When it comes to your employees in China, it is a lot cheaper to stay on the right track than to deal with issues or problems after they arise. The following eight tips are intended to help you stay on the right track with your China employees.
1. Your employment contracts should spell out every aspect of your employment relationship. In the United States (most other countries, not so much), employers can terminate employees for nearly any reason. This U.S. concept of employment at will has no application in China and American companies often get into trouble when they fail to adequately understand this significant difference between the two systems. China has an employment contract law system. This means as a China employer, you must have written employment contracts with all your full-time employees.
Employers operating in China without written employment contracts will be exposed to several risks. Specifically, if an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, it will be required to pay double the employee’s monthly wage.
If an employer goes more than a year without executing a written employment contract, the employee without the contract will be deemed to have entered into an open-term employment contract with the employer. This usually means the employer must retain the employee until his or her retirement age. So do not expect your employees to push you for a written contract!
Because China does not have employment-at-will, after an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is on an open-term contract.
2. Include all mandatory provisions in your employment contracts. Your employment contracts must contain a number of mandatory provisions to be legally enforceable. The exact provisions required will vary by locale, but they generally include the following:
- Basic information about the employer and the employee (the employer’s registered name and address and the name of the legal representative or the person-in-charge, and the employee’s legal name, national ID/passport number and address)
- The term/duration of the employment contract
- A description of the work to be done by the employee
- Location of the workplace
- Working hours and the applicable working hours system (standard or alternate)
- Rest and leave time
- Mandatory social insurance
- Applicable labor protections, labor conditions and protection against occupational hazards
- Other terms required by relevant laws and regulations
In addition to the above required provisions, China employers should include provisions describing any additional benefits they will provide to particular employees.
3. Spell out the term of the employment contract and the probation period (if applicable). A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish a probation period of no more than one month; for employment terms of one year or more but less than three years, the probation period cannot exceed two months, and for employment terms 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 more difficult to terminate an employee after the probation period, we usually (but certainly not always) recommend an initial term of three years for a new employee. That allows you to provide a six-month probation period (the longest permitted under Chinese law).
Under the written law, an employee is entitled to an open-term contract after two consecutive fixed-terms. However, in practice, in most places in China, once an employee has been renewed at the end of the initial fixed term, you have essentially converted that employee to an open-term employee. Terminating an employee on an open-term contract is 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 use this time to determine whether it makes sense to have the employee on your team long-term.
You are not required to set a probation period. Even terminating a China employee on probation is difficult and tricky in China, so as a practical matter, be very careful with your hiring.
4. Know China’s working hour rules. Most China employees can work under only the Standard Working Hours System. Under this system, a full-time employee’s working time is generally limited to 8 hours a day and 40 hours a week (usually from Mondays through Fridays). There are two exceptions to this system: Flexible Working Hours System and Comprehensive Working Hours System. An employee can only be designated under either of the alternate systems if all conditions under the local laws are met. I need to stress that the laws on this are local because our China employment lawyers have recently handled a number of matters where the new client had secured flexible hours approval in some of the cities in which it had employees and just assumed this meant it had the same approval nationwide when it did not.
China’s Flexible Working Hours System is roughly similar to the salaried employee system in the U.S. but employees under this system are not necessarily exempt from all overtime pay. Under the Comprehensive Working Hours System, an employer may generally require an employee to work longer hours without overtime pay if the average hours worked in a certain “comprehensive calculation” period (e.g., a quarter) do not exceed the applicable legal maximum on total working hours for that period.
Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.
5. Know China’s vacation rules. China requires employers provide their employees (both Chinese and non-Chinese) with paid vacation days based on total years of service.
- 1 year or more and less than 10 years’ service: 5 days of vacation
- 10 years or more and less than 20 years’ service: 10 days of vacation
- 20 years’ service or more: 15 days of vacation
Employers are obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of normal wages for each unused vacation day. So be sure to make all necessary arrangements for your employees to take their vacation days. Allowing your employees to carry over their vacation days to the next year (though not prohibited by law) will complicate things and is therefore not usually recommended.
6. Understand what you’re getting into before paying for a 13th month. Getting a 13th month of salary is customary in many 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’re not careful, you may end up having to pay this amount indefinitely.
Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from deferring their individual income tax payments
7. Factor in social insurance and housing fund payments. China employers are typically required to contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all employees (but there are exceptions!). 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 your location. If you are required by law to make the payments, you cannot contract out of your obligations by agreement with an employee and any such agreement will be disregarded by the authorities.
8. Make Chinese your employment contract’s governing language. You should clearly state in your employment contract that Chinese is the official language. It should also be in clear English so your foreign management and HR people can make good use of them in making their HR decisions. And make sure the Chinese and English versions actually line up. Employment documents with mistranslations nearly always work against the foreign employer in the event of a dispute.