China HR: The 21 most asked HR questions about the Chinese labor law Part 1/2

8 min.

by Richard Hoffmann, ECOVIS Beijing China

The People’s Supreme Court issued a fourth Interpretation of the Chinese Labor Law, which came into force last year on February 1^st 2013. The fourth interpretation especially contains more specific regulations for payments during the non-competition period, but at the same time, it raises more questions about how to correctly apply the existing laws. Ecovis Beijing answers the 21 most asked China HR questions in its two part series about the Chinese Labor Law.

China HR: Questions 1 – 10: Drafting a labor contract, Social Security contribution, overtime and other basics you should know

The labor law and labor contract law, which have been effective since 2008, are regulating employment relationships in China. Labor laws in China cover the rights and responsibilities of both the employer and employee. Although this law has been in effect for quite a long time, uncertainty still remains concerning how to correctly implement the regulations. In addition, the wording is sometimes confusing or vague, which increases the difficulty in correctly interpreting the law. Moreover the labor law in China is rather new, consequently practical examples of labor disputes are also rare.

Therefore, a “Judicial Interpretation on Applicable Laws in terms of Trial and on Labor Disputes Cases” came into force on February 1st, 2013. This was already the fourth interpretation, which signifies how complex the situation is.

Typical questions raised are:

How shall the labor contract be drafted?

Generally speaking, well-drafted labor contracts are more and more important. Labor contracts that do not respect the applicable laws, exclude employee’s rights or not incorporate the employer’s responsibilities are simply invalid. So that no mistakes are made in drafting employment contracts, it is recommended to take legal advice before starting any action.

The employment contract absolutely has to contain:

Name, address & legal representative of the company
Name, address, ID number of the employee
Time limitation (if applicable) & probation period
Remuneration
Description and location of the employment
Regulations concerning working hour, rest & leaves
Working conditions, including safety & protection measures
Social insurance

Why is a written labor contract necessary?

A written labor contract is absolutely necessary in China in order to protect the employee as well as the employer. The law has special regulations on what happens if a written contract is not provided within one month after starting work. If this is the case, the employer has to pay double the salary for every month the employee worked without a contract. Additionally, if the employee works for 12 months or more without any written contract, the contract then becomes an open-ended one. This is of course beneficial for the employees and they will surely make use of their rights. In order to avoid these undesirable burdens the company should provide the employees with a written contract on the first day.

When is it an open-ended or a fixed term contract?

Usually the company and the employee agree within the written labor contract on the time frame of the employment. However, according to the law in China, a contract is simply supposed to be open-ended if one of the following circumstances applies:

The employee has been working for the same company for at least ten years.
After the expiration of the second fixed-term contract, which has been signed after 2008, the following contract for this employee has to be an open-ended one.
The employer did not provide a written contract for 12 months or more.

An open-ended contract makes it more difficult to terminate an employee. The issues of termination will be elaborated later.

Why should you have a probation period?

As the term “probation period” already implicates, this period is to test the employee. If an employee shows that he/she is incompetent for the position during the probation period, the employer has the right to terminate him/her without prior written notice and even without severance payment. During this period the employee shall receive at least 80% of his salary. If the probation period is longer than as stated in the law, then the employer has to pay compensation for each month the employee did not receive his/her full salary.

How long is the probation period?

The duration of the probation period is regulated by law. The given statutory periods are the maximum periods allowed: Contract for less than 3 months: no probation period. Contract for more than 3 months but maximum one year: 1 month probation period. Contract for more than 1 year but less than 3 years: 2 month probation period.

Contract for more than 3 years & open-ended contracts: 6 month probation period. For all project-based contracts there is no probation period.

How about part-time employees?

If the company wishes to employ a part-time employee, then this is generally possible even without any written employment contract. However, for the employer’s safety it is still recommended to have a contract. Part-time employees are only allowed to work on average 4 hours a day and not more than 24 hours a week. Part-time employees can be terminated immediately without any severance payment.

How much annual leave do you have to give an employee?

Chinese Law provides minimum requirements for annual leave. However, Foreign Invested Enterprises usually give more days annual leave than this.

The minimum requirements are:

5 days if working less than 10 years in aggregation
10 days if working 10–20 years in aggregation
15 days if working over 20years in aggregation

In addition to this, Chinese employees enjoy 11 days of Public Holidays, which are decided by the government and gathered around feast days.

Check annually on these holidays because overtime work on public holidays is very expensive.

How many hours can you let an employee work?

The Chinese system has three different systems to calculate the allowed hours per day. The standard working hour system is suitable for office workers. Under this system the normal working day shall not exceed 8 hours per day and no more than 44 hours per week. Under the comprehensive working hour system, the hours are calculated on a specific period such as week, month or quarter. The average day shall also not have more than 8 hours and the average week shall not have more than 44hours.

The third system, the non-fixed work hour system, does not calculate any hours and is therefore mainly used for senior management positions.

How much does overtime cost?

Under the standard working hour system overtime shall be paid based on a certain percentage of the basic hourly wage for each overtime hour:

On working days: 150%
On weekends: 200%
On public holidays: 300%

Under the comprehensive work hour system, overtime is calculated as follows:

Beyond ordinary shift: 150%
On public holidays: 300%

How much does an employee cost in addition to his/her salary?

Additionally to the salary, the company has to contribute to social security and to the housing fund. The employer’s contribution is calculated based on the salary of the employee. Since June 2013, the minimum base for the calculation is RMB 2,089 / RMB 3,134 (40%/60% of the average monthly wage in Beijing), meaning that even if the monthly salary in Beijing is below RMB 2,089 the contribution is calculated with the base of RMB 2,089. On the other end the maximum contribution is determined by a cap of RMB 15,669 (300% of the average monthly wage in Beijing). Every year in June, the Beijing Municipal Human Resource and Social Security Bureau and the Beijing Municipal Statistics Bureau publish the official average monthly wage for the previous year and the base for the calculation changes accordingly.

Pension Insurance: 20% (minimum base for calculation RMB 2,089/month, maximum cap for calculation RMB 15,669/month)

Medical Insurance: 10% (minimum base for calculation RMB 3,134/month, maximum cap for calculation RMB 15,669/month)

Unemployment Insurance: 1% (minimum base for calculation RMB 2,089/month, maximum cap for calculation RMB 15,669/month)

Employment Injury Insurance: 0.5 – 2% (minimum base for calculation RMB 3,134/month, maximum cap for calculation RMB 15,669/month)

Maternity Insurance: 0.8% (minimum base for calculation RMB 3,134/month, maximum cap for calculation RMB 15,669/month)

Housing Fund: 12 % (no minimum base, maximum cap for calculation RMB 15,669/month)

The exact figures depend on the region. Moreover, the employer’s contribution to the employment injury insurance depends on the industry.

Companies not paying any contribution to the social security, will have to pay interests on late payments. Moreover, employees have the right to terminate the labor contract and receive severance payment if the employer does not pay the social security contribution.

Part 2 of our series: The 21 most asked HR questions about the Chinese labor law

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