China Employment Contracts: An Employer’s Guide

In a recent email to a client, one or our China employment lawyers provided an overview of China’s employment law system. This post expands on that overview, offering insights and examples to help foreign employers understand the unique challenges and requirements of hiring in China.

As you will see, the Chinese employment system is based on Asian socialist and Northern European models. China’s employment law system is quite different from the U.S system. The main difference is that the U.S. is an employment at will system, which means you can terminate employees at any time for pretty much any reason. China’s system is the opposite. The Chinese employment law system is a contract employment system. This means all employees must be engaged pursuant to a written employment contract and during the term of that contract, it is difficult to terminate an employee.

A China employee can generally only be terminated for cause and cause must be clearly proved. China’s Labor Law outlines specific grounds for termination, including:

  • Serious violations of company regulations
  • Material damage to the employer’s interests
  • Inability to perform duties after illness or non-work-related injury

As an employer, you must maintain detailed evidence to support dismissal, such as written warnings, performance evaluations, and records of misconduct.

This whole situation makes the employment relationship and the employment documents much more adversarial than is customary in the U.S. You will find that the “tone” of the documents I am sending you is not consistent with your normal “collaborative team” approach towards employment issues. The China employer-employee framework usually requires substantial adjustments for U.S. employers accustomed to an “at-will” employment model. However, understanding and complying with China’s regulations is essential for successful operations

You should also note that China does not really have the concept of a “salaried” employee. The Chinese work week is 40 hours and overtime must be paid for any work exceeding this 40 hour limit. I know this approach is foreign to software/service businesses like yours, but there are virtually no exceptions to this rule.

I will be sending you a set of preliminary documents to review. At this time, please consider the following:

1. Term of employment.
 As noted above, each employee must be hired pursuant to the terms of a written employment contract. After the initial contract term expires, you may re-hire the employee pursuant to a second fixed term contract. After the second contract, employees transition to an open-term contract. This provides them with greater job security by making termination more complex for employers. Terminating an open-term contract typically requires a valid reason (as outlined in the Labor Law) and usually will require severance pay and other obligations.

While the PRC Labor Law provides the broad categories for termination, it’s crucial to understand what constitutes acceptable “cause” in practice. Here are some specific examples:

  • Serious violations of company policies: This could include consistent tardiness or absenteeism despite warnings, theft or embezzlement, breach of confidentiality agreements, or engaging in activities that damage the company’s reputation.
  • Significant harm to the employer’s interests: This is often related to negligence or misconduct that results in financial loss for the company, loss of clients, or damage to the company’s property. For instance, an employee who reveals trade secrets to a competitor or makes significant errors that cost the company a major contract.
  • Inability to perform duties after illness or a non-work-related injury: If an employee is unable to fulfill their job responsibilities after a prolonged illness or injury, even after reasonable accommodations are made, termination may be possible. This requires thorough medical documentation and, in some cases, may involve offering alternative roles within the company.

It’s important to note that these are just examples, and each case will be evaluated based on its specific circumstances. Maintaining detailed records of any performance issues, misconduct, or violations is crucial to justify termination under Chinese law.

Because of this, determining the length of the initial employment term is critical. We recommend an initial term of three years. This has two benefits. First, it allows you to provide a six month probationary period, during which time you can terminate an employee for any reason. This gives adequate time to test the basic skills of an employee. Second, it delays onset of open term employment for long enough to allow you to determine whether you wish to allow the employee to convert to open term status.

While terminating an employee during the probationary period is easier than during a fixed-term or open-ended contract, it’s not entirely without restrictions. You must still have a valid reason for termination, such as:

  • The employee fails to meet the performance standards outlined in the employment contract or job description.
  • The employee demonstrates a lack of skills or qualifications necessary for the role.
  • The employee exhibits behavioral issues or violates company policies.

It’s essential to document the reasons for termination and provide clear feedback to the employee. Even during the probationary period, it’s advisable to follow a fair and transparent termination process to avoid potential disputes.

Of course, you are free to specify any term you feel is appropriate.

2. Salary.
 You will need to provide a salary, which we will then convert into an hourly wage.In much of China, it is customary to  pay salaries on a 13 month basis, with the final month paid just before Chinese New Year. This is optional, but it is important to state whether you will be using this approach. Many employees expect this “New Year’s Bonus” and failing to pay it (if expected) can cause problems.

3. Bonus.
 If you plan to have a bonus system for your employees, we should set this out.

4. Vacation.
 The statutory rule on vacation for employees in China is as follows:

First year: No vacation.
Years 2 through 9: 5 days.
Years 10 through 19: 10 days
20 years or more: 15 days.

If you want to provide more vacation time than set forth above, we will need to specify.

5. Other benefits. 
If you plan to provide benefits beyond the statutory minimum (set out in the rules and regulations provided), we will need to specify that. If you want to provide a particular benefit to all employees, we should put that in your Employee Rules and Regulations. If you want to provide employee- specific benefits, we will include them in the specific employment contract. For example, China requires employees pay a portion of the employment taxes/fees. Some employers pay that portion for the employee as an additional benefit.

6. On site security.
 As you will see, the Rules and Regulations have a detailed section regarding on site security. If there are things that should be modified or added, please let us know. In addition, a company like yours should have formal policies on data and information security. I am sure you do this elsewhere and we can certainly modify what you already have for China. Please get those to us so we can put them into Chinese with everything else.

7. Travel.
 If your employees will travel domestically or internationally, you should have a written travel expense policy.

8. Trade Secrets/IP Protection.
 The documents include a separate Trade Secret and IP protection agreement. We drafted this to work for software companies like yours. If there is anything else you would like us to add, please advise.

In addition to protecting your company’s intellectual property, you may also want to consider using Non-Compete Agreements (NCAs). However, it’s important to understand that China’s Labor Contract Law restricts the use of NCAs to specific categories of employees:

  • Senior management: Those who have access to confidential company information and whose departure could significantly impact the company’s business.
  • Senior technical personnel: Employees with specialized knowledge, skills, or access to trade secrets that would give a competitor an unfair advantage.
  • Other employees with confidentiality obligations: This could include employees who handle sensitive customer data, financial information, or research and development projects.

NCAs are generally not enforceable against junior or entry-level employees.

Key Considerations for NCAs in China:

  • Scope: Clearly define the restricted activities, geographical area, and duration of the non-compete obligation.
  • Compensation: Chinese law requires that employers provide reasonable compensation to employees bound by NCAs. This compensation must be explicitly stated in the agreement.
  • Enforceability: NCAs are more likely to be enforced if they are reasonably necessary to protect the employer’s legitimate business interests and do not unduly restrict the employee’s future employment opportunities.

Example: A non-compete agreement for a senior software engineer might prevent them from working for a competing software development company in the same city for one year after leaving your company, and in exchange, you would provide them with a specific monthly payment during that year.

It’s crucial to have your NCAs drafted and reviewed by legal professionals to ensure they are compliant with Chinese law and enforceable in court.

Confidentiality Agreements:

While Non-Compete Agreements focus on restricting future employment, Confidentiality Agreements (also known as Non-Disclosure Agreements or NDAs) protect your company’s sensitive information during and after employment. These agreements prevent employees from disclosing confidential information, such as trade secrets, customer data, financial records, and internal processes.

It’s common practice to have employees sign a separate Confidentiality Agreement, even if they are also subject to a Non-Compete Agreement. This provides an additional layer of protection for your company’s confidential information.

9. Training. Will you be providing training for your employees? If yes, we should also develop a training agreement. Please advise.

10. Sign-off Agreement. 
Note that we have added a “Sign-off Agreement.” With this agreement, the employee acknowledges having received the Rules and Regulations and agrees to abide by those rules. It is important to have your China employees sign this so they cannot later claim never to have received it, which claim is frequently made at China employment arbitration

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