China’s New Labor Law: It’s A Huge Deal.

Everything is going to change on January 1, 2008, for employers in China. Well almost everything. That is the day China’s new labor law goes into effect and if you have employees in China (especially if you “unofficially” have employees in China), you absolutely must take various steps to get into compliance AND to avoid being sued. And you better start taking those steps now.

CLB’s Steve Dickinson has been working with many foreign companies to get them ready for the new law, called the labor contract law (LCL) and he just wrote a column for China International Business magazine on the basics involved. The article is entitled, “Power to the People,” [link no longer exists] with the “people” being employees and Chinese lawyers, who are already salivating about suing foreign companies on this. And when I say salivating, I mean salivating. We have heard from Chinese lawyers who already have plaintiffs all lined up and ready to sue various foreign companies for when those foreign companies fail to comply. I kid you not.

The new labor law is going to apply to all employers, no matter how few employees (even one!) they might have. It is going to require all labor contracts be in writing and it will impose significant penalties on employers for failing to comply with this. Employees can claim double salary for months worked without a contract for up to 12 months’ salary. This rule is absolutely going to apply to “informal” employment relationships common to so many foreign businesses doing business in China. Expect a whole slew of lawsuits to be filed on January 1, 2009, by employees seeking double damages for the 12 months they just completed without a contract.

It is also going to require all employers maintain a written employee handbook setting out the basic rules and regulations of employment. Without an employee handbook, employers will be essentially unable to fire anyone; “the failure to maintain an employee handbook means that an employer will effectively be unable to discharge employees for cause, since “cause” must be determined with reference to the employee handbook.” Do it.

The new law also greatly limits the use of term contracts and probationary periods, previously popular ways to skirt China’s existing labor law regime:

Under Chinese law, an employee can be discharged either at the expiration of a term contract or for cause. To avoid the need to terminate for cause, employers in China have typically engaged employees under a series of short-term contracts. This practice is no longer possible under the LCL. The employer is permitted to enter into a maximum of two term-contracts with the employee.

If the employee continues on after the expiration of a second term-contract, the subsequent employment contract is deemed to be an “open-term contract.” Under an open-term contract, the employee is employed until he chooses to terminate the contract or reaches retirement age. The employer can only terminate the employment contract by discharge of the employee for breach. This means that once the relationship has shifted to an open-term contact, the result for competent employees is effectively “employment for life.”

The LCL imposes severe restrictions on the use of probationary periods in the employment relationship. Probationary periods are permitted, but the length is limited based on the term of the employment contract, with an absolute maximum set at six months. Furthermore, an employee can only be subject to a single probationary period by a single employer. Wages during the probationary period must also be no less than 80% of the contract wage.

The LCL also clarifies requirements for employee non-compete agreements and a failure to abide by those renders the non-compete ineffective. Only senior management and other employees with access to critical trade secrets can be required to enter into non-competition agreements. “The agreement must be limited in duration to two years, must be limited in geographic scope to a reasonable area, and the employer must pay compensation to the employee during the period that the non-competition restriction is in effect.” In other words, you must pay your employee something for the non-compete you are asking he or she to sign and you must continue paying that for the non-compete provision to remain effective.

Employers who fail to abide by the LCL face administrative fines, awards of double wages and liability for actual damages. More importantly, “virtually every violation of the law gives the employee the right to sue the employer for penalties and damages in the local employment arbitration bureau or in the local courts.”

And if you think this new law is going to pass under the radar, think again:

The LCL has been actively publicized and employees are well informed about their rights under the new law. Growing numbers of Chinese attorneys are taking a strong interest in representing employees under the LCL in filing group claims against employers. It is this sort of employee “self help,” rather than administrative sanction, that is likely to be the greatest threat to employers under the new law.

Inside Counsel magazine, in a story entitled, Empowering the People: New labor law in China gives employees right to private action, [link no longer exists] also takes a look at this “sweeping” new law and finds US companies vulnerable:

As part of this power shift [from employer to employee], the new law allows employees to sue and seek damages from their employers. Most experts believe U.S. companies will be the prime targets of suits because of their deep pockets and the strained relationship that exists between the Chinese government and multinationals.

Bob Kwauk, managing partner at Toronto based mega-firm, Blake, Cassels & Graydon, rightly points out that the companies most likely to get penalized under the new laws will be the “multinationals that are following the rules but aren’t crossing the T’s and dotting the I’s,” because “It’s sexy to go after the big multinationals in the big city.”

The article goes on to note that “experts believe the new law will have some teeth,” and then quotes Steve on this:

“This new law gives the individual worker and the worker’s union the right to go to court to independently enforce their rights,” says Steven Dickinson, a China lawyer at Harris Bricken. “Chinese workers are increasingly aware of their rights, and they’re likely to take full advantage of this law to vigorously enforce them.”

This is a change from the past when employees weren’t allowed to file claims against companies. Instead they had to file a grievance with the government or state-run labor unions, which would then decide whether a claim should be brought against the offending company. Most employees were reluctant to file a grievance out of fear of retaliation. And many weren’t even aware they had the right to file grievances.

The article then posits that “no other area of the new law is likely to cause more litigation than the changes to regulations governing China’s labor contracts.” I agree.

This article also discusses the new term and termination requirements:

The new law allows employers to assign only two consecutive fixed-term contracts. After that the employer must offer the employee an open-ended contract, which the employer can only terminate under certain circumstances such as incompetence, serious violations of internal rules, gross negligence and fraud. Employers that violate this statute will have to pay the employee double salary for each month during which he or she had the right to an open-ended contract. Otherwise the employee can sue.

An employer can terminate an employee without cause but must pay the employee double severance. Severance equals one month’s pay per year of service.

The article concludes with Steve pointing out how Chinese courts heavily favor workers. I would add this is particularly true in lawsuits against foreign companies that are doing business in China.

To get an idea of the sort of impact this new law is already having and will have, check out this article on what Huawei has done in an effort to get around it.

This is huge and not just for China employment lawyers.

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