For foreign companies doing business in China, hiring local employees often provide valuable insights into local markets and can be crucial to business development. Yet, hiring staff in China can be a complicated endeavor that needs to be handled carefully. Chinese Labor Laws dictate many of the key terms of labor contracts, including the system for calculating working hours, rest periods, overtime rates, probation period, period of non-competition clauses, and termination and severance.
Notably, with the current trend of flexible working arrangements, the rules governing working hours are of particular importance. Labor Contract Law of the PRC and Labor Law of the PRC (hereinafter collectively referred to as “Chinese Labor Laws”) is predicated upon employee’s right to know the normal days and hours they are expected to work.
For employees who are not suitable for a Standard Working Hour System an alternative working hour system may be implemented. These systems are known as the Flexible Working Hour System and Comprehensive Working Hour system.
As the names suggested, both the Flexible Working Hour System and Comprehensive Working Hour System allow employees to work outside the regular days and/hours according to their job nature and work scope.
The flexibility in working hours can fundamentally change how overtime payments are calculated and due. Employers who wish to adopt an alternative working hour system must obtain prior approval from the local Labor Bureau before implementing it and will be subjected to review annually.
Standard Working Hours System
The Standard Working Hour System, by default, follows the provision of Chinese labor laws which includes the daily working hours, weekly working hours, overtime rates, and maximum amount of allowed overtime.
This system allows some flexibility for the time and place the employee is expected to perform his/her duties. Thus, a standard labor contract should include the following terms:
- Location at which work should be carried out,
- Days on which the employee is expected to work; and,
- The number of hours to work each day.
Chinese Labor Laws stipulate the standard number of working hours, rest days, and holidays as follows:
- The standard workday should last up to 8 hours.
- Any work performed after 8 hours within a single day are considered overtime and shall be paid at 150% of the employees’ hourly rate;
- The maximum amount of overtime performed per day is 3 hours;
- The maximum amount of overtime performed per month is 36 hours;
- Overtime hours performed on rest days should be paid at 200% of the employee’s hourly rate; and
- Overtime hours performed on statutory holidays should be paid at 300% of the employee’s hourly rate.
Comprehensive Working Hours System
The Comprehensive Working Hour System refers to the overall calculation of working hours based on the cycle of weeks, months, quarters, years, or other predetermined amounts of time. However, the average working hours and the average weekly working hours shall be the same as the standard working hours.
Under a Comprehensive Working Hour System, employers and employees can set the number of working hours worked per cycle according to Chinese Labor Laws before statutory overtime payments are invoked. Note, when overtime payments are invoked, the standard rates according to Chinese Labor Laws are applied.
Enterprises in China can implement a Comprehensive Working Hour System for the following types of employees:
- Employees in transportation, railway, post and telecommunications, water transportation, aviation, fishery, and other industries who need to work continuously due to the special nature of their work;
- Employees in industries restricted by seasons and natural conditions, such as geology and resource exploration, construction, salt production, sugar production, and tourism; and
- Other employees who are suitable for the implementation of the comprehensive working hours system.
A Comprehensive Working Hour System must be approved by the local Labor Bureau before it can be implemented and will be renewed annually.
Flexible Working Hours System
The Flexible Working Hours System refers to that employees can choose the specific work schedule flexibly and autonomously on the premise of completing the prescribed work tasks or fixed working hours. Under this Flexible Working Hours System, if the employee worked on the weekend for the tasks, overtime pay can be avoided.
Enterprises in China can implement a Flexible Working Hour System for the following types of employees:
- Senior management personnel, field personnel, sales personnel, on-duty personnel, and other employees who cannot be measured by standard working hours system due to the special nature of their work;
- Long-distance transportation personnel, taxi drivers, loading and unloading personnel of railways, ports, warehouses, and employees who need mobile operations due to the special nature of their work; and
- Other personnel suitable for a Flexible Working Hours System due to production characteristics, special needs of work, or scope of duties.
A Flexible Working Hours System must be approved by the local labor bureau before it can be implemented and will be renewed annually.
3 Types of Chinese Employment Contracts
Chinese labor contracts are divided into three types: fixed-term labor contracts, non-fixed-term labor contracts, and labor contracts for the completion of certain tasks.
Fixed-term labor contracts
A fixed-term labor contract refers to a labor contract in which the employer and the employee agreed on the length of the contract period. The employer and the employee may conclude a fixed-term labor contract through mutual agreement.
Non-fixed-term labor contracts
A non-fixed-term labor contract (also known as an ‘open-ended employment contract’) refers to a labor contract in which the employer and the employee agree on labor arrangements without a fixed termination time of the contract.
Under Article 14 of Labor Contract Law of the PRC, in any of the following situations a non-fixed-term labor contract shall be concluded:
- The employee has worked for the employer for 10 consecutive years;
- When the employer first implements the labor contract system, the employee has worked for the employer for ten consecutive years and is less than ten years away from the legal retirement age; or
- When a second continuous fixed-term labor contract is concluded.
Note: Article 14 in essence means that when the labor contract is renewed for a second time with the same employer, the term of the contract becomes “open-end”.
Furthermore, if an employer fails to conclude a written labor contract with the employee one year from the date of employment, it shall be deemed that the employer and the employee have entered into an open-ended labor contract.
Task-based labor contracts
A task-based labor contract refers to a labor contract which is defined by the task or project the employee works on rather than a fixed time period. Upon completion of the specific task or project, the employment relationship will come to an end and the employer shall make severance payments to the employee according to Chinese Labor Laws.
Under Article 19 of Labor Contract Law of the PRC, the probation period of a labor contract are defined as follows:
- If the fixed term of the labor contract is more than 3 months but less than 1 year, the probation period shall not exceed 1 month;
- If the fixed term of the labor contract is more than 1 year but less than 3 years, the probation period shall not exceed 2 months;
- If the fixed term of the labor contract is more than 3 years or is a non-fixed-term labor contract, the probation period shall not exceed 6 months.
During the probation period, the employer shall not terminate the labor contract unless the employee falls under the following circumstances:
- The employee cannot fulfill the conditions for employment during the probationary period, or the employee satisfied the criteria for immediate termination outlined in Article 39 of the Labor Law of the PRC;
- The employee cannot perform his or her duties due to illness or injury or is determined to be unqualified after training or adjusting the job scope.
Employers may not stipulate a probation period for fixed-term labor contracts with a term of less than 3 months and task-based labor contacts.
Confidentiality obligations and non-competition clauses
The employer and employee may agree on certain confidentiality obligations and non-competition clauses in the Chinese labor contract to protect the employer’s trade secrets and other confidential matters such as intellectual property rights.
For employees who are obligated to keep confidential information, the employer may agree with the employee to provide a monthly “compensative payment” during the non-competition period.
According to the Shanghai Higher People’s Court of Labor Judicial Interpretation, if the Chinese labor contract provides a non-competition clause but fails to provide details on the non-competition compensation amount to the employee, the employee can claim non-competition compensation through negotiation with the employer during the non-competition period. If an agreement through negotiation fails, the non-competition payment to the employee typically falls be between 20-50% of the worker’s previous normal wages for a period of no more than 2 years.
If the employee violates the agreement, they shall pay the employer damages in accordance with the agreement.
The persons subject to restrictions on confidentiality and non-competition shall be limited to:
- Senior management;
- Senior technical personnel; and
- Other personnel with confidentiality obligations to the employer.
Furthermore, the confidentiality obligations and non-competition period shall not exceed two years.
Employee Termination and Severance
Terminating an employment contract according to Chinese Labor Laws requires employers to give 30-days prior notice and pay severance to the employee. Within the probation period, the employer may terminate the employment contract by giving the employee three days’ advance notice.
Severance pay is generally equivalent to one month’s salary per year of employment with the company or a half-month salary if the employee worked for less than 6 months with the company.
Companies can avoid paying severance if;
- Termination of a labor contract is mutually agreed upon; or,
- The employee is fired for violation of the labor contract (breach of contract provisions or disciplinary rules) with solid documentation and supporting evidence.
It is important to note that labor disputes in China generally favor the employee. The burden falls on the employer to provide solid documentation and evidence to assert its right to terminate a labor contract.
The penalty for wrongful dismissal of an employee is generally two times the amount of the original compensation. In other words, a one-month severance payment becomes two months’ compensation if the termination is deemed to be unlawful.
Chinese Labor Contract Mistakes to Avoid
Foreign investors may be surprised to find labor disputes in China tend to lean in favor of the employee. Furthermore, employees can bring litigation against the employer for a breach of labor contract or violating Chinese Labor Laws quite easily and economically.
As such, foreign investors should pay special attention when hiring employees in China.
Hiring or retaining employees without a written labor contract
Hiring or retaining an employee without a written labor contract entitles the employee to two times their normal wages during the working period. Employees can easily demonstrate that they were hired or retained by the company through any salary payments made outside the contract period.
Withholding severance payment without evidence of wrongdoing
The burden falls on the company to demonstrate a breach of contract or breach of company rules if they decide to terminate a labor contract. The penalty for wrongful dismissal of an employee is generally two times the amount of the original compensation
Not having a detailed employee handbook
In the event of a labor dispute, an employee handbook serves as a detailed account of the companies’ rules and policies. Companies can use the employee handbook to set mandatory terms which employees must follow and use it as evidence of wrongdoing if they discover an employee has broken the rules or acted in bad faith against the company.
Neglecting to sign a non-competition agreement with key employees
Certain employees, such as salespersons or General Manager, may have private information about clients and the business’ key operations. It’s important to sign non-competition agreements with these employees to protect the interests of the company should the employee be terminated or leave the company.
Not paying overtime wages without a flexible working hour system
Before a company can implement a flexible working hour system, it must obtain approval from the local labor bureau. The company will still be liable for overtime payments and potential penalties if they implement a flexible working hour system without approval.