Multinational companies benefit a great deal from participating directly in China’s economy, but significant legal and cultural differences mean that business must be conducted differently there. To help arm you with the necessary knowledge needed to succeed in China’s labor markets, CBL has provided answers to 20 different frequent employment and labor law questions spanning seven topics.
Topics
Adapting Global Workforce Documents
Contracts of Employment
Is At-Will Employment Allowed in China?
Chinese labor law policies do not allow for at-will employment like that done in the United States, where the employer is free to terminate the employment at any time. Instead, China requires a term of at least one year offered in an Employment Contract, which is intended to significantly increase employees’ job security. After serving two terms at the employer, the employee can request a permanent employment contract. Strict rules govern the conditions under which an employee can be terminated, which require a reasonable basis for the termination, such as poor performance or poor business conditions that necessitate a layoff. The procedures for processing a termination under these conditions are complicated and, overall, terminating an employee in China is much more difficult than most other countries.
Is a Written Contract of Employment Required?
Chinese employment law requires signing a written employment contract with employees, which ensures that all aspects of the relationship are highly formalized. Under the statute, an employer that fails to sign a written employment contract within one month from when work starts will be subject to penalties, including double wage requirements for the employee. Even worse, the legal relationship will be characterized as permanent employment if the employer does not sign the contract within a year, which offers an even higher level of protection. Therefore, a business operating in China needs to have an effective legal compliance system in place for its human resources management.
Is an Employment Offer Letter Sufficient to Create an Employment Contract?
Yes and No. Overall, yes, an offer letter can create a contract to which you are liable, but, no, it’s not a legally compliant way to enter into an employment contract.
Under Chinese law, an offer letter is not an employment contract and is generally not going to be compliant with labor law, even if duly signed and executed. Companies in China do not use offer letters in this way, as that is more of a foreign cultural practice, and will generally use an employment contract. A dissatisfied employee could, therefore, file a claim for damages for an unsigned employment contract. However, under Chinese case law, an offer letter has been found by judges to constitute an obligation to enter into an employment contract at the terms described in the letter. In some cases, the courts have imposed a constructive employment contract where employers have rescinded the offer letter, holding the employer liable to its terms.
Can Employees in China Be Asked to Sign a Non-Compete Agreement?
The China Employment Contract Act allows for employers to use non-compete agreements, which can be signed with anyone who comes into contact with trade secrets, company executives, and senior technical personnel. A non-compete can remain in effect for two years after the discharge or termination of the employee, and the employer is required to pay the former worker financial compensation during that time. Financial compensation should be decided before the agreement is signed and should be sufficient to pay for the worker’s cost of living. In any event, it cannot be lower than the local minimum wage. Failing to pay financial compensation will void the non-compete obligation.
Can I Hire China Employees Without a local Legal Entity?
Generally not, but there are some common workarounds. The law itself states that you must form a legal entity within Mainland China and sign a Contract of Employment with all employees, meaning an LLC or a partnership with which to hire employees must be formed. A representative office cannot directly hire employees.
A common workaround is often called “labor outsourcing,” however, the approach is illegal and high-risk and can result in major legal liability and enforcement actions. For instance, a company using an employer of record that nominally hired 10 workers was held liable for $50,000 in damages to employees for the outsourcer’s labor violations, and its business managers who visited China were not allowed to exit the country until the employer paid the full balance.
There is a legal way to structure this kind of outsourcing, which we cover in an article here. We also have a separate article discussing the legal risks involved with EOR/PEO services in China
Adapting Global Workforce Documents
Can I Use My Global Employment Contract Version in China?
Partially. A contract being used in China needs to incorporate all local law provisions both in compliance with the employment statutes and in a way that conforms to Chinese business practice. For instance, there are several highly China-specific strategies for enforcing a non-compete provision, and while these strategies aren’t part of the law, it’s hard to enforce the provision without them. Secondly, any kind of labor law matters covered by a statute need to be drafted in the contract according to Chinese law and using the same phrasing and logic used in local laws. Otherwise, arbitrators and judges will think you have a poor commitment to labor law compliance.
At the same time, lawyers often have a poor understanding of how things work on the business side and will often copy language from other companies operating in the same industry without understanding your specific business model or organizational behavior dynamics. Business-side knowledge should be incorporated from global employment contracts and other employee guidelines to ensure that you are empowered to take action to the full extent permitted by law. Therefore, contract localization for China is necessary.
How Should an Employment Agreement Be Localized for China?
The first question in localization is “who” should localize the document. While lawyers are skilled in the law, China’s international lawyers mostly lack minimum language proficiency and the localization skills needed to localize any legal documents for the China market. If looking at the American Council for Teaching Foreign Languages (ACTFL), an attorney should minimally score “Superior” language proficiency in writing. However, lawyers in Shanghai who routinely counsel clients in English rarely score above “Advanced-Mid,” two steps below minimum competence. Secondly, China’s national standards governing language localization require being able to pass a certification exam, such as the ATA, CIOL, or CATTI-2 standards.
Here, virtually no lawyers have passed minimum competency on localization or translation skills. Often, they try and fail. In practice, lawyers usually just put documents into ChatGPT, generate answers, make a few changes, and pass it off as expert work.
A successful approach is for lawyers and linguists to collaborate with each other on the production of the final document. A good first step is for the linguist to translate the employment contract and other relevant guidelines into Chinese, and to make a summary in Chinese of English-language information about other important global business information. Then, the linguist can meet with the attorney and discuss what steps to take when adapting the contract to the local market. Particular attention should be paid to ensuring that the client’s intent and possible future needs can be manifested in the contract language.
A review should be done to ensure that contract provisions are adequately localized. The Google Translate dialect of Mandarin is extremely common in Chinese contracts, but relying on “Google Translationese” is a quick path to defeat in labor arbitration. The attorney should draft a memorandum in their native language—Mandarin Chinese—briefly identifying the rationale for decisions deviating from global practice. Unless they have language and localization proficiency certifications, don’t have the attorney write in English. That’s even worse than getting legal advice from an unlicensed attorney or surgery from an unlicensed physician.
The fully localized contract should then be translated back into English for the client’s review, and again, the linguist and attorney should meet to discuss the contract and memorandum, especially to resolve ambiguities or untranslatable expressions in the memorandum.
Company Policy Requirements
Am I Required to Have an Employee Handbook?
While a handbook is not mandated by Chinese law, an employer will be virtually unable to defend an employment dispute without one. If an employer makes decisions regarding payment, working hours, rest periods, or workplace safety, or disciplines an employee, an inclusive process must be used that accounts for employee input. This involves holding a meeting to discuss, deliberating about provisions, and then implementing the handbook with adequate notice. The labor union or representatives from a meeting of all the employees must be included in the process. Consent to the handbook is not required, only the inclusive process.
Is a Different Company Policy Needed for Different Regions?
Yes, a different policy and handbook is needed for each different province or home rule city you operate in. This is because of how the Chinese employment law system is structured with a general statutory framework provided at the national level, and local laws adapting rules to regional conditions and expectations. Let’s go over how it all fits together.
Labor and employment law is governed by several Acts of Congress and cabinet-level administrative regulations that establish uniform legal principles nationwide. The national laws establish the fundamental legal principles that provide how the system should work in general and what an employer may or may not do, but the rules aren’t specific enough to determine what will happen in a specific case. Major congressional legislation includes the PRC Employment Act, Employment Contracts Act, Protecting Women’s Rights Act, and Occupational Health and Safety Act. These national laws establish the law for paying wages, entering into employment contracts, and discharging employees.
Local laws passed by provinces and home rule cities fill in specific details, such as the specific number of days allowed for maternity leave. Cases are heard by local arbitration tribunals and can be appealed to the courts, and in practice, the labor law bar is knowledgeable about the judge-made caselaw used in the courts of each region. Despite the high consistency in the rulings at the court of appeals overseeing each region, there is no official judicial precedent doctrine. There are some legal issues for which different judges in the same court building will rule differently, but lawyers can also identify consistency and consensus that amounts to effective caselaw.
A common example is that Shanghai interprets its minimum wage level as being the amount after social security deductions are taken, whereas Shenzhen considers minimum wage to be the pre-deduction amount.
Does the Company Need an Employee Privacy Protection Process?
To some extent it does, but it works differently than elsewhere. Unlike the United States, there is no specific employee privacy law that provides for what kind of privacy employees are entitled to; rather, general purpose legislation applies.
Employee privacy is covered by general statutes, including the Internet Security Act and the Personal Information Protection Act. These congressional acts establish a framework for vigorous data rights protection in China, and in some ways, they are more comprehensive than employee privacy laws. Employers must establish and enforce an effective data protection policy for their employees and obtain their consent before collecting their data. Multinational companies will be affected by cross-border data export regulations. An international business operating in China can expect to audit its data protection policies annually to ensure that they are up to date with current rules.
Terminating Employees
How is Discharge and Employment Termination Done in China?
The law in China tightly regulates the entire termination process; therefore, discharging an employee needs to be done according to a very specific process and requires reasonable grounds for doing so. The statute divides terminations into several different kinds, including for malfeasance, by agreement, layoffs, objective material change, and poor performance. Prior to legally terminating an employee, employers are required to follow a time-consuming process involving providing performance evaluations, offering a different job, or retraining. They must also document the full termination process and reasons for doing so to support their decision before a labor arbitrator.
Except for cases of serious misconduct, an employer will generally have to pay severance compensation. In China, severance is required in the amount of one month’s salary for each year that the employee has worked for the employer.
Additionally, the employer must follow several specific procedures when conducting employee layoffs. For example, they are required to identify which employees have been with the company for a long period of time or who have dependents to support, and give them priority in keeping their jobs. The company is also mandated to allow its labor union to conduct a meeting of all employees and hear their opinion about how to do the layoffs. Finally, the employer needs to file a report on how the layoffs will be done with the local labor regulatory agency.
How Are Employment Termination Disputes Adjudicated?
The first step in adjudicating an employment dispute is to file for arbitration at a local tribunal, as claimants are not permitted to file initially in court. If a party is dissatisfied with the arbitral award, they are entitled to make an appeal within 15 days, after which the arbitral award is final and binding.
Regulatory Compliance
What Are the Minimum Wage and Overtime Pay Requirements?
China’s law on wages is focused on ensuring people are paid fairly and preventing exploitation. Local governments have a great deal of autonomy to set minimum wages, and each province and home rule city sets their own minimum wage periodically based on local economic conditions, which primarily involves studying the cost of living within the province.
Employers in China are also required to pay overtime for hours beyond 40 hours a week, during weekends, and during holidays, and are liable for damages if salaries are paid late. Exceptions to overtime rules, however, are possible for employees on a fluctuating work week schedule.
What Social Security Contributions Must be Made?
Social security in China is intended to benefit workers of all ages and for different needs, such as workplace injury and childbirth, and contributions are mandatory. Responsibility for paying into social security is divided between both the employer and employees, and involves payment to funds for retirement benefits, medical insurance, unemployment insurance, worker’s compensation, and maternity benefits. Payment into a government Housing Provident Fund is also required, and different regions may have different contribution requirements.
Therefore, business managers in China need to proactively take steps to correctly process social security contributions when doing payroll and take note of any specific regional contribution requirements.
Are There Workplace Safety and Health Requirements in China?
China has been progressively implementing its Occupational Safety and Health Act throughout each of its various regions. Employees must be provided with a safe work site and given training and personal protective equipment.
Over the past decade, a number of high-profile incidents, including several chemical plant explosions, have drawn public attention and prompted the government to more vigorously enforce workplace safety law. Now, very large OSHA fines that accrue for each day of non-compliance can be imposed. Therefore, businesses in China generally recognize that complying with occupational health and safety law is essential to avoid these large fines.
Chinese workers expect a safe environment, and business consultants have also widely pointed out that the effectiveness of workplace safety programs significantly influences employee morale. Therefore, the most knowledgeable experts would advise being proactive about ensuring full compliance with the Occupational Health and Safety Act.
Temporary Workers
Does China Allow Temporary and Part-time Workers?
Yes, China adopted the legacy United States system of “employee leasing,” which has been mistranslated back to English as “labor dispatch.” The law permits up to 10% of the total workforce comprise of temporary employees, but specifies that they may only be used for temporary non-essential positions. Hiring part-time workers is also possible but note that they will be entitled to a written employment agreement if their work time exceeds 24 hours per week. If you don’t sign this agreement, you will be liable to pay double their salary in damages and must pay severance damages if you discharge them from employment.
Independent contractors are not well recognized by Chinese law, and are generally treated as part-time workers. Therefore, special care should be taken to adopt a policy that ensures you avoid the risk of unintentionally incurring double salary and severance payment liability.
Another approach that is sometimes taken is for the employee to form their own entity. However, this creates serious legal risks and courts will classify them as a bona fide employee should a dispute arise, holding you liable for non-compliance with labor law.
Unions
How Can Labor Unions Affect the Business?
In China, the Labor Unions Act requires that labor unions represent both national and worker interests and labor unions have, in recent years, encouraged workers at foreign companies to establish a union for their workforce, which would require an additional 2% of total payroll to be paid as union dues. Chinese labor law requires company unions be consulted whenever making changes to workers’ salary, work conditions, or scheduling, or changes to the employee handbook or company policy for employees.
There are some procedural requirements that go along with labor unions; for example, an employer that discharges an employee must provide the labor union with notice even if the employee is not a union member. Furthermore, all unions must be part of the national federation of trade unions, which is under the leadership of the Chinese Communist Party.
Legal Reviews
What Employment Legal Risk and Compliance Reviews Should Be Done in China?
Typically, an attorney will need to review copies of all of the employer’s written documents for their China offices, such as employment contracts, policies, and employee handbooks, and a description of any current or past employee problems, including poor performance, misconduct, or harassment, to ensure compliance with specific requirements. For example, China has a very specific performance review procedure for discharging an employee due to poor performance that must be followed in order to legally discharge said employee. Companies with IP concerns can also provide attorneys with lists of trade secrets to protect and the employees who have access to those trade secrets.
Often, existing documents and HR records will imply the existence of other documents that should exist but that have not been drafted. For example, anti-corruption policies are often a standalone and missing document. Following their review, the lawyer should then draft a memorandum in Mandarin Chinese discussing their impressions of each document and recommendations about what subsequent steps to take to improve the company’s HR risks and compliance. The Chinese version of the memorandum should be provided to the relevant managers at the local office to review in their native language (Chinese); and an English language version should be prepared by a well-qualified linguist with expertise in the law who collaborates closely with the attorney.
Are Legal Reviews Necessary for Small Businesses?
There are some cost-effective strategies for small businesses that can help ensure legal reviews provide good return on investment in terms of risk mitigated. In particular, you can scale down the amount of legal work done to better fit the needs of a smaller local operation, and attorneys can focus on a smaller number of high-value items. As an example, a small local office with a dozen software engineers would benefit from having basic trade secret protection rather than zero trade secret protection.
Another cost-effective approach is to educate yourself about how employment law works in China and what good legal strategies are. Many business executives hire expensive international lawyers to brief them on basic China law principles that you could learn about for free in an afternoon of reading.