Global Employment Law - Global News & Commentary on Labor and Employment Issues Worldwide

Background

Workplace laws in modern China do not have a long history. It was not until 1995 that the PRC's first labor legislation, known as the "Labor Law," came into effect. This law focused on basic employment law issues, outlined general employment obligations, and set out a framework of employees' rights.

In 2008, the development of labor protections advanced considerably with the introduction of the "Employment Contract Law" (ECL) and its implementing regulations. Among other major innovations, the ECL made written employment contracts mandatory and instituted new severance requirements. Together, this statute and its implementing regulations have markedly increased the burden of employment law compliance and overall costs of doing business in China.

In addition to national laws, in China, employers must also be familiar with and fully understand the local rules and regulations of the locality in which they operate. Indeed, it is not unusual for local governments in China to have their own unique requirements. For example, an employee handbook prepared for Shanghai could be illegal or incomplete in Beijing.

Given the dramatic change the ECL represents, universal compliance with the new law has not been immediate and local labor bureaus have not always diligently enforced it against employers. Nevertheless, many companies have found themselves entangled in disputes -- and facing costs -- that could have been avoided with a greater understanding of the law, and a few vital precautions.

1) Gain a Basic Understanding of Local Labor Laws

Some multinationals have been slow to grasp the compulsory nature of the PRC's labor laws. Many, assuming that the employee protections of their home jurisdiction must be stronger than China's, tend to ignore local requirements. However, both home and local requirements must ultimately be considered.

Though some multinationals may have domestic legal considerations that could apply to certain citizens of their home jurisdiction employed abroad -- e.g., U.S. citizens working overseas for U.S.-controlled operations may be protected by Title VII of the Civil Rights Act and certain other U.S. workplace laws -- such concerns do not excuse them from requirements imposed by PRC law on employment relationships in China.

By way of further illustration, a U.S. employer that does not use employment contracts for its U.S. "at-will" work force will likely face significant issues if it takes the same approach in the PRC.

Not only are employment contracts mandatory in the PRC, but well-drafted employment documents specifically designed for China operations will constitute essential evidence in the event of any employee disputes. When foreign employers fail to follow relevant laws, they find themselves at a disadvantage -- and almost always in the losing position -- in Chinese labor disputes.

2) Ensure Employee Handbooks are Specific, Detailed and Well-Publicized

The employee handbook has a different form and function in China than in most other jurisdictions. A failure to appreciate and act on these differences can add substantial risks to a China operation.

In recent decades, U.S. employers have made widespread use of employee handbooks to communicate critical company information, rules of daily operation, terms and conditions of employment, and procedures relating to performance assessment, complaint resolution and disciplinary action. This gives them some experience with detailed handbooks, but also can lead to complacency.

In other jurisdictions, labor relations policies are based on patterns of practice and regulation derived through collective mechanisms (e.g., labor agreements in unionized operations and/or practices resulting from mandated consultations with Works Councils, as in Europe), resulting in very little real experience with employee handbooks.

Due to such diverse experiences and mistaken assumptions, many employers in China, both foreign and domestic, fail to correctly understand the need to have a comprehensive, and thoroughly localized, handbook. Employers are often also unaware that in China the handbook cannot simply be written by the company and made passively available to employees. In order for it to be admissible as evidence in labor disputes, the handbook must be formulated through the "democratic procedures" set forth under the ECL and proactively "published" to the covered work force.

Among the China-specific topics often absent from imported or poorly drafted employee handbooks for use in China are specific provisions covering "corresponding punishment" for misconduct. "Corresponding punishment" provisions describe in detail the punishment that will accompany any rule or policy infraction.

A sliding scale of penalties for various forms of misconduct -- ranging from written warnings (oral warnings are inadvisable as it is difficult to prove that the employer has actually issued them), demotions, "demerits" and termination for the most serious transgressions -- is appropriate.

The absence of these can quickly undermine an employer's position in any dispute. To prevail, an employer must be able to prove the misconduct and further demonstrate that the employee both knew that it was prohibited and was aware of the consequences. The employee handbook is the best evidence for this.

3) Ensure Handbooks Do Not Include Unlawful Provisions

Not surprisingly, it is important that the handbook avoid illegal provisions. However, many provisions illegal in China would be legal in other jurisdictions, and as a consequence, employers may either willfully or accidentally include them in their China handbook.

For example, some handbooks state that the employer is entitled to make deductions from an employee's wages for misconduct. However, in China, if an employee's actions do not result in actual economic losses to the employer, such deductions could be illegal, and would not likely be supported by an arbitral tribunal or court.

While glossing over the intricacies of PRC law may result in liability, on the flip side, a better understanding of the local laws will pay off. For example, PRC law does provide a mechanism for withholding wages where the employer has suffered losses tied to an employee's actions.

Where this is the case, the employer may make a deduction from the employee's wages of up to 20 percent on a monthly basis, so long as the employee still receives at least the locally applicable minimum wage. If the desired offset would exceed 20 percent of the employee's monthly wages, the excess amount can be carried forward and deducted from the following months' wages.

4) Understand that the Application of Foreign Law Is Limited

Many employers operating in China specify in their standard contracts that the laws of their home country control. This impulse is understandable but violates the ECL, which requires that employment relationships within Mainland China (which for purposes of this law excludes Hong Kong, Taiwan and Macau) be governed by Chinese law.

Foreign employers seconding expatriates to work in China can avoid the application of PRC law, though it requires careful management of the employment relationship. This is done using an "assignment arrangement" in which the foreign employer's offshore entity establishes a relationship directly with the expatriate, and then assigns him or her to work for its local PRC entity for a specific period of time.

To successfully carry out such an assignment requires both careful contract drafting and vigilant oversight to ensure that the expatriate does not enter into any agreements with the local Chinese entity that could be considered employment related, and thus invite the application of PRC law.

In addition, since some U.S. employment laws (e.g., Title VII) apply with equal force to U.S. citizens working overseas, potential conflicts between Chinese law and U.S law could arise. Any such conflict in governing laws must be navigated carefully by a U.S. employer operating in China.

5) Recognize that U.S.-Style "At-Will Employment" Principles Will Not Apply to Terminations in the PRC

It is not unusual for U.S. employers to believe -- mistakenly -- that "at-will" employment policies can extend, automatically, or through incorporation into local handbooks, to employees in the PRC. By way of illustration, foreign employers in China may predicate their hiring practices on the assumption that they can freely dismiss an employee during the probationary period with or without cause.

However, there are many restrictions on the ability of an employer to terminate an employee in the PRC and termination without cause is prohibited outright, even during probation. In fact, in the absence of any legal grounds, an employer can only terminate an employment relationship through amicable consultations and with the mutual agreement of the employee.

Wrongful termination procedures in the PRC are also quite different from those in the U.S. Under the ECL, when an employee has been wrongfully terminated, he or she may request either reinstatement or compensation equivalent to twice the applicable severance pay. It is important to note that the choice of reinstatement rests solely with the employee.

Further, in order to legally terminate an employee for incompetence, the employer must first provide either additional job training or a new position, and then must show that the employee is still unable to perform satisfactorily. This procedure is further complicated by the law's silence as to the required duration of the training period or what type of new position should be provided.

In practice, the two factors that seem to be most important to labor arbitral tribunals and courts are that (1) the time period must be reasonable; and (2) the new position must correspond to the employee's knowledge and qualifications.

If the employee is still unable to perform his or her job duties after additional training or a new job position has been provided, the employer is permitted to terminate the contract by providing a 30-day written notice or by paying the employee an amount equivalent to one month's salary in lieu of notice. In all termination cases where the employee initiates legal action, the burden of proof to justify the termination falls on the employer.

6) Understand that Waivers of the Right to Overtime Wages Will Not Be Effective

Many modern production methods and market conditions encourage long hours. Consequently, some employers mandate a working day extending beyond the standard eight hours, and many employees even seek such arrangements to maximize their earnings.

However, unless the employer has obtained approval for a special working-hours system, it is illegal for an employee to contractually consent to extended working hours, or, more importantly, waive his or her right to overtime wages. According to the ECL, any employment contract will be wholly or partially invalid if the employer seeks to limit its legal liabilities or curtails an employee's rights.

7) Recognize that the Chinese-Language Version of Any Employment Contract is Controlling

Many contracts drafted by foreign companies operating in China specify that the English or other foreign language version of the contract will prevail in any subsequent dispute. Under Chinese law, however, only the Chinese version is legally binding. The foreign language version is used for reference only.

8) Plan Ahead to Satisfy the Strict Evidence Admissibility Requirements

Chinese law requires that all employment-related disputes first be submitted for resolution through arbitration. The arbitral tribunal's decision can be appealed by either party to the people's court with appropriate jurisdiction, with a second and final appeal available to the higher-level people's court.

However, strict and China-specific evidentiary rules apply at all stages. Many foreign parties underestimate the preparation needed for a successful defense and do not take the proper steps to ensure that their evidence is admissible in these legal proceedings.

9) When Terminating an Employment Contract, Provide Notification to the Trade Union

Trade unions in China are controlled by the state. Generally they do not engage in the aggressive collective bargaining on behalf of workers typical elsewhere in the world, but nevertheless wield some power and are well-integrated into the employment law landscape.

When a company with a trade union wishes to terminate an individual employment contract, the ECL requires the employer to first notify the trade union, consider its opinion and advise it in writing of the final termination decision. In practice, if the employer does not have a trade union, it must notify the regional higher-level trade union.

The ECL also gives trade unions the power to demand that an employer remedy any violation of law or an employment contract. If the employer fails to notify the trade union in advance but the termination is otherwise conducted in accordance with the law, the termination may still be valid. However, the employer would still need to notify the trade union as soon as possible after the fact, and communicate with it to secure its support.

In addition, employers must consider any specific local requirements. For example, in Shanghai, if an employer fails to notify its trade union of an impending termination and a wrongful termination case is subsequently filed by the employee, the employer must then notify the union as soon as possible prior to the issuance of the final judgment. If it fails to do so, the termination could be categorized as a wrongful dismissal due to procedural defects.

10) Recognize that it Costs Employees Very Little to Challenge a Termination

The ECL has totally eliminated the filing fees associated with mandatory arbitration, and in addition allows an employee dissatisfied with his or her arbitral award to initiate a court case for a filing fee of approximately $1.50.

It is, thus, much cheaper now for employees to initiate a dispute with their employers. Moreover, available data show that employees are victorious in five out of every six labor disputes. Given these facts, it is not surprising that official statistics reveal that the number of labor dispute cases has increased substantially since the ECL took effect in 2008.

Compounding this phenomenon, in May 2008, the PRC's "Labor Dispute Mediation and Arbitration Law" took effect, which extended the statutory period for filing most labor dispute claims from 60 days to one year. This new one-year period begins on the date when the employee knew or should have known that his or her rights had been violated. This permits an employee to initiate claims well after the termination or expiry of the employment relationship.

Conclusion

As is apparent from the preceding discussion, in China any oversight or misunderstanding on the part of an employer can lead to a costly labor dispute. As arbitration is mandatory before any litigation can take place in a labor matter, it is not uncommon for such cases to take more than a year to be resolved. In addition, if the employer is found liable for wrongful termination, it will generally be ordered to pay the employee's salary and benefits all the way up to the judgment date. With such lengthy proceedings, this can create substantial damages.

Fortunately, many such disputes can be avoided through careful attention to the compliance requirements of PRC law when both creating and documenting the employment relationship. Efforts devoted to these issues in advance are certain to pay dividends in both preventing formal proceedings from arising, and resolving them quickly if they do.

This article was written by Dr. Isabelle I.H. Wan, TransAsia Lawyers, and Peter A. Susser, Littler Mendelson PC, for Law 360.

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