China business: Labour 101 — get it right from the beginning or risk big headaches

Employing, managing and developing employees successfully is crucial to the long-term health and success of a company. Foreign companies operating in China often struggle to successfully maintain good employees and terminate difficult ones due to a lack of cultural understanding and knowledge related to relevant laws, rules and regulations. In this article, we outline the basics of labour law in China for foreign companies employing local staff.

Employing, managing and developing employees successfully is crucial to the long-term health and success of a company. Foreign companies operating in China often struggle to successfully maintain good employees and terminate difficult ones due to a lack of cultural understanding and knowledge related to relevant laws, rules and regulations. In this article, we outline the basics of labour law in China for foreign companies employing local staff.

Employment applications

Before onboarding a local candidate, the employer shall check if the candidate is still employed by another company. In this instance, the previous employer should issue a certificate of labour termination to verify the termination of the labour relationship. If no labour relationship was terminated with the previous employer and results in losses to the previous employer, both the employee and employer shall jointly bear liabilities.

Offer letters

An offer letter cannot stand as  a written contract. Offer letters refer to the indication of employment from the company to the candidate, and is sent prior to  the conclusion of the existing, soon to be previous, labour contract. Even though major terms related to the job post, start date of employment, salary and relevant benefits can be stipulated in the offer letter, the offer letter in court will not be recognised as a labour contract.

Written contracts

The Labour Contract Law requires a written contract to be concluded either on the date work commences or prior to the first working day. If no written contract is concluded more than a month and less than a year from the work start date, the employee is entitled to twice the amount of pay from the working date and an open-ended employment term. (For more information about labour contract, please see our previous post on Employment contracts in China.

Probation period

Only one period of probation is allowed. The term of the probationary period shall strictly adhere to the following terms:

  • 1 month for an employment term of more than 3 months and less than one year

  • 2 months for an employment term of more than a year and less than three years
  • 3 months for a fixed term contract of more than three years or open-ended contract

  • A probationary period shall not exceed six months

Termination

Terminating employees is often difficult in China. Even after the probationary period, employers may find the employee lacks the necessary skills or performs in a manner that can be considered ‘negative’ and influences the work environment. Without, the cultural awareness related to terminating an employee in a culturally sensitive, appropriate manner, the employer may experience a backlash that results in difficulties managing the rest of the workforce and/or face a potential lawsuit.

Termination during  the probationary period

If the employee fails to meet the requirements of employment during the probationary period, the employer may terminate the employment. However, employers should be careful to clearly specify workplace requirements in the company’s corporate rules and regulations, and inform the employee of such requirements as part of a comprehensive job description that matches such requirements; such job descriptions may be attached to the labour contract. The employee’s performance can be evaluated based on such employment requirements and be determined as having objectively demonstrated  in a performance assessment whether the employees has met or failed the employment requirements.

In the case where the employer terminates the probationary employee on the basis of failure to meet employment requirements, the employer must prove the employee “failed to meet the employment requirements”. In this instance, the employer is generally required to prove the following three terms:

  • The employee was informed of the employment requirements at the time of hiring;

  • The employer has conducted a just and fair evaluation of the employee during the probationary period; and

  • The evaluation result shows the employee is unqualified.

Termination during the employment term

The termination of a labour contract shall be supported with a certificate attesting to the termination; any failure to issue such certificate shall result in a rectification order and compensation to the employee for any damages caused.

Reasons for  termination

The Labour Law stipulates an employer may terminate an employee under the following circumstances:

  • The employee fails to meet the employment conditions during the probationary period;

  • The employee seriously violates the rules and regulations of the employer;

  • The employee is seriously derelict of duty or engages in graft for personal gain;

  • The employee establishes labour relationships with another employer simultaneously, which results in a major impact on the completion of tasks for the current employer, or the employee fails to rectify the issue after cautioned by the employer;

  • The labour contract is made invalid by the fraud, coercion or exploitation of the other parties’ disadvantaged position, or a party causes the other party to conclude or amend the labour contract against the latter’s true intent; and

  • Criminal liability is pursued against the employee in accordance with the law.

As mentioned beforehand, direct termination is extremely difficult in China. Even if the employee violates the internal rules, the employee may provide a reasonable explanation and supporting evidence to challenge the violation, such as a doctor’s certification of a health problem as the reason for the violation. Equally, direct termination may result in an unfair dismissal lawsuit against the employer before the labour tribunal. Unlawfully terminated employees may be entitled to compensation equivalent to the full employment term and three times the amount of monthly salary as severance pay.

Both hiring and terminating employees is a complex area in most companies’ operations. In China, with the added cultural differences, foreign companies should make good use of  proper professional advice to ensure the development and implementation of compliant strategies for investing in talent and terminating underperforming or derelict staff. It is often the case that  the foreign headquarters of foreign companies operating in China lack basic labour law knowledge for correctly implementing employee policies and procedures to safeguard their company in China. 


If you would like more information about China labour law and HR best practices or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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