If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up-front is much less expensive than the alternative. These eight tips will help you stay on the right track.
1. Write employment contracts that spell out every aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will employment is foreign to the Chinese and American companies often get themselves into legal trouble when they fail to adequately understand this significant difference between the two countries. As an employer in China, you must have written employment contracts with all full-time employees.
Employers that don’t implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment agreements, which essentially means that the labor relationship has no definitive end date.
If an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, the employer will be required to pay double the employee’s monthly wage.
If an employer lets more than a year go by without implementing a written employment contract, the employee will be considered to have entered into an open-term employment contract with the employer. Such a contract usually means the employer must retain the employee until his or her retirement age. After an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is operating under an open-term contract.
2. Make sure all mandatory provisions are included in your employment contracts. China’s Labor Contract Law requires employment contracts to contain the following provisions:
- Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
- The specific term/duration of the employment contract (and any probation period)
- A description of the work to be done by the employee
- Location of the workplace
- Working hours
- Rest and leave time
- Social insurance
- Applicable labor protections, labor conditions and protection against occupational hazards
- Other terms required by relevant laws and regulations
In addition to the required items, employers should include provisions describing any additional benefits they will provide to particular employees.
3. Clearly spell out the term of the employment contract and probation period. A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months, and for employment terms of more than three years or for an open-term employment plan, the probation period cannot be longer than six months. Each employee can have only one probation period.
Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to provide a six-month probation period (the longest permitted under Chinese law). Though it is fairly easy to terminate an employee during this probation period, it not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.
Keep in mind that, in most cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether you should convert the employee to a lifetime employee.
As with most aspects of employment law in China, the general rule is just that; it is not the right option for everyone since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.
4. Know China’s working hour rules. Most municipalities enforce an eight-hour workday and 40-hour workweek, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is somewhat similar to the salaried employee system in the United States It applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than eight hours a day or 40 hours a week without having to pay overtime wages; however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.
For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local labor bureau and the approval is valid for only a limited time. You must submit a renewal application before the expiration of the term specified in the government’s approval letter.
Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.
5. Learn China’s rest time and vacation rules. Every employee must have two rest days, typically Saturday and Sunday.
Employees who have worked continuously for one year are entitled to paid vacation days. The statutory vacation period, based on the employee’s total years of service (with any employer, not just for you), is as follows:
- More than 1 and less than 10 years’ service: 5 days of vacation
- More than 10 and less than 20 years’ service: 10 days of vacation
- More than 20 years’ service: 15 days of vacation
Employers are required to make arrangements for employees to use their vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who does not allow an employee to take annual leave may be forced to pay that employee 300% of his or her daily wages for each unused vacation day. Chinese employees are very familiar with this law and they virtually always pursue the 300% owed to them (and more) when they leave a job.
6. Understand what you’re getting into before paying for a 13th month. Paying a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.
Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in your employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from a lower individual income tax burden.
7. Factor in social insurance and housing fund payments. As an employer in China, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Some employers mistakenly pay for expat employees’ social insurance when they don’t have to, and others neglect to pay for their expat employees’ social insurance when they are required to do so. Both errors can be very costly.
8. Make Chinese your employment contract’s governing language. We recommend specifying in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. Single-language contracts can help eliminate costly disputes related to differences in the two “official” languages. Such disagreements are practically inevitable with dual-language contracts. It also makes the terms of the contract clearer for both you and your employees. For the benefit of our clients who cannot read Chinese, our China employment lawyers virtually also create an unofficial English-language version as well.