Employment Law – China

Key Employment Documents

Key employment documents include employment contracts, employee handbooks, expatriate assignment agreements, non-compete agreements, and termination agreements. Many employers often wrongly or mistakenly believe that they can adopt the employment documents of their offshore parent companies or affiliates and use them in China with minimal or no revisions. This is often a fatal mistake which employers discover upon the occurrence of a labor dispute and learn that such documents may actually be invalid or contrary to Chinese law.

It is imperative that employers ensure that all key employment documents be reviewed from a Chinese law perspective to ensure due compliance. Such review should include incorporating the latest legislative changes at both the national and local levels. It is also important to note that, unlike corporate documents, employment documents must be in Chinese to be legally binding.

Social Security, Housing and Welfare Benefits

China prescribes a mandatory social insurance scheme for Chinese employees in which the employer must contribute their own portion in addition to withholding and paying for their employees’ portions. The social insurance scheme is comprised of 5 different funds: unemployment, housing, pension, maternity, and work-related injury. In China, the calculation basis of the social insurance schemes differ by locality due to income disparity among the different regions.

On 1 July 2011, China’s new Social Insurance Law came into effect and became the first piece of legislation enacted on the Chinese national social insurance system.

Stock Options

There is no comprehensive legislation that addresses stock options under PRC law except for those relating specifically to PRC-listed companies’ management incentive option plans. For stock option schemes, if the stock option agreement is to be signed between an offshore company and a Chinese employee, from a Chinese legal perspective, the agreement does not need to be governed by Chinese law. However, it is essential that such a stock option agreement be carefully drafted to avoid conficts with Chinese law, particularly with regards to issues relating to registration under Circular 75 (if the offshore company is a non-listed entity) or Circular 78 (if the offshore company is a listed entity) of the PRC State Administration of Foreign Exchange.

Termination and Retrenchment

The 2008 Employment Contract Law set forth the following limited grounds for terminating employees: immediate termination by the employer where the employee is at fault; termination with 30 day advance written notice where the employer has cause; termination by mutual agreement of the parties; or voluntary resignation by an employee. However, contrary to certain Western jurisdictions, the law does not recognize “at-will” or unilateral terminations without cause. As such, it is vital to ensure that the early termination of any employee be handled with due care; failing to do so could result in a labor dispute case. Since Chinese employment laws are pro-employee, the burden of proof to justify the termination rests solely on the employer.

Expatriate Employment

In order to avoid the applicability of Chinese law when hiring expatriates, we generally recommend that such expatriates be seconded by the employers’ parent companies to their local Chinese subsidiaries. A secondment or assignment agreement needs to be properly drafted to minimize the possibility of Chinese law governing the relationship. Such an agreement can be attached to the expatriate’s master employment contract with the parent company, and both agreements can be governed by the same set of foreign laws. Recently, the State Administration of Taxation has tightened its scrutiny over permanent establishment issues arising from secondment arrangements. As a result, the proper drafting of a secondment or assignment agreement has become all the more important.

In addition, as of 15 October 2011, China has introduced new administrative regulations mandating expatriates to participate and contribute to the Chinese social insurance system (South Korean and German expatriates are exempted from certain kinds of social insurance contributions as a result of their countries’ bilateral social insurance treaties with China). As of April 2012, most major cities, including Beijing, Tianjin, Chengdu, Qingdao, Guangzhou and Shenzhen, have implemented these new regulations. However, Shanghai has not formally required expatriates to make mandatory contributions, meaning that employers in Shanghai can choose whether or not to enroll their expatriates into the Chinese social insurance system.

Sexual Harassment

Regulations governing sexual harassment are still developing and relatively immature in China. The relevant provisions are scattered throughout various laws and local regulations as opposed to a specific document. Although China’s national laws stipulate that “no individual is permitted to sexually harass women”, there is no legal definition of “sexual harassment” at the national level. That being said, the definition for such is subject to certain local regulations. For example, in Guangdong Province and Guangzhou Municipality, sexual harassment is defined as “any form of sexual harassment imposed on women via language, words, gestures, graphics, electronic messages, etc.”.

Labor Dispute Resolution

Chinese law stipulates mandatory arbitration as the first dispute resolution forum for any labor disputes. If either party is dissatisfied with the arbitral award, it can then “appeal” to the local people’s court. Litigation will generally involve a trial of first instance and often a final appeal to the higher people’s court. In early termination cases where an employer terminates an employee before the expiration of the employment contract, the employer bears the burden of proof to justify the propriety of the termination. This burden of proof can only be discharged with solid and relevant evidence which is to be collected and/or preserved in accordance with the law. In this connection, evidence collection and preservation can be both time-consuming and costly. As such, employers must be prudent in handling its employees, particularly with a view to minimizing labor disputes where possible. This would entail establishing a PRC-compliant employment management system which includes the retention of all relevant records pertaining to employees’ salaries and social insurance payments, performance reviews, clock-in/clock-out records, disciplinary warnings, etc.

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