China Employment Documents
Let’s face it, navigating China’s employment laws and regulations is challenging. From stringent contract requirements to unusual policies on probation periods, vacation time and more, understanding and adhering to China’s local employment practices is pivotal yet complex.
This article provides foreign employers an in-depth guide on effectively creating employment documentation in China. It summarizes the key documents needed, explains crucial considerations regarding things like compensation structure and training, and offers practical tips to ensure full legal compliance. Whether you are looking to hire your first employee in a new China office or drafting contracts for multiple workers, this blog post should help you navigate China’s distinct employment landscape.
An Email on China Employment Practices and Laws
I recently read an email to one of my firm’s clients from one of our China employment lawyers. The email explained a large set of employment documents prepared initially just for the in-country China WFOE manager but written to be used with various imminent China employee hires as well.
Because this email so nicely sets out what it takes for a company to have employee documents that work well for both the employer and the employee, while also complying with China’s labor laws, I thought putting it into this post would be helpful. I share the essence of that email below, modified to protect confidentiality and reshaped to provide an easier read.
Overview of China Employment-Related Documents
Attached please find a .zip file containing drafts of the following employment-related documents for _______ [their in-country China manager]:
- An Employment Contract.
- The XYZ Company WFOE Rules and Regulations.
- A Sign Off Agreement, in which the employee acknowledges receipt and comprehension of the Rules and Regulations.
- A Trade Secrecy and Intellectual Property Agreement.
- A Non Compete Agreement.
- An Educational Reimbursement Agreement.
As you review these documents, please consider the following questions and comments:
Guidelines and Queries for Document Review
As you review these documents, please consider the following questions and comments:
1. Information to be Filled in
In each agreement, we have highlighted in yellow the areas that need to be filled in before execution. Some of this information can be collected beforehand, and the rest can be filled in by hand. Information to be filled in includes:
a) A telephone and fax number for ________, as legal representative of the WFOE (You will probably want to use the Shanghai WFOE office numbers, but it’s up to you).
b) The effective date of the Rules and Regulations (probably today, or any date before the employee agreements are signed).
c) For _________[the in-country China manager]:
i) His (Shanghai) contact address and telephone number.
ii) The term of the employment agreement (more on this below).
iii) The date his wages will be paid during the standard employment term.
iv) The exact amount of wages during the standard employment term.
v) Whether he will be paid on a 12-month or 13-month schedule (more on this below). As a default, we have set this to a 13-month schedule.
vi) The term of the probation period (more on this below).
vii) The exact amount of wages during the probation period.
d) The address of the workplace, if different from the registered office.
e) For the Non-Competition Agreement:
i) The term of the employment contract.
ii) The term of the Non-Competition Agreement (as a default, we have put 12 months; the maximum term is 2 years).
iii) The amount of compensation during the non-compete term (as a default, we have put 50% of the standard monthly salary).
f) For the Education Reimbursement Agreement:
i) The name of the training program.
ii) The period of training.
iii) The location of training.
iv) The wage and bonus provided during training.
v) The total training expenses.
vi) The service period after completion of the training.
2. Rules and Regulations
The Rules and Regulations document is basically a handbook on Chinese employment law. Much of the content in this document is required by Chinese law and is therefore not optional. Though it is not what I would call pleasure reading, an initial review of the Rules and Regulations will likely resolve many of the questions you may have about these documents. At its heart, the document lays out the basis of the relationship between the WFOE and the WFOE’s employees. For your purposes, this document is especially important because China’s employment law system is very different from the U.S system. The main difference is that the United States is an employment at will system: employers can terminate employees at any time for pretty much any reason. China’s system is a contract employment system: 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. More precisely, an employee can only be terminated for cause and cause must be clearly proved. Therefore, employers must maintain a detailed set of rules and regulations and discipline records to be able to establish grounds for dismissal. This is why the Rules and Regulations are so detailed and (from a Western standpoint) so negative in tone. If you have anything else you want included in your company’s Rules and Regulations, please advise us now.
3. Employment Contract
a. Contract Terms
Chinese employment contracts necessitate specifying the initial employment duration and the probation period.
b. Post Probation Termination
Post-probation, employee termination can occur without subsequent issues.”
4. Trade Secrecy and IP Agreement
Since your employees will be dealing with proprietary information, we have included a Trade Secrecy and IP Agreement for them to sign. Except for senior management like ________, there will be no way to control your employees’ behavior through a non-compete agreement, because they are not senior enough to be covered by such an agreement. Therefore, because your protection will be limited to the terms of the Trade Secrecy and IP Agreement, please review it carefully and let us know if you have additional concerns.
5. Sign Off Agreement
The Sign Off Agreement memorializes each employee’s receipt of the Rules and Regulations and their agreement to abide by those rules. It is important to get your employees to sign this so they cannot later claim not to have received it – a claim frequently made at labor arbitrations in China.
Additional Considerations for Employee Management
a) Additional Benefits. Please let us know if you want to provide any employee benefits beyond the statutory minimums set forth in the Rules and Regulations. If you want to provide a particular benefit to all your employees, we should put it in your Rules and Regulations. If you want to provide specific benefits to a specific employee, the benefits should be spelled out in the specific employment contract.
b) Travel. If your employees will travel domestically or internationally for work, you should have a written travel expense policy. (See Article 43 of the Rules and Regulations.)
c) Vacation. The statutory rule on vacation for employees is as follows:
First year of service: No vacation.
Between 1 and 10 years of service: 5 days/year.
Between 10 and 20 years of service: 10 days/year.
20 years or more: 15 days/year.
Note that these statutory limits are for the employee’s total years of employment (that is, from the time they started working, regardless of employer). If you want to provide more vacation time than set forth above, we will need to specify.
d) Monthly Salary. You will need to convert the annual salary into a monthly wage. Note that in many parts of China, it is customary to pay the salary on a 13-month basis, with the final month paid just before Chinese New Year. This is completely optional, but it is important to state clearly whether or not you will be using this approach. Many employees have come to expect this “New Year’s Bonus” and you failing to pay it (if expected) can cause problems. This expectation varies both by industry, the type of employee (i.e., factory workers vs. office workers), and the geographic location. Note that paying on a 13-month basis does not obligate you to pay more in salary; you would just divide the annual salary by 13 instead of by 12.
e) Bonus. If you plan to have a bonus system (e.g., performance bonus, retention bonus, referral bonus, etc.), it should be set forth in writing.
Enclosed is an English language and a Chinese language version of the FCPA manual. As we discussed the other day, we will be getting back to you shortly to schedule a time for our compliance attorneys to begin training your employees (in the U.S. and in China) on what they must do to keep your company in compliance with the FCPA and with China’s own anti-corruption laws. We will provide that training in both English and in Chinese, whichever is most appropriate for the particular audience.
Glossary of Terms
1. WFOE (Wholly Foreign-Owned Enterprise)
A company established in China that is entirely owned by foreign investors.
2. FCPA (Foreign Corrupt Practices Act)
A United States law that prohibits firms and individuals from paying bribes to foreign officials to further business dealings.
3. Non-Compete Agreement
A contract that prevents an employee from working for competitors or starting a competing business for a specified period post-employment.
4. Educational Reimbursement Agreement
A contract outlining the conditions under which an employer agrees to pay for an employee’s educational training and the obligations of the employee thereafter.
Basic Actionable Advice: Navigating Employment Documentation in China
1. Documentation Review
Ensure all documents, especially those with highlighted fields, are thoroughly reviewed and appropriately filled out.
2. Regulation Adherence
Be mindful of the distinct and stringent labor laws in China and ensure all documentation and employment practices adhere strictly to them. Note also that when it comes to China employment law, everything is local. See China Employment Law: Local and Not So Simple
3. Proactive Approach during Probation
Utilize the probation period wisely and ensure a thorough evaluation of employee performance to avoid long-term contractual obligations with unsuitable candidates.
4. Precision in Benefits and Compensation
Clearly articulate any additional benefits and bonuses, and consider local customs like the 13-month salary system to align with employee expectations.
5. Legal Compliance
Be wary of both FCPA and local anti-corruption laws and engage in meticulous training to ensure complete compliance across all levels of the organization.
Steering through the intricacies of China’s complex and stringent labor laws presents a formidable challenge. Ensuring meticulous attention to the creation, execution, and management of employment documents and adherence to local regulations is pivotal in safeguarding the interests of both the employer and employee. The robust set of documents – from the Employment Contract to the Educational Reimbursement Agreement, each serves a vital purpose in establishing a clear, compliant, and constructive employment relationship.
For a deeper dive into how to best cope with China’s employment laws, check out A China Employment Best Practices Guide.