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Introduction to Labour and Employment in China

In China, there are a wide range of government institutions involved in HR processes, and while key laws are drafted by the central government – such as the Labor Contract Law – numerous bylaws and regulations are instituted at the local level.

Nevertheless, many HR laws and principles are fairly universal across China.

In China, the company can hire employees in the following three ways:

  • Direct Hiring of employees;
  • Labour Dispatch; 
  • Services Outsourcing

It is essential for foreign investors who want to establish, or are already running a foreign-invested entity in China, to obtain a firm understanding of China’s laws and regulations relating to human resources and payroll management.

Direct Hiring of Employees

Except for ROs, FIEs can hire employees directly by themselves. The Chinese labor law requires employers to sign a written contract with their employees within one month, starting from the employee’s first day of work at the company. Failing to do so results in double salary compensation for each month without a contract, and a non-fixed term contract by default after one year without a contract. One exception to this rule is part-time work, where an oral agreement is considered sufficient.

Generally, China allows three types of employment contracts:

  • Fixed-term contract;
  • Non-fixed term contract; and
  • Job contract.

Fixed-term contract

The fixed-term contract creates an employer-employee relationship for a fixed length of time, and can be used for part-time or full-time work. More often than not, a fixed-term contract can be renewed only once, after which it will be necessary to give the employee a non-fixed term contract when renewing for a second time. Certain clauses may be inadmissible according to Chinese law, while others are mandatory. Employers are able to stipulate a probationary period at the beginning of the contract, during which time it is comparatively easier to dismiss the employee.

Also, the employer is allowed to pay the employee 80 percent of the full salary stated in the employment contract, although this amount may not fall below the local minimum wage. The employee may resign after giving only three days’ notice. It is therefore inadvisable to stipulate a very long probation period. The length of the fixed-term contract will determine the maximum length of probation the employer can set.

During the probation period, the employer may dismiss the employee if he/she is found to not meet the requirements for the position. The burden is on the employer to prove this.

Probation periods in China

Maximum Probation Period by Contract Term

Contract term

Maximum probation period

Less than 3 months

None

3 months to 1 year

1 month

1 – 3 years

2 months

3+ years or non-fixed term contract

6 months

Note: An employer cannot make an employee take a new probation period, for example, after promotion or when the company has been merged or acquired by an investor.

Part time employment

For part-time workers:

  • The employee may not work for more than four hours per day, or 24 hours per week;
  • No probation period is allowed, and either the employer or employee may end the agreement at any time;
  • The employee is not entitled to severance compensation;
  • The employee must be paid at least every 15 days; and
  • Part-time employees are not required to have a written contract.

Non-fixed term contract

Based on its unrestricted term and limited grounds for termination, the non-fixed term contract effectively guarantees the employee job security until retirement. Specifically, an employee on a non-fixed term contract can only be terminated based on grounds eligible for immediate dismissal, dismissal with 30 days’ notice, or as part of a mass lay-off. During a mass lay-off, employees on non-fixed term contracts must be prioritized over other employees.

"Job contract"

Due to its lack of legal clarity, the job contract is an unpopular choice in China. This type of contract is defined by the specific task or project an employee is to work on, not the length of time. Once the project is completed, the employment relationship comes to an end, and the company must pay severance to the employee. No probationary periods are permitted.

Job contracts are sometimes used for seasonal jobs where the scope of work can be defined very clearly. However, in most cases, defining the completion of a project can prove to be a challenge. The relevant legal framework offers no guidance on what to do when a project is left uncompleted, or how employees should be compensated in such a case, making job contracts more prone to disputes and even litigation.

Hiring Dispatch Workers in China

Labor dispatch is an alternative option for FIEs looking to hire Chinese staff. While the preparatory work often requires the assistance of Chinese employees, FIEs are not allowed to establish legal contracts with Chinese individuals before they obtain their business license. Additionally, as mentioned previously, an RO cannot hire staff directly, and their employees must be seconded from dispatch agencies.

According to relevant laws and regulations, labor dispatch arrangements are only applicable for the following three types of positions:

  • Temporary position: A position with duration of no more than six months;
  • Auxiliary position: A position that provides auxiliary services to the main or core business of the employer; and
  • Replaceable position: A position that can be performed by a dispatched employee in place of a permanent employee during the period when such an employee is away from work for study, vacation, or other reasons.

The number of total dispatched employees used by an employer should not exceed 10 percent of its total number of employees, including regular employees and dispatched employees. ROs of foreign enterprises, however, are not subject to this restriction on dispatched employees’

In addition, there must be a contract between the dispatching company and the dispatched employee, the dispatching company and the FIE, as well as the dispatched employee and the FIE, respectively. The contract between the dispatching company and the dispatched employee should have a fixed term of at least two years.

Outsourcing Labor Services in China 

Outsourcing is an additional option for FIEs. Generally, the most commonly outsourced tasks are those that require specialist skills, a high degree of confidentiality, or those that have a clear scope, but incur major consequences if incorrectly implemented. Good examples in China include accounting, tax filing, HR administration, and payroll processing work. Many small and medium-sized companies will choose to completely outsource some or all of these functions, whereas large companies will set up a separate entity to manage such back-office tasks on behalf of their regional subsidiaries.

The below points should be noted for outsourcing:

 Responsibility for the behavior of the outsourced employee is borne by the company contracted for the outsourcing;

8 Fundamental Tips for Employing Staff in China  

Here, we offer eight quick tips to handle the fundamentals of employing staff in China.

1. Mandatory written contracts

All employees must be given a written contract within one month of hiring; if not, the employee is entitled to double salary. Electronic labor contracts are regarded as written contracts as well by satisfying certain conditions. 

2. Probation period

The range of legitimate grounds for dismissing an employee is considerably wider during his or her probation period. The employer may also pay only 80 percent of the employee’s contractual salary during this time.

3. Regional variation

National laws are often intentionally broad and vague, leaving a lot of room for local interpretation or additional legislation. Regulations and practices differ per city on issues such as minimum wagework visa policysocial security contributions, and maternity leave.

4. Representative offices

The simplest of foreign investment vehicles in China, the representative office (RO) is not permitted to directly hire staff in China; instead, they need to use dispatch agencies, the agencies must hold a government-issued special license that allows them to hire employees on behalf of their clients (e.g. Dezan Shira & Associates has dispatch licenses).

5. Leave during the first year of employment

Employees are not entitled to any mandatory minimum number of leave days during their first year of employment, except those during major holidays such as Chinese New Year around February, and the National Day celebrations in early October.

6. No at-will termination

Terminating employees in China is both difficult and expensive. Employees may resign with 30 days’ notice, but for employers, there are limited grounds for terminating an employee before his or her contract has come to an end.

7. Non-fixed term contract after two fixed term contracts

After an employee finishes his or her second contract with your company, he or she generally shall be offered a lifetime contract as the third unless he or she wants another fixed term contract instead. Such a non-fixed term contract can only be terminated if there are grounds for dismissal. Notably, some regions, such as Shanghai, offer more flexibility on this rule.

8. Severance payments mandated by law

In practice, severance payments are even higher than the law prescribes and can comprise a significant part of overall HR costs.

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