Everything You Need to Know About Labor Contracts in China
December 8, 2022
Labor Contracts in China

Labor Contracts in China

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China’s labor laws and regulations have been implemented and developed with the intention to protect employees and their interests in the workplace. Companies operating in China need to ensure the protection of employees’ wellbeing in order to remain compliant with local regulations.

In this article we will provide you with insights on the most important labor contract topics that should be considered by every company operating in China. We will guide you through requirements for labor contracts and pointing out mandatory as well as optional clauses to be included in such a labor contract. We also explore different kinds of labor contracts such as fixed-term or non-fixed term contracts and terms related to salary, probation periods and annual leave. Lastly, we will give you a short overview of terminating a labor contract as well as related severance payments.

Requirements for a labor contract in China

In China not every company can hire employees directly, depending on their legal status. Examples of companies which can hire employees directly – meaning having a direct contract between the employee and the company he/she will be working at – are domestic companies, Sino-foreign Joint Ventures and Wholly Foreign Owned Entities. If a foreign company is the parent company of a Representative Office or the company cannot fulfill the status of a legal entity in China, the employment of staff is only possible via a licensed Professional Employer Organization (PEO) or Foreign Enterprise Service Company (FESCO).

In General, the labor contract shall be agreed upon between the employer (either the company, PEO or FESCO) and the employee which comes into effect after both parties have signed the contract or the company chops are sealed to it. Additionally, both parties are required to keep an original copy of the employment contract.

Are labor contracts required to be written in China?

A Chinese labor contract must be in written form and shall be signed within 30 days after the employment starts, otherwise the company may face serious financial penalties as explained below.

A labor contract shall be conducted in Chinese language. If a second language is provided it is usually for reference only and the Chinese version represents the legally binding one. In previous labor disputes, Chinese courts have accepted contracts provided in other languages (e.g., English) only. The disadvantage in case of a dispute is that a labor contract solely provided in a foreign language needs to be translated into Chinese by institutions approved by the court leading to the situation that the employer no longer would have control over the content of the Chinese translation. However, there have also been cases where purely non-Chinese employment contracts have been interpreted as a non-existent employment contract. Therefore, it is recommended to always draft the employment contract in Chinese, which is considered as the prevailing language.

Why an employment contract must be signed within 30 days

The time of signing a labor contract is highly important in China. According China’s Labor Contract Law, an employer can be required to pay penalties to an employee if the contract is not signed on time.

According to Article 82, if the employment contract is not signed within 30 days after the employment started, the employer would be required to pay the employee twice as much as the employees’ monthly salary. Even if the employer decides to terminate the employee and not to sign the contract during the second month of the employment, the employer must again pay the employee twice the amount of the agreed remuneration as economic compensation.

If an employee goes without a contract for more than 1 year, according to Chinese Labor Contract law it would be deemed that the employee has entered into a non-fixed open term contact with the employer (Article 14 of the Labor Contract Law).

Therefore, it is recommended ensuring labor contracts are signed latest during the employee’s onboarding process, especially for companies with a high number of employees.

Mandatory and optional Clauses to be included in a Chinese Labor Contract

A Chinese labor contract must include several mandatory clauses. In addition, further optional clauses can be incorporated. Following, we will explain mandatory and optional components of an employment contract in China.

Mandatory Clauses in a Chinese Labor Contract

Every Chinese labor contract needs to contain these mandatory clauses:

  1. Information about the employer such as name, address, a person representing the employer or the legal representative;
  2. Information about the employee such as name, living address and ID-number;
  3. Definition of the employment period, either in terms of a fixed term or non-fixed term contract;
  4. A general description of the employees’ job responsibilities and duties;
  5. General working hours as well as rest-time and leaves, e.g. annual leave, sick leave, etc.;
  6. The employee’s remuneration, which consist of basic salary, bonus, commissions and allowances;
  7. A clause that mentions social insurance will be contributed by both parties in accordance to the law;
  8. Occupational safety clause which additionally ensures environment and occupational hazard prevention; and
  9. Other specifications, e.g. company policies which may require to be included in the labor contract.

Optional Clauses in a Chinese Labor contract

The following clauses are recommended to be included but not mandatory in a Chinese labor contract:

  • Non-competition clauses;
  • Confidentiality clauses;
  • Probation period;
  • Allowances and benefits (in particular if hiring foreign employees);
  • Reference to the company’s employee handbook.

Different types of labor contracts in China

Chinese labor contracts can be divided into 3 groups; fixed-term contracts, non-fixed term contracts and freelance contracts. Fixed-term contracts and non-fixed term contracts are agreed upon between the employer and the future employee. A freelance contract can be conducted with a third-party service provider or an individual not considered as an employee of the company.

Fixed-term labor contracts

Fixed-term labor contracts in China are commonly agreed upon between employers and employees. These will be conducted to a specific employment term and can be applied for full-time as well as part-time work.

Additionally, Part-time contracts need to be in line with the following regulations:

  • A written contract is not mandatory, although it is highly recommended to have one.
  • No probation period can be agreed upon, and both the employee and the employer may end the agreement at any time.
  • Salary must be paid at least every 15 days.
  • Working hours are restricted to a maximum of 4 hours per day and 24 hours per week.
  • In case of termination by the employer, the employee is not entitled to severance compensation.

Non-fixed term labor contracts

A non-fixed Chinese labor contract between an employer and an employee can be obtained in different ways. The employer and the employee can mutually agree on a non-fixed term labor contract.

As discussed above, such a contract can also be obtained by failure of the employer to hand over a written labor contract to the employee within 1 year after the employment started.

Other ways of entering a non-fixed term labor contract – depending on local regulations – can occur after a second renewal of the employee’s contract or if an employee has been working with the company for more than 10 years.

Independent contractors

Companies can “hire” personnel as an independent contractor or freelance contract. Regardless of fixed working hours or duration of the contract, such a contract is comparable to the commissioning of third parties for a specific project, but in this case, it is concluded with an individual person.

Since no employer-employee relationship emerges, it is not allowed to set a probation period in terms of this contract. On the other hand, after the project is completed, the company needs to make a severance payment to the individual contractor accordingly.

Defining a proper working scope needs to be very precise which proves to be a challenge to many companies. Another challenge is the definition of the end of a project which can be based on the scope of activities, period of time or certain conditions being met. For this part it shall be mentioned that the relevant legal framework does not offer any guidance in case a project is not completed adequately or remains incomplete.

Due to the reasons mentioned above, most companies avoid having individuals as independent contractors and try to employ personnel directly via a fixed-term or non-fixed term labor contract.

Salary and Probation Period

Salary

Salary in China contains a fixed and a flexible part. The fixed salary is the amount agreed upon within in the labor contract, whereas the flexible part refers to bonus, commissions and allowances as well as overtime payments or other flexible amounts that can vary on a monthly basis.

In China, salary must be paid on time and in full after the end of the related month (Article 30 of the Labor Contract law). The monthly net salary is calculated by deducting allowances, taxes and social contributions from the gross salary. For further information on payroll and the social security system in China, please refer to our article on payroll in China.

 

Probation periods and salary during the probation period in China

In the Chinese labor law probation periods depend on the agreed term of the employment contract. The employer may stipulate a maximum probation period of 6 months, the regulation is as follows:

  • Employment term < 3 months – a probation period cannot be agreed upon;
  • Employment term > 3 months but < 1 year – probation period may not exceed 1 month;
  • Employment term > 1 year but < 3 years – probation period may not exceed 2 months;
  • Employment term > 3 years – probation period may not exceed 6 months.

A probation period can only be agreed upon once per employee. Accordingly, a new probationary period is no longer permitted for extensions of employment contracts.

During the probation period an employee’s salary must be at least 80% of the minimum wage the employer would pay to an equivalent employee in the same position, or 80% of the salary agreed upon in the labor contract and no less than the minimum wage of the employer’s location.

Annual leave in China

Regulations on paid annual leave days in China are dependent on the accumulative number of working years, regardless of the length of employment with the current company. This means the more working experience or the more seniority an employee gained, the more annual leave he is entitled to.

Employees with less than 1 year of working tenure are not entitled to have statutory annual leave. If an employee has 1 to 5 years of working experience, the annual leave is at least 5 days. With accumulative working years between 10 to 20 years, an employee has 10 days of annual leave to which he or she is entitled by law. Lastly, if an employee has been working for more than 20 years, the statutory annual leave amounts to 15 days.

National holidays and weekends are not included in the paid annual leave days. However, employees may be restricted in taking annual leave if – depending on their accumulated working experience – they have already been absent for a certain period due to sick leave.

For more on ‘leave days in China’ check out our full article here).

Termination & Severance Pay in Chinese Labor Law

The termination of a labor contract in China is special compared to other countries. It usually occurs in either upon expiration of the labor contract or through early termination which can be mentioned as the most frequent reason for the termination of employment contracts in the country.

In China, a unilateral termination by the employer is impossible without fault or at will, unless any statutory reasons to terminate the agreement exist. Generally, a labor contract can be terminated according to one of the following reasons:

  1. Termination by mutual agreement between the parties
  2. Termination due to fault or misconduct by the employee
  3. Termination without fault
  4. Wrongful termination

What usually comes with a terminated labor contract in China is an obligatory severance payment to the employee. This, by Chinese labor law, intends to provide fair treatment to both employers and employees with respect to the agreed employment contract.

Under the Labor Law of the PRC, severance pay in China is equivalent to 1 month’s full salary for each year of an employee’s service. Termination after employment of up to 6 months, the employee is entitled to receive half a month’s pay in severance. If an employee was working between 6 months and 1 year, he or she will receive a full month’s pay in severance.

Severance pay must usually be paid if the employer terminates an employee’s contract for 1 of the following reasons:

  1. Changes in business circumstances
  2. Health issues or injury renders an employee unable to work
  3. Mass layoff
  4. Company dissolution
  5. Fixed-term employment contracts

A company is not required to pay severance if the employee fails to pass his or her probation period or the employer and the employee do mutually agree on the contract termination. The only reason when an employer does not need to pay severance but unilaterally terminated the employment contract takes place due to prohibited behavior of the employee.

If you are interested in further information on termination of employees in China, please read our detailed article here, for further information when an employer needs to pay severance, we recommend to read our article on severance pay in China.

How Moore MS Advisory supports you in HR

As a business advisory that helps foreign companies overcome their challenges in China, our experts can help you navigate the employment laws in China. We have a comprehensive understanding of the business, legal and employment landscape in China and can provide you with the right advice to keep you fully compliant. For all your accounting, HR and Corporate Restructuring needs, get in touch with us today so we can assist you.

Disclaimer: all articles and its related content are the property of Moore Stephens Consulting Company Limited and may not be reproduced either in part or in full without prior consent.

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