International Employment Law Review - August 2013 - Issue 4: Overview of Labor and Employment Law in China

by Dechert LLP

As China’s economy and role in the international markets grows, labor and employment law plays an increasingly important role in China. Indeed, in recent years, the number of labor disputes has skyrocketed and this trend is expected to continue. Employers doing business in China or considering opportunities in China would do well to familiarize themselves with at least the basics of Chinese labor and employment law.

The National People’s Congress (NPC) has supreme authority to enact laws governing employment. The Ministry of Human Resources and Social Security of the People’s Republic of China (MOHRSS, formerly known as the Ministry of Labor and Social Security), a department of the State Council, is responsible for drafting national employment law. The labor administrative departments of local governments (usually referred to as “labor bureaus”) are responsible for enacting the local labor and employment rules and regulations. The local labor and employment rules and regulations are enacted by local congresses and their standing committees, or by local governments within their respective authorities.

The most significant statutes regulating labor and employment issues in China are the Labor Law of the People’s Republic of China, effective January 1, 1995 (the Labor Law), and the Employment Contract Law of the People’s Republic of China, effective January 1, 2008 (the ECL).

The labor and employment law of China may be interpreted by the Supreme People’s Court and the local people’s courts. Labor disputes are first submitted to an arbitration committee for judgment, and then to the courts. The interpretations released by the courts in China do not constitute binding precedent, but courts may rely on them as guidance in subsequent labor and employment arbitration and litigation. As a result, traditionally, relatively few decisions were regularly reported. However, in recent times, courts have been more willing to publish decisions and this enables parties to similar disputes to learn more about the approach taken in other matters.

2012 Amendment of the ECL

The issuance of the ECL in 2008 was a milestone event in the development of labor and employment law in China. The ECL mainly regulates labor dispatch. Almost five years later, on December 28, 2012, for the first time the ECL was amended. The Amendment was issued by the Standing Committee of the NPC of the PRC.

The Amendment contains four major revisions to the relevant provisions in the ECL. First, it raises the entry requirements for a labor dispatch service provider. ECL, Article 57 was amended to require several things including: every labor dispatch service provider shall meet the requirements as: a minimum registered capital of RMB 2 million (previously it was RMB 500,000); have fixed operating places and facilities which are qualified to operate a labor dispatch business; establish labor dispatch management rules in accordance with laws and regulations; obtain a permit from a competent labor authority and make corresponding registration as a company with the company registration authority. With regards to the permit requirement, the MOHRSS published a draft of Management Measures on Administrative Permit to Labor Dispatch on April 19, 2013 and solicited public opinion on the draft.

In the event that any entity provides labor dispatch service without meeting these requirements, its illegal income will be confiscated and additional fines of one to five times the amount of illegal income may be imposed. If the entity has no legal income, a fine up to RMB 50,000 may be imposed.

Second, the Amendment includes a definition of “equal pay for same work.” Amended Article 63 provides that the remuneration agreed to in the labor contract and the labor dispatch agreement should follow the principle of equal pay. In other words, the dispatched employees should receive the same salary for the same position as a direct hire would. According to the Amendment, if there is no identical position for comparison, the remuneration for a similar position should be used as a reference when determining equal pay.

Third, the Amendment emphasizes that direct hiring should be the primary means of employment in China. Labor dispatch should only be used to supplement a company’s directly hired workforce, and it can only be used for “temporary,” “auxiliary” and “substitute” positions. “Temporary” positions are positions that will exist for less than 6 months, “auxiliary” positions are those not related to the core business of a company, and “substitute” positions are those filled temporarily while a directly hired employee is on full-time leave. The Amendment also explicitly limits the percentage of dispatched workers in a company’s workforce. Those specific limits will be defined by the MOHRSS.

Finally, under the Amendment, both the labor dispatch service provider and the accepting entity will be liable for any violation of the rules on labor dispatch. The fine for illegally dispatched employees will be raised from RMB 1-5,000; to RMB 5-10,000 for each individual.

The labor dispatch agreements signed before the issuance of the Amendment can be executed till the expiration of its term, but those contents in conflicting with the principle of equal pay shall be revised.

The Supreme People’s Court Issues its Fourth Interpretation of the Law Applicable to the Hearing of Labor Disputes

On February 1, 2013, the Supreme People’s Court issued the fourth interpretation of the law applicable to the hearing of labor disputes cases (the Fourth Interpretation). The Fourth Interpretation mainly addressed issues such as service year calculation, non-competition agreements and related economic compensation, verbal amendments to employment contracts and the requirement of prior consultation with a trade union before dismissal.

Service year calculation: The Fourth Interpretation provides that where an employee is transferred to a new employer not due to the employee’s preferences and the original employer has not paid severance, when the employment contract with the new employer is terminated by either the employee or the employer, the new employer must pay severance based on not only the service to the new employer, but also based on the service years with the original employer. The Fourth Interpretation provides a list of factual scenarios in which an employee would qualify for this treatment.

Non-competition agreements and related economic compensation: The Fourth Interpretation provides that where an employer and its employee have reached an agreement on non-competition restriction in the employment contract or in a separate non-disclosure agreement, but the economic compensation for such non-competition restriction is not set forth in the agreement, compensation shall be paid at a fixed rate. If the employee has fulfilled the non-competition obligation, the employee is entitled to receive a monthly payment from the employer. The payment is calculated at a rate of 30% of the employee’s average monthly salary in the 12 months before the termination of employment. If the amount is less than the average minimum municipal salary, the employer must use the average minimum municipal salary number.

Verbal amendments to an employment contract: The Fourth Interpretation confirms that if an employer and an employee use verbal means to amend the employment contract, and the amended contract has been performed for more than one month and the amendments are not in conflict with laws or regulations, the oral amendment is valid.

Prior consultation with the trade union before dismissal: The ECL requires that employers notify their trade unions before they unilaterally terminate an employee. The Fourth Interpretation emphasizes this requirement and provides that an employee can seek a court order against the employer for damages for illegal termination, but this rule would not apply if the employer has rectified this defect in process before the litigation is commenced.

New Laws and Regulations Regarding Foreigners

On June 30, 2012, the Standing Committee of the NPC of the PRC passed a new law on exit and entry administration, which took effect on July 1, 2013. The new law contains some measures which seek to address issues related to foreigners who illegally enter, live or work in China. The new law restates that foreigners must have valid work permits and work-related residence permits before they can work in China. Companies and individuals are prohibited from employing a foreigner without both a valid permit and work related residence permit. The new law also provides that foreigners will be deemed to be illegal employees if they work in China without valid employment permits.


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Dechert LLP

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