by COVID-19 on employers is overwhelming and simply cannot be ignored. Many employers have been suffering from the difficulties of continuing to pay employees regular salary while having only a fraction of their previous revenue.
There have been several national and many local measures announced to help employers deal with the pressure. For example, in Guangdong Province, the provincial high people’s court and the Human Resources and Social Security Department of Guangdong Province together published a guidance in April 2020 (Guangdong Guidance), and it was made clear that if an employer has not resumed operations after the Spring Festival (24 January 2020 to 2 February 2020), within the first pay cycle, employees’ salary as agreed in the employment contract should still be paid.
For the following pay cycles, however, employers only need to pay employees 80% of the local minimum salary as basic living allowance. The Guangdong Guidance further says that the above rule can apply to an employee in the situation where, even if the employer has resumed operations, the employee has not been able to return to work or work from home after the Spring Festival due to COVID-19. Similar provisions can also be found in the Beijing Guidance.
It will not be exaggerating to say that the above provisions are ground-breaking and very friendly to employers. Under PRC laws and local regulations, usually an employer can only start paying employees basic living allowance in case of operations having been ceased for reasons not attributable to the employees. Due to COVID-19, however, many cities have broken the barrier and made it clear that, even though the operations of an employer have not been ceased, the employer can still start paying employees basic living allowance on account of employees’ inability of returning to work or working from home.
Protection for employers in case of unintended reduction of salary
Under PRC laws, if an employer fails to pay an employee’s salary in full in a timely manner, an employee can terminate employment and request payment of statutory severance. The problem created during COVID-19 is that there have been many measures aiming to reduce employers’ cost being announced every now and then by the government and, sometimes, it may be difficult for an employer to correctly understand the measures and pay their employees accordingly.
As such, there have been some cases where employees are arguing that their employers have not paid them in full or in a timely manner and they should be entitled to terminate the employment and receive statutory severance payment. Employers, however, are arguing that they believed the reduction of salary was in line with the relevant government measures and they were only exercising their rights in relation to same.
On this point of argument, there have been some local measures supporting employers' stance. For example, the Beijing Guidance provides that, during COVID-19, if an employer and an employee have reasonable misunderstandings of the correct salary standards to be used which may have been caused by the vague wordings in the contested measures, the employee’s request of terminating employment and paying statutory severance generally should not be supported by arbitrators and judges. Note that the precondition of invoking this provision is that the employer should not have been malicious or grossly negligent in reducing the salary payment.
Since the COVID-19 outbreak, it has been a hot topic of discussion whether PRC employment law and practice are tilting towards protecting businesses in comparison with the situation prior to COVID-19. It is considered that the real intent of the change is for the government to support employers survival through COVID-19. By releasing some of the pressure on employers and protecting them from bankruptcies, most employees will retain their employment and this, in a sense, may be considered in increase in protection for employees.
It may be surprising to learn that, while electronic signatures and related laws have been developing for a long time in countries such as the USA, it is only at an early stage of development in China. It was not long ago that people were still debating over the validity of executing employment contracts electronically.
In March 2020, the PRC Ministry of Human Resources and Social Security published an official reply and confirmed that employment contracts can be executed electronically. The question then, is how to know whether an employment contract, or any contract, that has been executed electronically is valid under PRC laws?
The answer to this question lies within the PRC Electronic Signature Law. The PRC Electronic Signature Law has a concept of “reliable electronic signature”, which can have the equal enforceability under PRC law to handwritten signatures. The four conditions below listed in the PRC Electronic Signature Law can further explain what a reliable electronic signature should look like –
It can be seen from the above conditions that the PRC Electronic Signature Law, when defining a reliable electronic signature, only provides requirements without specifically limiting the approaches or technologies that should be used to finish electronic signatures. As such, if the validity of an electronic signature is challenged in arbitration and litigation, as long as sufficient evidence can be produced to prove that the electronic signature in question satisfies the above conditions, arbitrators and judges can be convinced to acknowledge the validity of the electronic signature.
In addition to these conditions, albeit not compulsory or enforced as such, the PRC Electronic Signature Law also provides that electronic signatures can be certified by a third-party electronic certification service provider (Certificate Authority or CA) in order to enhance the reliability of an electronic signature (eg, to execute an electronic signature through a CA a signatory’s identity has to be verified by the CA). In order for a service provider to become a CA, a licence should be obtained from the relevant government authority.
As such, electronic signatures can be executed in practice between organizations and individuals. In order to be considered a valid and enforceable electronic signature when a dispute takes place, an electronic signature needs to meet the conditions of a reliable electronic signature analysed above. To further enhance the reliability of an electronic signature, signatories can resort to the assistance of third-party service providers for certification service.
Among third-party service providers, there are government approved CAs whose service standard has been certified by the relevant government authority, and once a dispute takes place it is more likely that an electronic signature done through a CA is considered to be a reliable signature.
As widely acknowledged, COVID-19 is the defining global crisis of our time and may be the greatest challenge human kind has faced since World War Two. The way it has impacted lives and legal systems, globally, simply cannot be ignored – particularly so in regards to employment law. It is expected that COVID-19 will continue to change the way we live and the way in which laws are interpreted.
The trends and developments summarised in this article are only a small part of the greater picture that is yet to be completed, and there will be many more to share as future trends and developments rise to the surface.