28 December, 2012


Legal News & Analysis – Asia Pacific – China – Labour & Employment


The employment laws of the People’s Republic of China (“China” or “PRC”) are based on statutory law system. There is no system of binding case-law precedent and also no requirement for the reporting of cases. There are primary pieces of national legislation, such as the Labour Contract Law 2008, and also local legislation at provincial or municipal level, as well as varying local practices. In general, PRC employment laws are very protective of employees. In particular, employers can only terminate contracts unilaterally if a specific ground prescribed by law exists and these grounds are limited. For example, there is no ground to terminate for under-performance, unless this can be categorized as incompetence.


Against this general background, it is important to take great care in structuring and managing employment relationships and to think strategically about the issues that arise.


Issues arising on hiring individuals


Immigration and foreign nationals


Foreign nationals must obtain a work permit and residence visa to work in China for more than three months, whether employed directly by or seconded to work for an entity in China. Foreign nationals are subject to PRC individual income tax whether employed directly by or seconded to work for an entity in China. Social insurance obligations now also apply to foreign nationals, whether employed directly by or seconded to work for an entity in China (a few exemptions apply – e.g. German nationals). 


Employment structuring and documentation


Chinese nationals working as full-time employees in China must have a written Chinese language employment contract governed by PRC law – penalties apply for failure to do so. A subsidiary English version is permissible.


PRC law contracts can be for a fixed term or open term – employers tend to use fixed terms (1 – 3 years) because termination opportunities are limited, although there is a limit on the number of consecutive fixed term contracts.


Foreign nationals can be employed directly by an entity in China (with a PRC law governed contract) or can be employed overseas and seconded to the entity in China. 


Representative offices of foreign companies cannot employ any staff directly – for Chinese nationals a staffing agency must be used to hire staff; for foreign nationals secondment is normally used.


Implementation of handbooks, rules and policies are subject to a consultation process with employees.


It is not possible to contract out of mandatory provisions of PRC employment laws. In addition to national level laws and regulations, local regulations also apply (mainly provincial and municipal).


Finally, part-time employees (less than four hours per day / 24 hours per week) are not covered by many of the statutory protections – most issues (including termination) can be agreed by contract.


Issues arising during the employment relationship


Wages, leave and working time


Minimum wage requirements apply and the exact amount, which is reviewed annually) varies by location – in Shanghai (from April 2012) this is RMB 1,450 per month.


Employees in principle are entitled to paid overtime (or in some cases time off in lieu) after 40 hours per week – some exemption schemes apply for specific categories of employee such as management staff, transport employees, travelling sales people and security personnel. It is also common, but not mandatory, to pay a 13th month salary as a form of bonus.


In terms of working time, employees are entitled to a minimum of one day’s rest per week. After one year’s work (during their career) full-time employees are entitled to a minimum annual leave entitlement of 5-15 days per year – the exact amount varies according to total years worked.


Medical treatment leave applies – exact entitlements vary by location and years of work, although salary can be reduced during medical leave. Maternity leave also applies – the basic minimum is three months with extensions in specific circumstances. Further, female employees are exempt from termination (except summary dismissal) from pregnancy to one year after birth of child. Finally, marriage leave applies (three or ten consecutive days, including weekends) depending on the age of employee.


Labour unions


Employees can require their employer to establish a labour union within the company (or branch) and union representatives must attend board meetings on HR related matters and can generally represent employees. Unions must be registered with the All China Federation of Trade Unions. Industrial action is neither expressly permitted nor forbidden, but increasingly an issue or risk in practice.


Tax and social insurance


Employees have an obligation to pay individual income tax on their remuneration on a monthly basis. Employers have a separate independent obligation to withhold and pay this to the tax authorities on a monthly basis.Employer and employee have statutory obligations to make contributions to various social insurance and welfare funds. The exact funds and calculation of contributions varies by location, but typically include: housing, medical, pension, unemployment, work-injury and maternity.




Employees have a right and obligation to report unlawful activities to relevant authorities.

Issues arising on termination of the employment relationship

Business transfers


There is no automatic transfer of employees with a transfer of business or assets – employees must terminate their employment with the seller and enter into a new contract with the buyer.




There is no statutory definition of discrimination, but discrimination on the grounds of nationality, race, sex, religious belief, disability and infectious disease is recognized and prohibited. Sexual harassment of women is also prohibited.


This area of law is not sophisticated but claims are increasing. 


Terminating employment


During the probation period an employer can terminate without notice (if an employee fails to fulfill recruitment criteria) and an employee can terminate with three days’ notice. Thereafter, employees can resign at any time by giving notice (normally 30 days). Employers can only terminate for specific grounds prescribed by law, which are limited – for example, there is no ground for under-performance. Permitted grounds withoutnotice or severance include: serious breach of employer rules and policies; serious dereliction of duty or graft causing substantial harm to the employer; and criminal prosecution. Permitted grounds with notice and severance include: incompetence (after training and/or re-assignment of duties); failure to return to work after statutory medical treatment leave for non-work related injury or illness; and major changes in circumstances which render the contract unperformable.


Redundancy can only apply in specific “mass lay-off” circumstances (minimum 20 employees) when the employer faces financial or operational problems – consultation with employees and severance apply.


The statutory severance referred to above is one month’s salary per year of employment, although a cap applies to salary periods of employment from 2008 onwards. The remedy for unfair dismissal is either double severance (per above calculation) or reinstatement of the employment – the employee is entitled to request his/her preferred remedy


For further information, please contact:
Matthew Durham, Clyde & Co

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