China Employment Contracts and the Double Wage Penalty

China Employment Contracts. Do them right.

China’s labor laws mandate China employers have written employment contracts with all full-time employees. If an employer goes more than one month without having a written employment contract with an employee, the employer will be required to pay the employee double that employee’s monthly wage and immediately execute a written labor contract with that employee.

Essentially, PRC labor laws do not hold the employer “on the hook” for the first month without a written contract; instead the clock starts running the second month. For example, an employee that starts work on April 1, 2014 but does not enter into a written employment contract with the employee is not entitled to double wages for the month of April. In other words the employer gets a one month “free pass.”

But suppose there is still no written employment contract in place come May 1, 2014, and that continues to be the case. In that circumstance the employer will be liable to the employee for double the employee’s monthly wage for every month without a written contract. Is there any limit on how many months an employer must pay double wages for not having a written employment contract with an employee? Most jurisdictions end the double wage penalty after the first year (that is, 11 months, as the employer gets a “free pass” for the first month), but at that point the employer will be deemed to have entered into an open-term labor contract with that employee. And since this is about as close as one can get to lifetime employment this is not a situation in which any employer wants to find itself.

How long can an employee wait before pursuing a claim for double wages? The usual statute of limitations for China labor law disputes is one year. When though does this one-year clock start ticking? Some jurisdictions in China categorize a double wage payment as labor compensation but others categorize it as a penalty for violating the law. If it’s the former, the one year statute of limitations does not begin to run until after the employee ceases his or her employment. But if it’s the latter, the one year statute of limitations begins to run as soon as the employee knows or should have known the injury has occurred.

To make things even more complicated, some China labor arbitrators use a third method to calculate the one year statute of limitations. They calculate from the last day of the employee’s first year of employment.

Bottom line:
You must have an appropriate Chinese language written employment contract with all your employees. Oh and one more thing: just about any person in China doing work on behalf of your company is your employee. For more on this, check out China’s Tax Authorities Want You.

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