The State Council promulgated a new regulation, the Implementation Rules of PRC Employment Contract Law (the New Rules) on September 18 2008. This is the government’s latest effort to clarify certain key issues within the Employment Contract Law (ECL) which became effective on 1 January 2008. The New Rules focus on clarifying the following points listed below which have previously drawn significant criticism from the public.

Written employment contracts

The ECL expressly requires that employers sign written employment contracts with their employees within one month of hiring them. An employer who has only signed written employment contracts with its employees after one month but still within a year, must pay its affected employees double their salary from the end of the first month the employee is employed until the day before the written employment contract is signed.

An employer who has failed to sign written employment contracts with its employees within a year will be deemed to have signed open-ended employment contracts with its employees, which can only be terminated for the causes listed in Article 19 of the New Rules.

If an employer refuses to sign an open-ended employment contract with an affected employee in the written form required by law, the employer will be liable to pay double the employee’s monthly salary from the date when an open-ended employment contract should have been signed until such open-ended employment contract is actually concluded in written form.

The ECL was however silent on the consequences for an employer who has failed to sign a written employment contract with its employee due to the fault of that employee. The New Rules have provided clarification on this point. Article 5 of the New Rules provides that where an employee, having been notified by the employer in writing, fails to conclude a written employment contract with the employer within one month from the day on which he is employed, the employer must terminate the employment relationship with the employee by notifying the employee in writing. Following this notification the employer will not be required to give any economic compensation to the employee, but shall pay the employee for his/her actual working time. The New Rules therefore offer employers fairer protection when non-compliance is not caused by their own acts.

Open-ended employment contracts and causes for termination

An open-ended employment contract is an employment contract that does not specify an expiration date. In general, open-ended employment contracts under Chinese law are seen by the government as a way to protect the rights of employees, as employers cannot terminate such employment contracts without justifiable reasons. The ECL expressly provides that an employer may be required to sign an open-ended contract with his/her employees under certain circumstances, which include:

1. where the employee has been working for the employer for 10 consecutive years; or
2. where the employee has concluded two consecutive fixed-term employment contracts with his/her employer, and has not breached any of the provisions as set out in the ECL which can be used by the employer as legal reasons for refusing to sign an open-ended contract.

After the promulgation of the ECL, an employee who has served a long service period at a company may be able to request that he/she signs an open-ended contract with his/her employer. This prospect has resulted in protests from employers who feel they may not able to terminate the employment of some of their longer serving staff, even if they have justifiable reasons to do so. They contend that this may damage the competitive atmosphere within their companies.

To clarify this misconception, the New Rules emphasise that granting an employee an open-ended employment contract will not make it impossible for an employer to terminate an incompetent employee’s employment. An employer can still terminate an open-ended contract for the same reasons which are used to terminate fixed-term contracts provided severance pay has been paid to the employee in accordance with the law. The justifiable reasons for termination include the following:

1. the employer and the employee have agreed to terminate the contract;
2. the employee is proved to have failed to meet the employment conditions during his probation;
3. the employee seriously violates the internal rules and procedures of the employer;
4. the employee seriously neglects his duties or engages in malpractice for personal gains and has caused severe damage to the employer;
5. the employee simultaneously enters an employment relationship with any other employer and thus seriously affects his completion of the tasks assigned by the employer, or the employee refuses to correct a problem after the employer has pointed it out;
6. the employee, by means of deception or coercion or by taking advantage of the employer’s difficulties, forces the employer to conclude or change the employment contract against the employer’s true will;
7. the employee is convicted of a criminal offence;
8. the employee is sick or is injured for a non-work-related reason and cannot resume his original position after the expiration of the prescribed time period for medical treatment, nor can he assume any other position arranged by the employer;
9. the employee is not competent enough for his position or is still not competent after training or being assigned to another position;
10. the objective situation on which the conclusion of the employment contract is based has changed considerably, which makes it impossible to perform the employment contract, and no agreement on changing the contents of the employment contract has been reached after negotiations between the employer and the employee;
11. the employer is being restructured according to the Enterprise Bankruptcy Law;
12. the employer encounters serious difficulties in production and business operations;
13. the employer changes its products, makes important technological innovations or adjusts the way of business operations, and it is still necessary to lay off some employees after modifying the employment contract; or
14. other objective economic situations in which the employment contract is based change substantially, which makes it impossible to perform the employment contract.

Due to the conditions set out above (and in the New Rules), employers are still able to discharge incompetent employees or terminate the service of their employees for economic reasons. This is designed to help ease the concern from major corporations, which was raised after the implementation of the ECL. However, the wording of some of the justifiable reasons for terminating an employee’s service is still very vague and subject to the interpretation of local authorities.

Service years

The New Rules have provided some clarification as to how to calculate an employee’s service years for the purposes of determining their eligibility for an open-ended employment contract and also as to what happens to these service years if an employee is transferred to another company.

The New Rules provide that the 10 year period referred to above is counted from the date the employee started work for the employer and will include time worked prior to the implementation of the ECL.

In addition, if an original employer (the Original Employer) wants to transfer its employees to another company (the New Employer), there are two ways to calculate service years under the New Rules. The Original Employer can either:

• transfer its employees to the New Employer, including the calculation of his/her previous years of service, so that the New Employer will have to include this when calculating years of service for the employee’s contract; or
• the Original Employer can pay compensation according to the law and the New Employer can then re-employ the employee without having to take into consideration the calculation of his/her years of service with the Original Employer.

The clarification specified above is designed to prevent certain employers from circumventing the service period rules by using “voluntary resign and reemployment” schemes to clear the employment history of its existing employees following the implementation of the ECL.

Liability of the employee

Generally speaking, under Chinese labour law or the ECL, employees are not required to compensate employers for an early termination of their employment contract if such termination is their own choice. However the New Rules provide a series of circumstances under a fixed-term employment contract in which employees may be liable to pay employers compensation where such a contract is terminated by the employer.

These circumstances include:

1. the employee seriously violates the internal rules and procedures of the employer;
2. the employee seriously neglects his duties or engages in malpractice for personal gains and has caused severe damage to the employer;
3. the employee simultaneously enters an employment relationship with any other employer and thus seriously affects completion of the tasks assigned to him/her by the employer, or the employee refuses to correct a problem after the employer has pointed it out;
4. the employee, by means of deception or coercion or by taking advantage of the employer’s difficulties, forces the employer to conclude or change the employment contract against the employer’s true will; or
5. the employee has been convicted of a criminal offence.

Labour dispatch

As a significant development in Chinese employment law, the ECL set out new nationwide rules to regulate labour dispatch, in order to prevent employers circumventing statutory requirements to pay benefits and remuneration by claiming employees are not employed by them but by labour dispatch agencies.

The ECL therefore requires that a dispatching agency shall sign a fixed-term contract with a term of more than two years with its dispatched employees and pay salaries on a monthly basis. The ECL also restricts the use of labour dispatch arrangements to temporary, auxiliary or fungible positions, forbids entities to establish any labour dispatching agency to dispatch workers to work for themselves or their subsidiaries, and imposes a requirement for “equal pay for equal work”.

To avoid any employer using loopholes contained within the ECL, the New Rules have provided further clarification. Under the New Rules no employer or its subsidiary can establish a labour dispatching agency in the form of a joint venture or a partnership to dispatch any employee to the employer or its subsidiary. Furthermore, no labour dispatching agency may employ dispatched employees on a part-time basis. Finally, the New Rules also reemphasize that the compensation rules between employers and employees should also be applied to the labour dispatching agency and the dispatched employees.

Conclusion

The New Rules reflect a more employer friendly attitude from the legislators. This may be a result of the Chinese government trying to balance the relationship between employer and employee after the promulgation of the ECL which has drawn much criticism from bigger companies and foreign investors since January 2008.

Although the New Rules try to provide clarification in relation to most of the points in dispute, there are still ambiguities in them. Local authorities will need to interpret and clarify any of the remaining uncertainties according to their local needs.

This article was written by Virginie Deslandres, a corporate finance lawyer based in the Beijing office of Norton Rose, and Jim James, a dispute resolution lawyer in the Shanghai office.