Understanding Labor Contracts in China, India and Vietnam

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By Dezan Shira & Associates 

Foreign companies expanding their operations into the Asia-Pacific need to be fully versed in the region’s various hiring policies. While firms are permitted to hire both domestic and overseas employees, businesses will need to understand a unique array of considerations and challenges that do not exist in the West.

Within Asia, the laws that govern hiring procedures vary significantly from country to country, with numerous affiliated conditions and stipulations. Companies looking to establish a presence in more than one of the region’s booming economies will not be able to do so under a single policy, as may be possible in other parts of the world. Rather, the procedures of each country will need to be individually interpreted, which will better prepare a company to decide which Asian jurisdiction best suits their operation.

Generally speaking, Indian employment contracts are less sensitive than those of China and Vietnam and can offer greater flexibility to the employer. Chinese and Vietnamese employment law tends to provide more protection to the employee and can force employers into unwanted contractual obligations if proper due diligence isn’t paid.

Foreign enterprises in Asia generally opt to hire employees on a fixed-term basis in order to mitigate liability for unjust dismissal. In this section, we detail how these types of contracts are structured in China, India and Vietnam, outline the other main types of employment contracts available to employers, and provide practical guidance for maintaining compliance before and during an employment relationship.

China

In principle, a company does not have to be located in China in order to hire staff to work in China. However, unless the employment contract is entered into via an invested entity on the Chinese mainland, it will not be regulated by relevant Chinese legislation. As a result, the company won’t be able to make mandatory benefit contributions to employees in China or deduct individual income tax before paying salaries, neither of which is likely to attract talent to one’s operations.

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Fixed-term Contract

The vast majority of employees hired in China’s private sector are given fixed-term contracts. This type of contract creates an employer-employee relationship for a fixed length of time and can be used for both part-time and full-time work.

In China, a fixed-term contract can only be renewed once. When a contract is renewed for a second time, the employee must be given an open-term contract. This is why an employer needs to be careful when determining the contract length – if two successive short fixed-term contracts are offered and accepted, then the employee will automatically obtain an open-term contract, which makes termination far more difficult.

The employer needs to sign a written contract with the employee within one month, starting from the day the employee starts working at the company. If not, the employee will be entitled to double salary for each month that they have gone without a contract. If a year passes without a written contract, the employee’s contract switches to open-term.  

India

India, like others, has adopted varying measures to regulate the conditions under which employment contracts are written, applied and interpreted. Labor is a concurrent subject in the Indian Constitution, and is therefore subject to legislation from both state and central governments. The principal legislation governing employment relationships can be found in:

  • The Industrial Disputes Act 1947 (ID Act), which regulates the center’s labor laws;
  • The Shops and Establishments Act 1953 (SE Act), which provides state-specific regulations; and
  • The Indian Contracts Act 1872 (IC Act), which regulates labor contracts.

In India, “workmen” are entitled statutory rights under the ID Act, but “non-workmen” have no such protection and are regulated via their specific employment contract and relevant SE Act. Indian labor law distinguishes between workmen and non-workmen type employees as follows:

  • A workman is a person (including apprentices) employed in any industry undertaking manual, unskilled, skilled, technical, operational, clerical or supervisory work earning less than US$25.89 (Rs 1,600) per month
  • A non-workman is a person employed in a managerial, administrative or supervisory capacity drawing wages in excess of US$25.89 (Rs 1,600) per month

Regardless of whether a person is employed on a permanent, temporary or part-time basis, employers should offer a written contract setting out the terms and conditions of the employment relationship. These must meet the minimum statutory requirements set out in either the SE Act of the state where the employee is based or the ID Act, depending on the employee’s classification.

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Written employment contracts usually include:

  • The employee’s position and duties;
  • Remuneration rate, including benefits such as bonuses, provident fund contributions;
  • Working hours, holidays and leave provisions;
  • Term of employment and termination provisions;
  • Provisions for dispute resolution in relation to key employees.

Fixed-term Contract

Like China, the majority of employees hired in India’s private sector are given fixed-term contracts, primarily because this can assist with termination procedures. A fixed-term contract creates an employer-employee relationship for a fixed length of time and can be used for part-time, full-time or temporary work.

In India, there are no limits to the amount of successive standard fixed-term contracts that can be issued, nor is there a maximum cumulated duration of successive standard fixed-term contracts.

The employer should sign a written contract with the employee within one month of starting work at the company. However, unlike China, failure to do so after one year does not result in an open-term contract. While open-term contracts do exist in India – and create an employer-employee relationship for an indefinite length of time – they are not subject to the same stipulations as in China, and can only be established through mutual agreement.

Vietnam

Vietnam has strict laws relating to foreign companies’ employment of domestic Vietnamese workers. When recruiting Vietnamese employees, foreign businesses must first submit a recruitment request to a Vietnamese recruitment agency. The agency is responsible for introducing Vietnamese employees to the employer within 15 days of the request. If the agency fails to do so within this time period, the foreign company has the right to recruit Vietnamese staff directly.

Labor contracts in Vietnam are divided into three types by the country’s Labor Code. As with China and India, fixed-term contracts are the most commonly used, but these are separated into “definite term contracts” and “seasonal contracts” under Vietnamese law, depending on the length of the contract. Open-term contracts also exist in Vietnam’s Labor Code, but under the name of “indefinite contracts”.

Written employment contracts must detail:

  • Name and address of the employer;
  • Name and personal details of the employee;
  • Job title, job description, and term of the labor contract;
  • Wage, form and deadlines of payment, wage-based allowances, and promotion and wage-raise regimes.
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Definite Term Contract

A definite term contract can be anywhere between 12 and 36 months in length. Within 30 days of expiration, a new contract must be signed if the employer is still working. If no new contract is signed within this period, the contract will automatically become indefinite term.

Similar to China, employers can only grant two definite-term contracts, following which an indefinite contract must be offered to the employee.

Seasonal/Work-Specific Contract

Seasonal/work-specific contracts can only be offered if the position is less than 12 months in length, except when temporarily replacing an employee who is on maternity or sick leave, military duty, recuperating from a workplace accident, or taking other temporary leave. Such contracts may not include probationary periods.

As with definite term contracts, the employee must be offered a new contract if they continue to work after the contract term expires. If no new contract is signed but the employee continues to work for 30 days following expiration, they must be offered a definite-term contract with a duration of 24 months.

Cover 110 x 154 newThis article is an excerpt from the March issue of Asia Briefing Magazine, titled “HR Administration: Labor Contracts, Visas and Termination Procedures“. In this issue, we set out to provide readers with a basic understanding of how to navigate the HR procedures of China, India and Vietnam. We begin by introducing the most common employment contract structures in each of these countries, as well as their laws for employment probation. We then take a look at the three’s increasingly complex procedures for obtaining work/business visas, and conclude with a special feature on how to legally terminate an employee across Asia.

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