If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up front is much less expensive than the alternative. These eight tips will help you stay on the right track.
1. Write employment contracts that spell out every important aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will-employment is foreign in China and foreign companies (especially those that come from at-will-employment jurisdictions) often get themselves into legal trouble when they fail to realize this significant difference between the two systems.
As an employer in China, you must have written employment contracts with all full-time employees. Employers that fail to implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment contracts, which essentially means the employment relationship will remain in effect until the employee reaches his or her legal retirement age.
2. Make sure all mandatory provisions are included in your employment contracts. Your employment contracts need to contain at least the following provisions:
- Basic information about the employer and the employee (including the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
- The specific term/duration of the employment contract and any probation period
- A description of the work to be done by the employee
- Location of the workplace
- Working hours
- Rest and leave time
- Social insurance
- Applicable labor protections, labor conditions and protection against occupational hazards
- Other terms required by relevant laws and regulations
3. Clearly state the term of the employment contract and probation period. A probation period gives the employer and the new employee time to see whether they are a good fit for each other. Generally speaking, the longer the initial employment term, the longer the probation period may be, provided it is within the legal limit. For an employment term of three months or more but less than one year, you may establish a probation period of no more than one month; for an employment term of one year or more but less than three years, the probation period cannot exceed two months, and for an employment term of three years or more or for an open-term employment arrangement, the probation period cannot be longer than six months. Each employee can have only one probation period.
Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to set a six-month probation period—the longest permitted under Chinese law, if you want to set a probation period at all. That said, terminating an employee during probation is not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.
Keep in mind that, in many cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract tends to be much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can and should use the initial contract term to determine whether it makes sense for you to convert the employee to a lifetime employee.
4. Know China’s working hour rules. Most municipalities enforce an 8-hour workday and 40-hour workweek, which is called the standard working hours system. There are two exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is somewhat similar to the salaried employee system in the United States, but not quite the same. It applies to certain categories of employees such as senior management. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than 8 hours a day or 40 hours a week without having to pay overtime wages; however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.
For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local employment authorities and the approval is valid for only a limited time. If you want to keep the employee within the alternative system, you must submit a renewal application before the expiration of the term specified in the government’s approval letter.
5. Learn China’s vacation rules. Employees who have worked continuously for one year are entitled to paid vacation days. The statutory vacation period, based on the employee’s total years of service (with any employer, not just for you), is as follows:
- More than 1 (including 1) and less than 10 years service: 5 days vacation
- More than 10 (including 10) and less than 20 years service: 10 days vacation
- More than 20 years service (including 20): 15 days vacation
Employers are required to make arrangements for employees to use their vacation time each year. Technically, unused vacation time in one year may be carried over to the next year, however we do not recommend adopting this as a usual practice so as to keep things simple. An employer who does not allow an employee to take annual leave will be required to pay that employee 300% of his or her daily wages for each unused vacation day. Be sure to resolve this issue at the time of employee separation otherwise risk the employee pursuing you for a claim on compensation for vacation balance.
6. Understand what you are getting into before paying for a 13th month. A 13th month salary is customary in some parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you are not careful, you may end up having to pay this amount indefinitely.
7. Factor in social insurance and housing fund payments. As an employer in China, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your full-time employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at the employer’s location. To the extent your local law mandates such payment, you cannot contract away the legal requirement with your expat employee.
On that note, it is risky to employ someone solely for the purpose of making social benefits (or other type of company-sponsored benefits) contributions for that person. Sometimes people (oftentimes a former employee) will request this so they can get employee benefits without being a real employee. Be aware before you go along with this. This is an example of things gone wrong despite good intentions on the employer’s part. Your employees are not China employment lawyers and you should be careful before agreeing to anything they propose.
8. Make Chinese the governing language of your employment contracts. Your employment contract and any other employment-related agreement or document should specify that Chinese is the governing language. If your company’s management/HR personnel are not fluent in written Chinese, your documents should also contain an English-language (or your native language) version for your reference so you understand the content of your own documents.