Looking at Employees and the Law

Because China is still a communist country, it doesn’t offer employers the most flexible legal system for dealing with employees.

Under the current legal framework, local labor bureaus have a lot of power to enact and interpret employment laws and regulations. The government did enact a national labor law in 1994, but it leaves a lot of blanks for local governments to fill in. However, at the time of publication of this book, the Chinese government was circulating portions of various draft versions of a new national labor law. As the government received comments from businesses and employee groups, it did a good deal of redrafting. In general, although the new law should standardize some practices, many labor issues and interpretation of parts of the law will likely remain local.

This section discusses the current state of the law. We also mention some changes to the existing law that have been part of recent drafts. Keep in mind that these changes may be different when the law is finalized, so use the discussions on the draft law just to get a sense of the legal trends.

Employment law is changing rapidly and is oriented very locally, so don’t hire employees without first seeking legal advice.

Employment contracts

Expatriates may sign employment contracts with the FIE’s parent and then be seconded to the FIE, or they may contract directly with the FIE.

People’s Republic of China (PRC) employees are Chinese nationals who are hired locally. For them, the current national labor law requires that seven items be specified in employment contracts:

✓	Term
✓	Job requirements and duties
✓	Salary and benefits
✓	Termination provisions
✓	Consequences of a breach of contract
✓	Behavior and discipline standards
✓	Working conditions

You can add other provisions, such as a probation period, to employment contracts, too. We discuss each of these components in the following sections.

A contract must be written in Chinese in order to be valid and binding. An employment contract can have multiple language versions, but only the Chinese version is official.

Term

You can create two basic types of employment contracts in China — open-term and fixed-term:

✓	An open-term contract doesn’t have an ending date — it’s for an indefinite period.
✓	A fixed-term contract can be for a certain amount of time (for example, one year) or for a particular assignment or project (for example, upgrading the computer network).

As we discuss shortly, getting rid of employees after their probationary periods can be difficult. One advantage of a fixed-term contract is that when it expires, the employer can let go of the employee without a problem. On the other hand, as long as the economy continues to boom, keeping good workers is going to be hard. A fixed-term contract obligates good employees to stay for a certain period of time. Most commonly, employers use one-year fixed-term contracts with their PRC employees.

In one version of the proposed draft law, if you continue to employ somebody after his or her fixed-term contract expires — even without signing a new contract — the employee will be considered to have an open-term contract. Another proposed change in the draft law says that employees without written contracts will be considered to have open-term agreements.

Job requirements

Be careful when describing the job requirements and the employee’s duties in the contract. If your description is too broad, then arguing that an employee wasn’t doing his or her job properly may be difficult (see “Legal disputes,” later in this chapter). If you go too narrow and later try to change the employee’s duties, you’ll have to get him or her to sign a new or amended contract. The job description has no magic formula — you have to decide which side you’d rather risk erring on.

Depending on locale, you may be able to give yourself flexibility with a clause that specifically allows you to change the duties and requirements as necessary.

Salary and benefits

China currently has no national minimum wage (although that may change under the new labor law). However, most local governments have put minimum wages in place. Table 9-1 shows minimum monthly wages for full-time workers in some major cities (to convert to your home currency, visit finance.yahoo.com/currency).

Table 9-1. Minimum Monthly Wages in Four Cities

City	Minimum Wage (RMB)
Beijing	640 RMB
Shanghai	750 RMB
Guangzhou	780 RMB
Shenzhen	810 RMB

In addition to wages, you have to pay into at least some social welfare funds for all PRC employees. Social welfare funds usually cover

✓	Basic health insurance
✓	Unemployment insurance
✓	A housing savings plan
✓	Pension

The amounts you need to pay into the funds vary by the domicile of your employees. Domicile, or hukou (pronounced who-koh), is where a person is officially registered. It determines eligibility for social services and other benefits. It isn’t the same thing as residency — a person can live in Beijing but have hukou in Xi’an because he or she was born there. Switching hukou is difficult.

For employees who have hukou in the city where your company is located, the required contributions to their funds are higher than for employees whose hukou is elsewhere. A number of factors determine the difference in required hukou contributions, but outside hukou contributions may be about half of what local hukou requirements are. There’s a somewhat complicated formula for determining the social welfare fund contribution amounts, but in first-tier cities such as Beijing, it may be approximately 45 percent for employees with local hukou.

Termination provisions

The termination provisions you should list in the contract are

✓	How many days’ notice each side must give of termination
✓	The allowable grounds for termination

This area is usually governed more by local law than national. Regardless of what the contract says, after the worker has finished the probationary period, terminating an employee without paying compensation is usually difficult (see “Legal disputes,” later in this chapter).

Consequences of breach of contract

You can specify consequences for breaching the contract — for example, failing to give sufficient notice of leaving, terminating the contract early, or breaching a non-compete or non-solicitation clause (which we discuss later). Some companies that invest significant money in training employees insert provisions that require an employee who terminates a contract early to reimburse the company for some or all the expenses.

Local law may limit how much you can actually get from an employee for breach, and some draft versions of the proposed national labor law also contain limits on employer compensation. Regardless of whether the law limits the amount you can get, as a practical matter, your compensation is likely to be limited. Arbitration panels and courts often look at the employee’s ability to pay, not damage to the employer.

Many companies don’t include requirements that breaching employees pay compensation (aside from when breaching non-compete or non-solicitation clauses). The labor market’s tight, and this type of provision can scare off potential employees.

Behavior and discipline standards

Usually, the behavior and discipline section is just boilerplate language reading that employees will comply with all lawful company rules and policies and that those who violate the rules and policies will be disciplined according to company procedures.

Working conditions

The working conditions clause is usually just boilerplate language reading that the employer will provide a working environment that complies with applicable laws.

Non-compete and non-solicitation clauses

For employees who deal with sensitive information and valuable clients, include a non-competition or non-compete clause in your contracts; such a clause limits their ability to use that information or those relationships to benefit a competitor. This clause works by requiring that an employee not join or start a business in the same field within a defined geographic area (such as Beijing) for a set period of time (for example, two years) after he or she leaves your company. Non-competition clauses usually also include non-solicitation clauses, which prohibit former employees from actively seeking out your customers and employees (whether for a competing or non-competing business).

In China, an employer must pay separate consideration (aside from the salary) to have an effective non-compete clause. This consideration varies by locale where the contract was signed, but it’s usually fairly high. Generally, the law does not restrict how broad a geographic area the non-compete can cover. In other words, whether the former employee is in a different city shouldn’t matter.

The national law specifies that non-competes may be no longer than three years (one version of the draft law would shorten that to two), but some locales have laws that allow for longer non-competes. Many arbitration panels and courts will look at whether a non-compete is reasonable under the circumstances.

If you take action against a former employee for breaching a non-competition clause, you have to show that the clause was valid and reasonable. You also have to prove the breach. The amount you recover is more likely to be based on what the former employee can actually afford to pay rather than on what your losses are.

Despite the legal protections against former employees competing with you for business or employees, the best protection is to compartmentalize — don’t let any single employee see too much of your business. We discuss intellectual property (IP) protection strategies in Chapter 17.

Putting employees on probation

Your employment contracts should all impose a probationary period on new employees. After an employee is through the probationary period, terminating him or her — even for poor performance — without ultimately paying compensation is hard. Later in this chapter, we discuss the best ways to screen for talent (see “Finding [and Keeping] Good People”). Nevertheless, you’ll still likely find that you’ve hired people who aren’t up to their jobs. The probationary period is crucial for trying to ferret out your hiring mistakes.

During the probationary period, you can terminate employees if you discover that they misrepresented themselves during the hiring process. You can also let go of employees during this time if you decide that they aren’t suitable for the position. Basically, you get a good deal of subjective leeway during the probationary period.

Currently, local laws govern the maximum length of probationary periods. How long you can keep an employee on probation usually depends on the term of the contract. The shorter the contract, the shorter the maximum probation period is. In general, you’re able to have at least one month for a probationary period. Under the current national labor law, the probationary period can’t be more than six months.

Terminating employees

After the probationary period (see the preceding section), an employer can terminate an employee for a “serious” conduct violation, gross negligence, or causing the employer to suffer severe losses. Also, if the employer gives at least 30 days notice, it can terminate an employee who’s unable to do his or her job due to non-job-related sickness or injury or where the employee falls short of job standards despite receiving training or having other jobs.

Even though the employer appears to have leeway to terminate an employee who doesn’t do a good job, as a practical matter, it’s hard to do so without paying compensation. Most labor disputes must go to mediation and arbitration, and employees do pretty well in arbitration; therefore, expect that if you terminate an employee without reaching a settlement first, you may end up owing in arbitration.

You’re not allowed to terminate employees without paying compensation merely because you want to reduce headcount. If you want to get rid of a few employees who still have time left on their contracts, you have to work it out with them. If you own a factory or other business and want to reduce headcount by a large number, consult with the local labor bureau. The bureau will usually negotiate with you on behalf of the workers.

Legal disputes

By law, a labor dispute must almost always be heard by an arbitration panel before a court can hear it. The parties can choose to mediate the dispute before going to arbitration. If mediation isn’t successful or the parties don’t opt for it, the complaining party has to apply to the local Labor Dispute Arbitration Committee for arbitration. This committee is made up of the following:

✓	Representatives from the local labor bureau
✓	The local Commission of Foreign Trade and Economic Cooperation (COFTEC) or Ministry of Commerce (MOFCOM) (see Chapter 7)
✓	A trade union

Employees win their arbitration cases outright 47.5 percent of the time; employers win outright only 12.9 percent of the time. The balance is mixed judgments. If a party doesn’t agree with an arbitration award, it can appeal it to the local People’s Court. The court doesn’t have to hear the dispute, though.

Unions

The Chinese Communist Party controls trade unions that are organized along industrial and geographic lines. Chinese law requires that employers allow their employees to join a trade union. Historically, trade unions haven’t had much power and haven’t often engaged in collective bargaining; they served social and political functions. Currently, some employers and trade unions execute collective contracts, but they’re not very detailed. Instead, these contracts are framework agreements that guide employees’ individual contracts. In actuality, people often see Chinese trade unions as quite pro-employer.

The trend is changing, though. Trade unions are becoming stronger and more pro-employee. In 2006, Wal-Mart had a front-page spat with a major trade union and the government over whether its employees could join a union. Wal-Mart has a firm no-union policy, but the public and government pressure on Wal-Mart in China was eventually successful. Wal-Mart allowed its Chinese employees to join a trade union. This news is likely a sign that trade unions are going to be a bigger force in employer-employee relations in the future.

The new labor law will likely give trade unions more rights and power. It may also encourage collective bargaining.