China Employment Laws and How to Avoid “Forever Employees”

The iron rice bowl lives on in China’s employment laws

I have often written about the importance of selecting an appropriate initial fixed employment term for Chinese employees because in most places in China employees are automatically converted into “open contract” employees when their fixed term concludes. An open-term labor contract means the employer must (with very few exceptions) retain the employee until his or her retirement age.

China’s labor law provides that an employee is entitled to an open-term contract under the following circumstances:

1. The employee has been continuously working for the employer for ten years.

2. The employer is implementing the labor contract system for the first time or the employer is a state-owned enterprise and went through reorganization and executes a labor contract with the employee, and the employee has been continuously working for the employer for ten years and is less than 10 years from his or her legal retirement age;

3. After execution of two consecutive fixed-term labor contracts (unless grounds for termination exists).

The PRC Labor Contract Law is very pro-employee when it comes to conversions to an open-term labor contract. At renewal or execution of the labor contract, unless the employee requests a fixed-term labor contract, an open-term labor contract shall be concluded. And many Chinese courts (especially outside Shanghai) strictly read this language to find that an open-term labor contract has been created.

For example, in a Jiangsu Province case, after executing two consecutive fixed- term contracts, the employer and the employee entered into a third fixed term contract, at the end of which, the employer chose not to extend the contract. The employee sued and the court held that the employer bore the burden of producing evidence proving the employee had been the one to request the third fixed term labor contract. Lacking conclusive proof of this, the court held that the employer had failed to meet its burden of proof and its decision to execute the third fixed term labor contract was wrongful. Since the employer’s decision to end the employment relationship upon expiration of the third fixed-term contract was illegal, the employee was entitled to be converted to a lifetime employee and the employer was ordered to pay the employee double the employee’s monthly wage from the time an open-term contract should have been entered.

Oh, and don’t forget that you could be deemed to have entered into an open-term employment contract with your employee if the employee works for you for more than a year without having a written employment contract.

Bottom line: I am going to keep it simple: ma10ke sure your employment contracts are current and you are using the right term of employment.