Working solution

This year promises to be a pivotal one for Chinese employment law, with most attention fixed on the proposed Employment Contract Law, the first national Chinese law to govern employment contracts specifically. In general the new law will reflect the current aim of the government to increase employee rights, promote employment stability and build a harmonious society in a high-growth economy. It will replace a large number of local regulations and expand on existing provisions under the People’s Republic of China’s (PRC) Labour Law.

The draft law has been working its way slowly through the legislative process, a complex task with various interest groups helping to mould the final version. Paradoxically, the increasingly transparent nature of Chinese lawmaking has contributed to the delay in the law. An unprecedented 191,000 comments were received from the public in response to the March 2006 draft. Although most comments were submitted by employees and unions, foreign investors and chambers of commerce also weighed in.

Comments from the business community appear to have had some impact, with the latest draft scaling back protection for employees and sharply curtailing the role of the unions. This December 2006 draft was submitted to the Standing Committee of the National People’s Congress (NPC) for review. There is intense speculation about specific changes ordered by the standing committee, but the law was referred back to the NPC law committee for additional revisions. While another period for public comment is not scheduled, interest groups are expected to submit further comments, both formally and informally.

Employment stability
The promotion of stability is reflected primarily through provisions that discourage the use of short, fixed-term contracts. The December 2006 draft contains a controversial provision requiring employers to pay severance when fixed-term contracts are not renewed.

Currently many employers adopt such contracts, partly so that they can effectively terminate employment when employees’ contracts expire, avoiding the need to pay severance and other difficulties of terminating employees under PRC law.

This draft did, however, add an important exception to the new requirement to pay severance: employers would not be required to pay severance when an employee rejects an extension of a contract that contains terms at least equal to those currently enjoyed by the employee.

Another measure intended to foster long-term employment is a new provision that gives employers the right to extend fixed-term contracts only once. Subsequent extensions must have an open term.

Probation periods
Both employers and employees are likely to welcome one deletion from the March 2006 draft. It had attempted to replace China’s patchwork local regulation of maximum probation periods with a system that tied them to the position of the employee. Public comments demonstrated that attempting to categorise employees would be unworkable. As a result the new draft takes a simpler approach by linking maximum probation periods to length of contract – for example, requiring up to six months’ probation for a three-year or open-term contract.

While calls for clarity in regards to probation periods have been answered, expectations that the law would provide concrete guidance regarding non-competition covenants seem to have been dashed. Current PRC law is murky in an area that is of great concern to many employers having to manage employees in a hot job market: existing law requires that employers pay compensation post-termination in order to enforce a non-compete covenant, but only a few jurisdictions specify the amount of compensation.

The previous draft attempted to impose a standard compensation of one year’s salary. Realising that such a large amount was impractical, the current draft is silent regarding a specific amount. Limits on the amount of liquidated damages for the violation of a non-compete restriction were also removed, leaving employers with no clear guidance about the damages they could recover if an employee violated a non-compete restriction.

Representatives and unions
The focus of much of the outcry from the business community was a provision requiring employers to obtain the approval of unions or employee representatives before issuing company rules, such as employee handbooks and codes of conduct. The latest draft only requires employers to discuss company rules with unions or employee representatives before implementing them. However, a new provision states that the labour bureau can order employers to change company rules that violate applicable laws and to indemnify employees from any losses suffered as a result.

The current draft also dropped a requirement that an employer planning a mass redundancy must negotiate with, and obtain a consensus from, its unions or with all employees. This has been changed to a need to consult with trade unions or employees before a redundancy. Another positive change for employers is the expansion of the grounds for a mass redundancy to include economic-based redundancies (such as difficulties in production or management) and relocation of the enterprise due to pollution. Reflecting a possible compromise for these pro-employer provisions, a mass redundancy has been redefined as 20 employees (instead of 50), or 10 per cent, of the workforce.

Although many of the union-related provisions were deleted, one key consultation right was retained. Employers will still be required to give prior notification to unions when terminating employees unilaterally. Employers are also required to give the unions a chance to give their opinions regarding the termination. It is unclear whether this will require employers with no union to notify higher-level union authorities.

Employee rights
Enforcing and implementing these rights for all employees in China is difficult, but one change will probably impact on a pervasive problem throughout China: employees will be able to sue employers directly for unpaid wages. Currently employees must first seek relief from labour arbitration tribunals, with many claims being rejected for failure to meet tight filing windows.

Employees, however, lost a key right proposed in the previous version. This had given employees without written contracts the right to demand open-term contracts. The latest draft merely provides that employees without written contracts can demand contracts within one month of starting work. Employers that fail to provide contracts after the one month would be forced to pay employees twice their applicable wages.

Collective contracts and part-time employees
The State Council, China’s cabinet, wants to encourage the use of collective employment contracts covering employees from multiple companies on a geographic and industry-wide basis. The latest draft includes new chapters covering these types of employment.

Regulation of contracts for part-time employees underscores the need to provide a legal framework for the growing number of these employees. In the latest draft part-time employees’ contracts can be terminated at will, with no requirement for severance payments. In addition, there is no requirement for written contracts for part-time employees.

Although the proposed law provides a better balance between the interests of employers and employees, for foreign investors operating in China there will still be doubts as to their exact obligations. The balance between political and commercial interests will determine the final version of the law and to what degree requirements are enforced. Andreas Lauffs is a partner and Jeffery Wilson is an associate at Baker & McKenzie