Focus: China – Employment – June 2008

Draft regulations for the PRC Labour Contract Law

In brief: The Legislative Affairs Office of China's State Council has issued a circular seeking feedback on draft regulations for the PRC Labour Contract Law. The draft regulations interpret and clarify a number of provisions of the PRC Labour Contract Law, which came into effect on 1 January 2008, and suggest how the law may be implemented in practice. Partner Campbell Davidson (view CV) and Senior Associates Ross Keene and Katherine Yu outline key issues raised by the draft regulations and their potential impact for employers in the PRC.

• Requirements for written labour contracts
• Open-term contracts
• Protection of trade secrets
• Termination during probation
• Termination of open-term contracts
• Damages for illegal termination
• Calculation of economic compensation
• Employment agencies
• Non-conforming provisions void
• Conclusion

How does it affect you? The key areas employers should note under the draft regulations are: the need to ensure that a written labour contract is in place at all times, including, for example, if a fixed-term contract expires but the labour relationship continues; the need to ensure that all requirements are fulfilled upon termination of the labour relationship, including payment of required damages and economic compensation, and completion of registration and other formalities; the need to be aware of the grounds on which labour contracts may be terminated during the probation period; and that provisions under current labour contracts signed before 1 January 2008 that do not comply with the requirements of the LCL will be void.

Requirements for written labour contracts

The requirement under the PRC Labour Contract Law (the LCL) for written contracts has been strengthened and clarified by the draft regulations (the Draft) through the inclusion of the following provisions.

• Under the LCL, a written contract must be entered into on (and in any event within one month of) the labour relationship commencing. Under the Draft, if the employee refuses to sign a written labour contract in the first month after commencing employment, the employer may terminate the employment relationship on three days' written notice, in which case the employer need not pay any economic compensation to the employee.
• Under the LCL, if the employer does not enter into a written labour contract with an employee more than one month but less than one year after the labour relationship commences, the employer shall be liable to pay the employee double his or her normal remuneration (ie salary and allowances). The Draft states that if the employee refuses to sign such a contract, the employer may terminate the employment relationship, but must still pay compensation to the employee.
• The Draft clarifies that the requirement that a written contract must be signed also applies on the expiration of a fixed-term contract. If, one month after the fixed term expires, the employee is still employed but a written contract has not been signed, the employer will be liable to pay the employee twice the remuneration otherwise payable (as stipulated in the LCL).
• If an employer, upon termination or expiration of a labour contract, does not pay economic compensation, complete termination procedures or a handover of the employee's work, but still continues to employ the employee, the employer will be deemed under the Draft to have renewed the fixed-term labour contract (or to have entered into an open-term contract if the conditions for conversion into an open term contract are met).
• The Draft clarifies that the employee becomes entitled to double remuneration (for the employer's failure to sign a written contract) starting from the day after the expiry of the one-month period from the commencement of employment.

top of page

Open-term contracts

Where the parties sign an open-term contract under the LCL (for example, because the employee is entitled to be offered such a contract), the Draft requires that the employer and the employee agree on the content of the contract on a "fair and reasonable" basis. Accordingly, an employer looking to materially reduce an employee's entitlements under an open-term contract may be in contravention of this Draft provision.

top of page

Protection of trade secrets

The Draft provides that for employees who hold trade secrets, the parties can include a clause in the contract allowing the employer to move the employee to a different position within the company in the period before termination of employment or after the employee has given notice of termination. The employee's remuneration, however, may not be altered as a consequence.

top of page

Termination during probation

The Draft provides further clarity and definition to the grounds on which an employer may terminate a labour contract during the probation period. Those grounds are:

• where the employee is ill or has a non-work-related injury and the medical treatment period has expired;
• where the employee is not competent to do the job;
• where a significant change in circumstances since the labour contract was signed means the contract cannot be performed, and the parties have had discussions but cannot agree on how to amend the contract; or
• where the employer carries out a redundancy in accordance with the LCL.

top of page

Termination of open-term contracts

The Draft lists the grounds on which open-term labour contracts may be terminated early. These grounds are the same as the grounds for termination applying generally to other labour contracts under the LCL.

top of page

Damages for illegal termination

Under the LCL, if an employer illegally terminates a labour contract, then it must pay the employee damages equal to twice the economic compensation (which is related to the employee's period of service) that is otherwise payable under the LCL on termination of a labour relationship. The Draft clarifies that, apart from this damages payment, no economic compensation (related to the period of service) will be payable by the employer if it illegally terminates a labour contract.

top of page

Calculation of economic compensation

The Draft clarifies that, with respect to labour contracts signed prior to 1 January 2008 but terminated after 1 January 2008, the economic compensation payable to the employees shall be calculated in accordance with:

• the PRC Labour Law and the relevant regulations in relation to the period up to 31 December 2007; and
• the LCL in relation to the period from 1 January 2008.

top of page

Employment agencies

The Draft has made the following clarifications in relation to the 'dispatch' of employees by placement agencies.
Generally, employers shall use employees sourced from agencies to fill positions:

• not related to the main business of the employer;
• of no more than six months in duration; or
• made vacant temporarily because of the absence of the original employee on leave.

The Draft stipulates that employees of an employment agency shall not be subject to a probation period, and shall not be employed by the employment agency on a part-time basis (although the positions to which they are 'dispatched' may themselves be part-time in nature).

top of page

Non-conforming provisions void

Under the Draft, for labour contracts signed before the effective date of the LCL (1 January 2008) but that continue in force after that date, any provisions of such contracts that do not comply with the LCL shall be void from 1 January 2008.

top of page

Conclusion

The Draft displays a strong desire on the part of the PRC authorities to ensure that written labour contracts are in place in all cases, and that employees are placed on open-term contracts at the stipulated time, if this is their wish. The Draft further clarifies and entrenches the principles established under the LCL; for example, by rendering void any non-complying clauses in labour contracts signed before the effective date of the LCL.
At this stage, there is no indication when the final implementing regulations will be released and come into effect, but if the legislative process for the LCL is a guide, the PRC Government can expect to receive a range of comments on the Draft.

top of page

For further information, please contact:

Campbell Davidson International Partner, Shanghai Ph: +86 21 6841 2828 Campbell.Davidson@aar.com.au		Ross Keene Senior Associate, Shanghai Ph: +86 21 6841 2828 Ross.Keene@aar.com.au
Simon McConnell International Partner, Hong Kong Ph: +852 2840 1202 Simon.McConnell@aar.com.au		Nigel Papi International Partner, Shanghai Ph: +86 21 6841 2828 Nigel.Papi@aar.com.au
Donald Hess International Partner, Hong Kong Ph: +852 2903 6201 Don.Hess@aar.com.au		Stuart Mengler International Partner, Beijing Ph: +86 10 8515 0250 Stuart.Mengler@aar.com.au

Home | Top of page | Disclaimer | Privacy | Sitemap
Allens Arthur Robinson - a leading international law firm
© 2008 Allens Arthur Robinson, Australia | contactus@aar.com.au