China Employment Law: The Practicalities

In cleaning out my computer this weekend, I came across this memo from one of my law firm’s international employment lawyers to a client from nearly two years ago. I gave it a quick read and near as I can tell most of it is current. The only things I would note are that the rules can and do vary from province to province and from city to city within China and in some cities it is relatively easy to secure permission to have your employee work without having to pay overtime.

I am writing in response to your recent email regarding ______’s China employment matters. The basic response to your questions on PRC employment law are as follows. As you can see, the regulations are quite complex. Please contact me if you would like more detail on these matters, or if you have other related questions.

1.   In general terms, Chinese law does not allow for “comp time.” Calculation of work time and payment is regulated under the PRC Labor Law劳动法. Article 36 of the China’s Labor Law provides for an 8-hour workday and a 44-hour workweek. Article 44 of the Labor Law provides that any labor performed in excess of the statutory amount must be compensated at 150% of the base salary. If the employee works on a normal rest day (Saturday afternoon or Sunday), then pay is 200% of base. If the employee works on a national holiday, pay is 300% of base. It is not permitted to make up for excess time worked by providing time off in the following week. The statute is silent about adjusting work hours within the same week and many companies will say that if an employee worked 12 hours on day one, that employee can then work 4 hours on day two. Though this is a somewhat common practice, particularly among Chinese companies, this system violates the rules. Under the strict interpretation of the rules, if an employee works 12 hours, 8 hours is at base pay and 4 hours must be paid as overtime. For these reasons, most WFOEs have a very strict rule limiting overtime work. That is, no employee is permitted to work overtime without specific written permission. “Comp time” systems are generally not used in China by foreign companies because they violate the rules and we do not recommend our clients use such a system.

2.  Chinese employment law recognizes that for certain times of employment, a regular, 44-hour workweek, 8-hour day simply is not practical. For example, employees who work in transportation (on trains for example) and employees who work as travel guides will never work a standard week or day. For such employees, permission can be fairly easily obtained from the local labor bureau to establish a system of flexible work hours and accumulation of hours system. This permission system is regulated by the Labor Bureau Method for Enterprise Application for Non-Specified Work Hours and Gross Accumulation of Hours劳动部关于企业实行不定时工作制和综合计算工时工作制的审批办法.

Under this system, a company can work with its employees to design a system where hours are accumulated within a week or month in a flexible way that fits with the actual demands of the job. However, the basic rule of this system is that the final result must be as close as practical to a 44-hour workweek and an 8-hour workday. This system cannot be used to impose a non-hourly work system where the employee is paid a monthly salary and is required to work as many hours as are required to get the job done. That is, this system cannot be used to impose a salaried employee system as an hourly employee system. There is no concept of salaried employee under the Chinese labor law system. There is only the method described here where the hourly system is adjusted in a way to accommodate employees who have irregular work hours as an inherent part of their jobs.

Consider the application of the above to your employees.  Many of your sales employees will travel. You have two choices that comply with the law. First, absent special permission, you are required to pay overtime for every hour in excess of 8 hours that the employee works, even in cases where the excess hours are caused by travel that cannot be avoided. Second, if this is an excessive burden, you can request permission from your local labor bureau to implement a flexible system to allow for excess time on certain days to be made up as soon as possible by time off on other days, provided that the result is as close to an 8 hour day, 44 day work week as possible. In general, the employees must agree to this system: it cannot simply be imposed by the employer.

3. You have asked about the system for paying your general manager. This question applies to management employees in general. What you are really asking is whether or not you can pay your management people using the standard U.S. salaried employee approach. As noted above, the legal regime in China does not recognize the salaried employee concept. This means that for you to avoid paying overtime to your management personnel, you will need to obtain approval from the local labor bureau for an alternative payment system for these employees. However, as I have stated, the rules do not allow for an open-ended, salaried employee approach. Rather, the rules are designed to deal with workers whose jobs require an irregular hourly pattern of work. The rules quite specifically exclude the concept of open-ended, work as long as it takes to get the job done systems of compensation. For this reason, applications to impose this kind of salaried employee system are generally not granted by the local labor bureaus, but this does very much depend on the specific local labor bureau.

This whole approach is, of course, not consistent with the way modern companies are managed. The Chinese labor law system does not make any distinction between the factory line worker and the president of the company that owns the factory. By law, and absent approval, both the line worker and the president must be paid using the same rigid hourly wage system. The fact that this is entirely unrealistic means that most companies in China simply ignore the rule for management employees and for sales and other employees who inherently work irregular hours.

However, simply ignoring the law is not a sound strategy for foreign owned companies. When the law is ignored, the result is that the company is subject to large overtime claims from disaffected management and sales employees, and we see this happen all the time after an employee has left the company or is terminated. This issue arises quite consistently when foreign companies terminate a management-level employee. It is an unpleasant shock when the company learns that the manager it just terminated has been carefully accounting for unpaid overtime all along and insists on getting paid all back overtime wages, plus interest on those wages, plus penalties, all in addition to a claim for an already large settlement payment.

 4. The Chinese employment law system for vacation time is regulated by the Regulations for Employee Vacation with Pay职工带薪年休假条例. Article 3 of these rules provides that vacation with pay is mandatory, in accord with the number of years of employment, according to the following schedule:

— 1 year to 10 years employment: 5 days vacation.

— 10 years to 20 years employment: 10 days vacation.

— Over 20 years employment: 15 days vacation.

 Article 5 provides that vacation must be taken in the year accrued. That is, vacation cannot be accumulated and rolled into subsequent years. If the company cannot provide vacation due to the needs of the company, then the company must pay 300% of base salary for every vacation day denied.

Most foreign owned companies have a vacation policy more generous than required by Chinese statute. It is permissible to impose any vacation policy more generous than the Chinese required system, but not one that is less generous. The most contentious area is accrual of vacation. In general, it is considered permissible to allow for accrual and roll over of vacation time if this is the specific desire of the employee. You should note, however, that the regulation is silent on this issue. The Chinese government is concerned that employers will pressure their employees not to take vacation and to accrue the time when this is not really the intent of the employee. Therefore, the regulation favors payment of the 300% of salary as a way to control the actions of the employer.

Most employers simply use whatever U.S. vacation policy they have in place as their policy for China, though this is not always the best plan. It is better to adopt a vacation policy that complies with the Chinese system, with additional benefits on top of the Chinese system if that is considered desirable. Note also that the vacation policy should apply to all employees. Some companies will apply the policy only to management personnel. This is not acceptable under Chinese law.

5. Many Chinese-owned companies ignore the requirements of the Employment Law and the associated regulations. It is therefore common for Chinese staff of foreign owned companies to recommend that you too ignore the rules. However, this is not a good strategy for foreign companies. When a complaint is raised, the local labor bureaus are quite aggressive in enforcing the strict requirements of the labor system against foreign owned companies. and this type of enforcement is becoming more common, not less. Accordingly, even when the rules are difficult to deal with, you must be sure to follow them as closely as possible. Also, the employee who told you not to follow the rules will not hesitate to sue you for not following the rules, when doing so suits his or her purpose later on down the road.