Changing standards

The development of China's Labor Contract Law (LCL) has been nothing if not controversial. When proposals for this unprecedented legislation were first released, observers were divided over whether it imposed unrealistic obligations on employers or successfully enfranchised employees.

It appears the comments and concerned submitted by interested parties were heeded. A revised version of the draft labor contract law, submitted to the National People's Congress on December 24, while still very employee-centric, has been toned down and contains fewer ambiguities than before.

But it does substantially alter existing employment standards, something which will have an impact on all employers in China, both foreign and domestic. Pre-existing employment contracts will not be grandfathered and will need to be revised or redrafted to comply with the LCL.

As soon as the law is issued – expected in May 2007, from which time it will work in tandem with the Labor Law of the PRC (LL) – firms will be faced with additional costs, legal burdens and liabilities.

Consensus required

One of the major provisions of the draft LCL specifies that policies and rules made by employers, directly relating to "vital interests" of employees, must be agreed upon by employees or their representatives.

This means rules deemed necessary by an employer regarding a company's business or management may be subject to the approval of employees. "Vital interests" have been defined as including: wages; work hours; vacations; safety; training; discipline; and labor management. Such measures could seriously undermine a company's management and business plans.

Additionally, the draft LCL specifies where employees, or their unions, believe certain company rules are "inappropriate" they will have the right to pursue the revision of the rules by negotiation.

However, it isn't made clear what would happen if such negotiations were to fail. In the absence of any further definition, under the LL, this would likely constitute a labor dispute which would need to be adjudicated.
The draft LCL states whenever an employment relationship is formed without a written contract, a contract must be entered into within one month from the day in which the employment relationship was formed. This relationship will likely be deemed to have been formed from the date of recruitment or employment, or whichever date is earlier.

Furthermore, in the absence of a written labor contract, the employee should be paid in accordance with any collective agreement the company has with other employees or, failing that, with general standards as used in the company's industry. If there are still no collective contracts to refer to, the employee should be paid the same as other employees in the company with the same position.

If a company fails to enter into a written agreement with an employee within the one month period then the employee must be paid double what their salary should be until a written agreement is entered into.
Additionally, with limited exception, where an employer and employee have a different understanding regarding their labor relationship, the employee's perspective will prevail.

The draft LCL also hits employers hard as, in the case of labor contract disputes, it requires an analysis of disputed terms – but where more than one interpretation can be made, the version most beneficial to an employee prevails.

Limits to employee probation periods are another significant part of the draft law. There will be one month probation for employment agreements lasting less than a year, two months for one- to three-year agreements, and a maximum six months for fixed-term agreements exceeding three years or non-fixed term agreements.

Employer liability

Even where an employer and employee mutually agree upon an extended probation period, if it violates the LCL, it will be deemed invalid and need to be rectified, with the employer liable for damages.

During a probation period, employee wages shall not be less than the lowest wage paid for that position in a company and cannot be less than 80% of an employee's post-probation salary.

The new draft LCL also specifies that, during probation periods, employers cannot terminate employment contracts without evidence showing an employee has failed to meet the hiring requirements. Where an employer does terminate a labor contract during a probation period it must give the employee and explanation.

As for non-competition agreements, the draft LCL limits these to top management and technical personnel, and other employees with knowledge of commercial secrets.

While the specific terms of such agreements, such as compensation and geographic scope, are negotiable by agreement between employers and employees, duration may not exceed two years.

The draft LCL allows employers to terminate non-fixed term employment contracts by giving 30 days' advance written notice or one month's salary in lieu of notice. However, terminating fixed-term contracts will be costly and burdensome to employers even where employees cannot perform due to non-work related disabilities or illnesses, incompetence or where positions may become obsolete.

Parting of the ways

On severance, the draft LCL substantially deviates from existing rules. Under current practice, when employment contracts expire without renewal, no severance is due. The same rule applies where employees resign or otherwise terminate employment agreements.

However, under the proposed rules, severance payments must be made to employees based upon their term of employment with no exception for employment contract expirations without renewal, employee resignations, the triggering of contractual terms conditioning termination or very short duration hires.

One area of confusion is the portion of the draft LCL relating to employers that use labor service agents to hire employees on their behalf.

The draft states that employers may hire employees through labor service agents for a term of service according to their needs. It also specifies it is the agent that enters into an agreement with an employee and then dispatches that employee to the employer.

But, under the proposed rules, consecutive short-term labor dispatches that would segment a longer employment term are not allowed. Labor service agents must enter into two-year fixed-term contracts with employees, so the ultimate effect on employers is unclear.

An important legal point raised by the draft LCL specifies that, where a labor dispute predates the law's implementation, it will need to be resolved according to the LCL.

Since most employment contracts in dispute upon the LCL's enactment will likely have been drafted in accordance with pre-LCL standards, employers could be subject to far greater liabilities than anticipated at the time they entered into those employment agreements.
In order to mitigate significant risk and liability, all companies are advised to undertake professional legal due diligence to evaluate their employment contracts and human resources practices.

The degree to which the draft LCL favors employees, and the serious liabilities that can flow to employers through the careless drafting of contracts, means that substantive terms of all employment agreements should be crafted carefully.

Additionally, where both Chinese and non-Chinese versions are executed, translations must be identical in meaning and spirit.

China Axis, in association with Shuang Cheng, regularly helps companies evaluate their employment contracts and perform necessary due diligence, analysis, revisions and redrafting for legal compliance. For more information, go to www.shuangch.com or contact the firm at info@shuangch.com