Legal News

China Fixed and Open Term Employment Contracts.

One of our clients is coming to the end of its contract term with the bulk of its China employees and they wrote one of our China employment lawyers with questions regarding fixed term employment contracts under Chinese law. Our lawyers’ response is a made to order blog post, so here goes:

Chinese employment law permits you to enter into two fixed term contracts with an employee. The term of these contracts can be any fixed term to which the parties agree. The term typically ranges from one to five years. At the end of the second fixed term contract you can chose not to continue the employment relationship or you can chose to continue the employment relationship under an open term relationship.

An open term relationship requires a written contract. This contract has no term and it terminates only under the following circumstances: 1) the employee voluntarily resigns, 2) the employee reaches retirement age or 3) the employee is terminated for “cause.” Termination for cause is complex and difficult in China. There are two basic areas for cause. In the first, the employee has committed a crime like theft or a gross breach of conduct rules, such as arriving to work drunk. In this case, termination is straightforward. In the second, the employee shows up to work on time and follows all the rules, but is simply incompetent. In the current situation in China, it is virtually impossible to terminate an employee who falls into this second category.

Accordingly, you should never enter into an open ended employment relationship with an employee you suspect will fall into this second category. However, this is often difficult to predict. In actual practice, there are various ways foreign companies deal with such employees. However, there are plenty of employees with a “thick face” who are willing to earn minimum wage and engage in dead end tasks and those employees are nearly impossible to terminate under China’s employment law system.

China’s labor employment laws are new, so many of the issues have not yet been fully resolved. However, the trend is towards increasing employee protection and not towards more employer freedom. The trend is the same in Europe, so there is nothing unique about China’s employment law approach. China follows a European approach and that is the place to look for analogies. The United States is not the place to look for guidance as China’s employment law system is about as different from the U.S. as any system could be.

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