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

The labor law of the People’s Republic of China (PRC), which has been in effect since 1995, and the newest edition of the labor contract law, in effect since 2012, are now also regulating employment relationships in China.

The laws cover the rights and responsibilities of both – the employer and employee. Although this law has been in effect for quite a long time, uncertainty remains in how to correctly implement the regulations. In addition to this, the wording is sometimes confusing or vague, which increases the difficulty in correctly interpreting the law. Due to the fact that the labor law is rather new, practical examples of labor disputes are also rare.

Therefore, a new Judicial Interpretation on Applicable Laws in terms of Trial and on Labor Disputes Cases (4) (hereafter referred as the fourth interpretation) came into force on 1st of February 2013. This is already the fourth interpretation, which signifies how complex the situation is.

This article answers the most frequently asked questions concerning labor and labor contract law.

1. The labor contract

How shall the contract be drafted?

First of all, it is important to have a well-drafted labor contract. It should respect the applicable laws and therefore should clearly define the employee´s rights as well as the employer´s responsibilities. To avoid mistakes in the process of drafting a labor contract using legal advice is advisable.

The following elements are absolutely necessary for an employment contract:

• 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?

In general, 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 salary for each month the employee worked without contract. Additionally, if the employee works for 12 months or more without any written contract, the contract is then an open-ended one. This is of course beneficial for the employee and he/she will surely make use of his/her rights. In order to avoid these undesirable burdens, the company should provide the employee with a written contract on the first day.

Open-ended or 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 on later.

Do part-time employees need a written labor contract?

If the company wishes to employ a part-time employee, it can do so 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 4 hours a day and not more than 24 hours a week. Part-time employees can be terminated immediately without any severance payment.

2. Probation Period

Why should you have a probation period?

As the term “probation period” already implicates, this period is to test the employee. If during the probation period an employee shows that he/she is incompetent for the position, the employer has the right to terminate him/her without prior written notice and even without severance payment.

How long is the probation period in China?

Chinese law regulates the duration of the probation period. The given statutory periods are the maximum periods allowed:

Moreover, for all project-based contracts there is no probation period.

3. Working time

What are the minimum requirements for the annual leave?

Chinese Law provides minimum requirements for the annual leave. However, Foreign Invested Enterprises usually offer more 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 20 years in aggregation

In addition to this, Chinese employees enjoy 11 days of Public Holidays. The Chinese government declares these holidays, usually scheduling them around different festival days, such as spring festival or the golden week.

How many hours can an employee work in China?

The Chinese labor system has three different systems to calculate the allowed working 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 44 hours. The third system, the flexible 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 base hourly wage for each hour of overtime:

• Working days: 150%
• Weekends: 200%
• Public holidays: 300%

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

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

4. Insurances for employees

In addition to the salary, the company has to contribute to social security and to the housing fund. The employer’s contribution for employees in Beijing as of July 2015 is as follows, calculated with a base pay of 6,463 RMB per month and a cap of 19,389 RMB per month:

• Pension Insurance: 20%
• Medical Insurance: 10%
• Unemployment Insurance: 1%
• Employment Injury Insurance: 0.5 – 2%
• Maternity Insurance: 0.8%
• Housing Fund: 12%

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 and receive severance payment if the employer does not pay the social security contribution.

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.