Important things you need to know about the Chinese Labor Law – Part Two

This is the second part of our two-part article series “Important things you need to know about the Chinese Labor Law”.

5. Non-competition and competition agreement

When is it useful to have a non-competition agreement and how much does it cost?

Non-competition agreements usually apply for senior management or senior engineers because they have the greatest knowledge about the company’s strategy and secrets. Such a non-competition agreement states that the employee shall not compete with the employer even after termination of the contract. This includes starting a new job or one’s own business. Hence this period is usually a tough time for the employee as it is harder to find a new job. The cost of a non-competition agreement for the company usually amounts to at least 30% of the employee’s previous salary per month. Previous salary means the average salary obtained during the last 12 months, including bonuses or any other extra payments.

6. Is there a confidentiality clause in the labor contract?

Yes, a written labor contract should have a confidentiality clause. By signing the contract the employee agrees to keep all information, e.g. trade secrets, confidential. If the employee does not respect the confidentiality clause and as a result the company suffers losses, the employee is liable to pay compensation.

7. Employee termination

Termination is only possible if one of the statutory reasons applies or if the fixed-term contract expires. Any termination, which cannot be explained by the statutory reasons, is illegal and such a process for illegal termination can be very expensive for the company. For a termination the employee needs to be notified at least 30 days in advance. In addition, the employer also has to provide a 30 days written notice in advance during the following circumstances: the employee is still incompetent after training and position adjustment, the employee is unable to perform his/her job after being sick or if the objective circumstance which the person has been employed for, seriously changed.

When can you immediately terminate an employee?

If the employee…

• is to be found incompetent during the probation period;
• is investigated for criminal actions;
• seriously violates the internal rules;
• commits corruption or dereliction causing loss for the employer;
• has a second job, which makes it impossible for him to perform well, and the employee refused to change this situation;

…then the company has the right to terminate the employee immediately without any severance payment. In these special cases the employee only needs to be notified 3 days in advance.

How expensive will a termination be?

Under certain circumstances the company needs to pay severance payments. The total severance pay is then calculated as follows: [average monthly salary] x [years (> than 6 months) of service]. The average monthly salary refers to the average salary of the last 12 months before termination, including bonuses and further extra payments. However, for the employer’s convenience, average monthly salary used for severance payment calculation cannot be more than three times the municipality’s monthly average salary. Thus, for Beijing as of July 2015 this would be RMB 19,389 only.

An employer also has to pay severance pay if a fixed-term contract expires and is not renewed because of the following reasons:

• The employer and employee agree to terminate the contract and this has been proposed by the employer first
• The employee is terminated with a 30 days written notice only
• The company needs to release 20 employees or at least 10% of all employees because it undergoes changes as implied by the Enterprise Bankruptcy Law.

8. Labor Unions

Generally speaking having a labor union is not mandatory. However big companies often have their own labor union. Small companies, meaning no more than 25 employees, often join the labor union of an upper level company. The labor union has to be informed about everything going on in the company. The union is eligible to ask the company to change their actions, but their agreement to any company actions is not mandatory. It is important to keep the labor union informed, especially in the case of unilateral termination, in order to avoid disputes with the Labor Arbitration. However, in practice most small and medium sized Foreign Invested Enterprises don’t have a labor union.

9. Handbook

In addition to a labor contract, a company should have an employee handbook. Although this is not mandatory, it is strongly recommended in order to avoid labor disputes. In this handbook, internal procedures for leaves, sick leaves, and behavioral standards should be incorporated. The employee handbook gives the company the possibility to define expressions, which were vaguely formulated by the law.

As such, the employee handbook should cover:

• recruitment procedures
• staff performance and possible consequences
• confidentiality and non-competition
• termination
• discipline punishments
• approval procedures for leaves and overtime

The mentioned points should give you an overview and act as first support when hiring staff in China. For any further information or questions regarding labor law or labor contracts in China, please contact: richard.hoffman@ecovis-beijing.com.