Employment Law in China

Chinese employment law, with its extensive regulations and precedents, has become increasingly complex and presents considerable challenges, in particular for foreign SMEs.

In an environment characterized by a lack of skilled workers, increasing personnel costs and rapid staff turnover, companies are challenged by both the difficulty of finding suitable candidates and legal pitfalls. Foreign companies need to be familiar with Chinese employment law and have access to competent advice to handle individual matters.

The Labor Contract Law (implemented in 2008) hardly leaves any leeway for the employer regarding the contractual situation of an employee. It provides for tasks to be clearly defined and regulates termination issues in detail.

Not every foreign presence is entitled to hire employees in China. The prerequisite is having a Chinese corporate status, because only a legal person may enter into contracts - with partners, suppliers, customers and employees. A representative office is not sufficient in this regard.

Thus, representative offices have to rely on the support of official service companies such as the Foreign Enterprises Services Co. (“FESCO”), which offers a comprehensive compensation package, negotiates the employment contract and handles salary payments, social security and the payment of income taxes. In a nutshell, FESCO negotiates contracts, hires and fires.

Employers should check references, in part because CVs in China often contain unreliable information. The potential employer should collect information from previous employers, people who know the applicant and social media. In addition, an interview can be useful.

Employment contracts are often of limited duration in China. As a rule, a company will often first hire an employee for a maximum of three years. The employer may extend such a limited contract twice. Only after that is the employee entitled to a permanent contract. The trial period follows from the term of the employment contract: If an employee signs a contract with a term of three years, the notice period is between three and six months.

The employment contract must be in Chinese, but we recommend preparing a professionally translated version in English (or another foreign language).

A must-have for all companies is an employee manual. Every employee should have one - in Chinese and English or another foreign language. The employee manual is part of the employment contract and regulates in detail employee duties, what they are allowed to do and what is prohibited.

Be it after an offense, during the trial period or after the contract has expired, the manager of a medium-sized company needs good reasons to lay off an employee. It is complicated and expensive to let employees go, and companies regularly buy an employee out of a contract when it expires. Consequently, the rights and duties do not automatically end when the contract comes to an end. It is advisable to try and reach a settlement with the employee who is leaving the company 3-6 months before the end of the contract term and to regulate the formalities of the separation.

Employers cannot avoid compensation payments. And here, too, there are clear rules in China: the employee who is given notice will receive one month’s salary as compensation per year of employment, with a cap of 12 months. Empirically, this is the minimum basis for negotiation.

In the Chinese working environment, supervision of employee activities is important. Cases of nepotism and tax evasion by employees or managing directors taking advantage of the trust of the foreign parent company are common.