China's labour contracts to favour employees

Companies considering outsourcing key functions to China to take advantage of the country's supply of cheap labour should take note: things are about to get a lot tougher.

by China Economic Review
Last Updated: 23 Jul 2013

China's controversial draft Labour Contract Law (LCL) was toned down by the National People's Congress in December, but even in its new form it will fundamentally alter the country's existing employment standards, and will have an impact on all employers in China, both foreign and domestic. When the law is issued --expected to be in May -- it will work in tandem with China's Labor Law (LL) and will bring additional costs, burdens and liabilities on firms.

One of the major provisions of the LCL is that policies and rules made by employers that directly relate to the "vital interests" of employees must be agreed upon by the employees or their representatives. This effectively means that when a company seeks to introduce new rules which it deems necessary to the management of its business it may have to first seek the approval of workers.

"Vital interests" have been defined as including wages, work hours, vacations, safety, training, discipline and labour management. When employees, or their unions, believe certain company rules are "inappropriate" they have the right to pursue the revision of the rules by negotiation -- however, it isn't clear what would happen if these negotiations were to fail.

With regard to labour contract disputes, the draft LCL requires an analysis of disputed terms, but insists that where more than one interpretation can be made, the version most beneficial to the employee prevails. Strict limits on probation periods will also be introduced: there will be a one-month probation for employment agreements lasting less than one year, two months for agreements lasting between two-to-three years, and a maximum of six months for fixed-term agreements exceeding three years or non-fixed agreements.

During probation periods employers will not be allowed to terminate employment contracts without evidence showing an employee has failed to meet the hiring requirements. Where an employee does terminate a labour contract during a probation period, it must give the employee an explanation.

The draft LCL allows employers to terminate non-fixed term employment contracts by giving 30 days' advance written notice to or one month's salary in lieu of notice. But terminating fixed-term contracts will be much more burdensome and expensive -- even when employees cannot perform due to non-work related disabilities or illnesses, incompetence or where positions may become obsolete.

On severance, the draft LCL deviates substantially from existing laws. Currently, when employment contracts expire without renewal companies do not have to pay severance. The same rule applies where employees resign or otherwise terminate employment agreements.

However, under the proposed rules severance payments must be made to employees based on their term of employment with no exception for contract expirations without renewal, employee resignations, the triggering of contractual terms conditioning termination or very short duration hires.

China Economic Review

Review by Nick Loney

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