Hiring staff in China

Entities established in China may use indirect forms of employment for two main reasons: (i) either it is legally prevented from hiring staff directly, or (ii) it needs temporary staff.
Representative Offices (“RO”) in China cannot hire local staff directly. The reason for such restriction is because ROs have no legal personality while employees shall have the right to claim against an employer who is a legal entity. Therefore, ROs can only hire local staff through labor dispatch agencies, the latter becoming the legal employer of those employees. As such, a labor dispatch agreement is concluded between the RO and a labor dispatch agency (“Foreign Enterprise Service Company” or “FESCO”), under which such FESCO agrees to provide the RO with local staff and to manage subsequent labor relationships. Thus, employment contracts are concluded by local employees with the designated FESCO (instead of the RO where such employees are dispatched).
The same pattern is also used by domestic companies and FIEs to hire temporary workers. By the past, some companies abused the system, using dispatched employees for permanent positions. In order to put an end to such situations, China adopted new labor dispatch rules in March 2014 (the “Interim Regulation”). Under the Interim Regulation, labor dispatch agreements can only apply to the following positions: (i) temporary positions (less than six months), (ii) auxiliary positions (ancillary services to the main business of the employer), or (iii) replacement positions (when a permanent employee is temporary absent). In addition, the number of employees hired under dispatch agreements cannot exceed ten percent (10%) of the total employees of the company, and the salary paid such dispatched employees shall be equal to the salary of direct-hired employees occupying similar positions.

Employment legal framework in China is made of different laws and regulations, among which the most important are the Labor Law of the People’s Republic of China (1995) and the Employment Contract Law of the People’s Republic of China (2008 - 2013), together with their respective implementation regulations and interpretations.
These State-level laws and regulations form the basis of the employment system in China. However, local regulations (adopted in major municipalities such as Beijing, Shanghai, Tianjing, etc.) may provide additional rules.
Under the existing framework, the following provisions are mandatory:

  • Working Hours: Under the standard system, employees shall not work more than eight (8) hours a day and forty (40) hours a week. Besides, alternative systems allow the employer to require employees (i) to work longer hours without paying for overtime as long as the average hours worked do not exceed the limit set for a certain period of time (over that limit, compensation must be paid); or (ii) to work over forty (40) hours a week without compensation for certain high-qualified managerial staff.
  • Resting Days: Employees shall be granted at least one (1) day off per week.
  • Overtime: Under the standard working hours system, overtime hours shall be paid at the following rates: (i) 150% of normal wage on normal working days, (ii) 200% of normal wage or compensatory leave on resting days, and (iii) 300% of normal wage on public holidays. Those rates are not applicable to employees working under alternative working hours schemes.
  • Annual Leave: Employees shall be entitled to five (5) days’ annual leave for one (1) to ten (10) years’ service; 10 (ten) days’ annual leave for ten (10) to twenty (20) years’ service; and fifteen (15) days’ annual leave over twenty (20) years’ service. In practice, FIE established in the biggest cities often grant their employees longer annual leaves than the minimum statutory requirements.
  • Minimum Wage: Minimum wages are fixed locally and adjusted yearly. For instance, in 2015, minimum wages in the following cities are: 1.720 RMB/month in Beijing, 2.020 RMB/month in Shanghai, 1.850 RMB/month in Tianjin, and 2.030 RMB/month in Shenzhen.
  • Maternity Leave: Female employees are entitled to ninety-eight (98) days of maternity leave, starting fifteen (15) days before the contemplated birth. Difficult births, as well as giving birth to more than one (1) child at the same time gives right to an additional fifteen (15) days. While key points of maternity leave are regulated nationally, a significant part of the system is regulated at local level.
  • Retirement: Retirement age for male workers is sixty (60), while retirement age for female worker is fifty (50) or fifty-five (55) if in managerial or technical positions.
  • Employment Contracts: FIE must conclude written employment contracts with all of their employees. Such contracts can be drafted in foreign language. However, if there is a conflict with a Chinese version, the Chinese version will prevail. It is therefore important to make sure that the Chinese translation of an employment contract drafted in a foreign language is accurate.
  • Termination of Employment Contracts: Generally, employees may resign upon a simple thirty (30) days’ notice served to their employer. However, employers cannot dismiss employees so easily. Unilateral termination of an employment contract by the employer can only occur under a limited list of circumstances. As such, the employer can dismiss an employee immediately, with no notice and without severance payment if the employee: (i) fails to satisfy the recruitment requirement during the probation period, (ii) seriously violates the company’s labor discipline or internal rules, (iii) commits serious dereliction of duty resulting in a major harm to the company’s interest, (iv) is prosecuted for a criminal offense, (v) enters into a secondary employment relationship with another employer, which affects the completion of his tasks with the first employer, or (vi) causes the invalidation of the contract (i.e. uses coercion or deception to force the employer to conclude or amend the employment agreement). In addition, the employer can dismiss an employee with a thirty (30) days prior notice and with severance payment if: (i) the employee is sick or suffers from a non-work-related injury and cannot engage into its original work nor satisfy any other work provided by the company at the end of its medical treatment, (ii) the employee is incompetent and remains incompetent after training or being assigned to other tasks, or (iii) the performance of the original employment contract becomes impossible due to major changes in the objective circumstances upon which it was concluded, and parties fail to agree on amending such contract. Those conditions are very restrictive and there is no concept of “at-will” dismissal. In order to properly justify and evidence the rightful termination of an employment contract, employers are highly recommended to document their exchanges with their employees and to keep trace of any warning in written, in the employee’s handbook. In addition, prior unilateral dismissal of an employee, the employer shall give notice to the labor union.  The latter can raise objections, but cannot prevent the termination. In the event of unlawful termination, the employee can require its reinstatement in the company. Alternatively, the employer shall grant the employee twice the amount of severance payment that would be awarded if the employee had been legally dismissed. The safer option is to come to a termination agreement between the employer and employee, negotiating the termination date, severance payment and any other relevant details. If the grounds for dismissal have been insufficiently evidenced, and if the employee brings the case to court, the judge may hold that the employment agreement was unlawfully terminated.
  • Severance Payment: Severance payment is due (i) if the employer unilaterally terminates an employment contract, (ii) if both parties mutually agree on termination after the employer suggests unilateral termination, (iii) if the employee resigns because of the employer’s abuse, or (iv) upon expiration of a fixed-term contract. The formula to calculate severance payment is one (1) average month’s salary for each year of service to the employer. For computation purposes, any employment period between six (6) months and one (1) year is counted as one (1) year and entitles the employee to a severance payment of one (1) month salary, while any employment period shorter than six (6) months is counted as half a year and entitles the employee to half a month’s salary. Month’s salary is calculated by taking the average monthly salary earned by the employee over the previous twelve (12) months (including base salary, bonuses, allowances and commissions). In addition, when the terminated employee’s salary exceeds three (3) times the average local salary (which often happens for foreign employees with managerial positions), severance payments are capped at three (3) times the average monthly salary of that municipality.
  • Employment Disputes: China’s labour dispute resolution system relies on a four (4) stage framework that begins with an informal consultation between the employer and employee. If the consultation stage fails to resolve the dispute or is simply ignored, the parties can move on to mediation or more formal arbitration, handled by Labor Dispute Arbitration Committee at the municipality level. Finally, if a worker plaintiff is dissatisfied with the arbitration award, he can bring the case to the civil courts for adjudication.
  • Labour Unions: There is no independent union organization in China and all labor unions shall belong to the All-China Federation of Trade Unions (“ACFTU”). Domestic companies with more than twenty five (25) employees shall establish an enterprise trade union committee, which shall be approved by the higher level trade union within the area in which the company is established. Enterprise trade union committees are responsible for protecting the legal rights and interest of the employees. As such, they are competent for negotiating and concluding collective contracts, giving their opinion regarding the dismissal of employees, and, if any, participating to the elaboration of massive lay off plans. Companies shall provide the facilities, premises and other material requirements necessary for trade unions to carry out administrative matters and arrange union activities.
  • Social Contributions: Contributions to China’s social security system are mandatory for both Chinese employees and their employers and foreigners employed in China (except for foreigners in Shanghai, where the scheme exists but has not yet been implemented in practice). Chinese social security system includes basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. Contributions are computed as a percentage of the employee’s monthly salary which is subject to lower and upper cap. Those caps are adjusted every year. Contributions are to be made both by the employer and the employee on a monthly basis. Foreigners working in China must be registered by their employers with the local social security bureau within thirty (30) days from the date they applied for employment permits. Individuals failing to register with the local social security bureau or avoiding making contributions can be subject to penalties.

October 2015

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