Are you aware of your tax and social insurance obligations? Do you know if you have to pay overtime to your staff? And how should you deal with a labour dispute?If you’re an employer in China, these are just some of the things you need to know. In the article below Matthew Durham, Partner at Winston & Strawn LLP, provides the answers to these and other questions about labour and employment law in China.
Written contract and governing law: Full-time employees (more than 24 hours per week) hired by an entity in China must have a written employment contract governed by Chinese law. Employees can claim double salary if their employer does not produce one within one month of commencing work.
National-level law and local regulations: It is not possible to contract out of mandatory provisions of Chinese employment law. In addition to national-level laws and regulations, local regulations also apply (mainly provincial and municipal). In principle, national-level law prevails, although local regulations and practice sometimes contradict national-level law.
No at-will employment: There is no concept of at-will employment in China. Employers may only terminate employees on specific (and limited) grounds prescribed by law. For example, incompetence is valid grounds, but under-performance is not. Redundancy also is not grounds except in the case of a mass lay-off (20 employees or more).
Fixed and open-term contracts: Employment contracts can be for a specific duration or be indefinite in duration. The limited scope for employers to unilaterally terminate means that a fixed term gives more flexibility to employers. If grounds to terminate exist during a fixed-term contract, the employer does not need to wait until the expiry of the fixed term. After two fixed terms, employees are entitled to an open-term contract.
Probation periods: Probation periods can be used. The maximum permitted probation period depends on the duration of the employment contract: one month for a contract of less than one year; two months for a contract of one year or more but less than three years; and six months for contracts of three years or more or open-term contracts.
Working hours and overtime: Employees are entitled to be paid overtime (or in some cases time off in lieu) after 40 hours per week. Exemption schemes can apply for specific categories of employee, such as management staff, travelling sales staff and security personnel. Such schemes normally need to be registered with the local labour bureau.
Handbooks, rules and policies: Implementation of other employment documentation such as handbooks, rules and policies is subject to a consultation process with employees.
Non-competition: Non-compete restrictions of up to two years are possible for employees that hold confidential information, but the employer must pay compensation to the employee on a monthly basis during the restricted period.
Discrimination: There is no statutory definition of what constitutes discrimination, but discrimination on the grounds of nationality, race, sex, religious belief, disability and infectious disease is recognised and prohibited. Sexual harassment of women is also prohibited.
Disputes and labour arbitration: A legal claim relating to labour and employment issues generally must be heard in the first instance by a labour arbitration commission, but may be appealed to the local People’s Court. It is important to note that there is no system of binding case law precedent in China and the outcome of proceedings can be unpredictable. One of the available remedies for unlawful termination is reinstatement of the employee to his/her position.
Labour unions: Employees can require their employer to establish a labour union within the company or branch. Unions must be registered with the All China Federation of Trade Unions. Union representatives are entitled to attend board meetings on human resources-related matters and to represent employees generally.
M&A business transfer: There is no automatic transfer of employees with a transfer of business or assets. For employees to move with the assets, they must consent to terminate their employment with the seller and enter into a new contract with the buyer.
Hiring foreign nationals: Foreign nationals can be employed directly by an entity established in China (under a contract governed by Chinese law) or employed overseas and assigned to the entity in China. The international assignment structure has potential China tax consequences for the overseas employer. In either scenario, the foreign national requires a China work permit and residence visa and will be subject to Chinese individual income tax and, in most cases, social insurance contributions.
Tax and social insurance funds: Employees have an obligation to pay individual income tax on their remuneration on a monthly basis. Employers have a separate independent obligation to withhold and pay employees tax to the tax authorities, so in practice this is normally done by the employer. Employers and employees have a statutory obligation to make contributions to mandatory social insurance funds. The exact funds and calculation of contributions varies by location, but typically include: housing, medical, pension, unemployment, work-injury and maternity.
Whistleblowers: Employees have a right and obligation to report unlawful activities to the relevant Chinese authorities.
For more than 160 years, Winston & Strawn LLP has served as a trusted adviser and advocate for clients across virtually every industry. With 18 offices in key financial centres across the world, we bring an understanding of the global legal issues our clients face to both transactional and dispute-related matters.