When it comes to doing business internationally, being compliant with labor laws is undoubtedly an important requirement. This is especially true in markets like China, which historically have had a hostile regulatory environment for foreign businesses. As the world’s second-largest economy, however, businesses are now looking upon China more favorably. If you are in such a position, it is imperative that you understand the applicable China labor laws to keep your business on the right side of the regulations.
In this post, we review various types of China labor law, setting out the basics for anyone considering international expansion into China.
What Types of China Labor Laws Exist?
China labor laws are split into various different subtypes of regulation. The most common among these are labor contract law, the guidelines for mediation and arbitration of disputes, trade union law, law for social security measures, workers’ safety law, and the law for prevention and control of occupational health hazards.
Guidelines for Following Applicable China Labor Laws
Employment laws are frequently updated by the government and it is essential that as a business owner or a decision-making authority, you keep your company compliant with the same. Failure to do so often attracts penalties in the form of hefty fines and affects the reputation of your organization. The following are some points for you to keep in mind to ensure adherence to applicable China labor laws and thus run your operations smoothly in the country.
1. The Employment Contract
The employment contract is a legally binding document that is signed by both the employer and employee when the employee starts working at a company. Unlike the US, where the usual practice is “at-will” employment (meaning either party can end the relationship without giving any reason), China labor laws mandate an employment contract.
Failure to draw up and sign a proper contract can prove to be a costly mistake for your company. This will not only require you to pay fines as a penalty, but will also require you to double the employee’s salary if they work a month without a contract. And in case the employee works a year without an explicit written agreement, then the contract becomes effective for an indefinite period, i.e. it becomes open-term. An open-term contract is permanent in nature and requires the employee’s retention until their retirement age. Needless to say, not drawing up a properly written contract could come with some disastrous consequences that you most definitely want to avoid.
Mandatory Provisions for Employment Contracts
The main compulsory provisions to include in the contract are:
- Basic employer information
- Basic employee information
- Contract term, including probationary and training periods, if any
- Working hours
- Job description, including all relevant duties
- Work location or site
- Applicable leaves and breaks
- Detailed salary information, along with severance information
- Employee’s social security and insurance information
- Provisions for labor safety and employee protection
- Any other item as mandated legally for specific industries
Some provisions are considered applicable irrespective of whether they are included in the contract. These are:
- Minimum wage stipulations
- The grounds or reasons for a termination
- The statutory severance package
Language of the Contract
Chinese labor laws only recognize an employment contract written in Chinese as legally enforceable. Hence, even if you draw up a contract in both Chinese and English (or the language of your choice), you have to remember that the Chinese one is the only valid contract in eyes of the law. However, it is always a good practice to have a dual language contract written, signed and stored in the employee’s personnel file for ease of reference.
Another fact to keep in mind when writing a contract is the tone of language itself. A vaguely written contract is detrimental to the employer in case it is contested and the court rulings are usually in favor of the worker. Hence, you must take care to be precise in your wording and include all the above-mentioned provisions along with any additional things like employee’s eligibility for social insurances, if applicable.
2. Foreign Invested Enterprise (FIE)
It is common practice for foreign investors to opt for a Foreign Invested Enterprise (FIE) when expanding into China. An FIE is a form of legal entity that allows you to carry out various business functions in China, including allowing you to hire employees and carry out trade in China under certain circumstances. China labor laws vary between these different types of legal entity.
One option, for example, is setting up a representative office as your company’s legal entity. The drawback of such an entity is that it cannot employ people locally and has to take the help of a labor services company that is designated by the Chinese government. This company will then hire people on their payroll and lease them to work at your representative site.
Due to such strict regulations around various forms of FIE, it is often prudent to enlist the help of a local Professional Employer Organization (PEO) to hire your employees in China.
3. China Termination Laws
As mentioned earlier, the absence of “at-will” employment means that employers cannot terminate their employees without “reasonable cause”. The employment contract is another tool that protects the workers from being terminated from their jobs once their probationary period is over (and before the end of contract date) without any valid reason. Some of the acceptable causes for which an employer can ask an employee to leave are as follows:
- Gross misconduct or misdemeanor
- Criminal activities
- Neglect of duties
- Severe incompetence
- Reaching the retirement age
If an employee thinks that a wrongful termination has occurred, they can file a grievance report with the labor arbitration body free of charge. The court then asks the employer to provide necessary documents stating that the employee was lawfully terminated. Failure to do so may result in the court ordering the employer to reinstate the employee and pay them double severance payments for the damage.
Thus, in order to carry out business in China, it is crucial that you remain compliant with these termination laws.
4. Severance Packages
If the employment contract is terminated without any cause then applicable China labor laws stipulate that severance pay must be issued to the employee to the tune of one month of pay for every year worked in the company.
The present calculations for the severance packages are divided into two parts for work done before and after 2008. To calculate the pay, the average of the monthly salary drawn for the 12 months just before the dismissal is considered. This average is, however, limited by the government to three times the mean monthly salary of the local employees in a region.
Doing Business in China with a PEO/EOR
China is without doubt a market of great opportunity for foreign businesses. If your company is interested in doing business in China and is not sure how to handle applicable China labor laws, consider using a Professional Employer Organization (PEO) (also known as an Employer of Record (EOR)) and read our ratings of the top three PEOs in China.