A Strategic and Practical Approach to
Structuring, Managing and
Terminating Employment
Relationships in the PRC
Fiona Loughrey (Partner, Head of China Employment Group)
Matthew Durham (Consultant, China Corporate Group)
Yijia Jin (Associate, China Employment Group)
Presentation organised by CCH
Shanghai – 3 March
Beijing – 5 March
I.
Introduction
 Current trends and an overview of the employment
environment in the PRC
 Impact of the Labour Contract Law 2008 （劳动合同法）
 Increasing number of claims
– Statistics (in China)
– Hotspots
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II.
Pre-employment issues
 The interview process - what information can be
requested?
 Pre-employment checks and screening - what is permitted
and what information is available?
– Legitimacy
– Feasibility
 Basic information that relates directly to the employment
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Discrimination in selecting employees
No sophisticated laws, but fundamental principles:
 gender
 ethnic group
 race
 religious belief
Some incentives for encouraging employment of handicapped persons
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III.
The employment contract
 Written contract（书面合同）. Time limits and penalty.
 Fixed and open term (固定期限或无固定期限)
 Use of probation periods（试用期）
 Job description（工作说明书）
 Training bonds（服务期）
 Working hours and overtime
 Amendment of contract
 Termination provisions
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Written Employment Contract
Enter into within one month of commencing employment
Contract must specify:
 name of legal representative of employer
 name, domicile and ID no of employee
 term (duration) of contract
 job description and place of work
 working hours, rest and leave
 remuneration
 details re working conditions and labour protection
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Probation periods
 Maximum probation period will depend on term of the contract
e.g. 1 month for contracts of less than 1 year, 2 months for contracts of
1 year or more but less than 3 years, 6 months for contracts of 3 years
or more
 Employers can (potentially) pay 20% less during probation
 Additional restrictions on employer’s right to terminate unilaterally
without notice or severance during the probation period – prove that
employee does not satisfy the conditions for employment, etc.
 Employers will need to be more diligent in monitoring new joiners on
probation and ensuring they have sufficient evidence to justify any
termination during such period
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Fixed and Open Term
 Fixed or open term（固定期限或无固定期限）– the two fixed terms rule.
Regional differences in interpretation?
 Under LCL an employer may only have two fixed term contracts with an
employee. After that, if a further contract is entered into it must be open term
 Starts from first fixed term contract entered into or renewed after 1 January
2008
 What duration to choose?
 The employer must also pay severance on the expiry of a fixed term contract
without renewal, unless the employee rejects a new contract on the same or
improved terms
 Implications: fixed term contracts more expensive for employers. Employers
will also need to consider carefully how long fixed term contracts should be for
 Treat first contract with new hire as quasi “probation” period?
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Training Bond
 Agreement specifying ongoing term of service
 Must be “professional technical training”
 Paid for by employer with “special funding”
 Liquidated damages – must not exceed training costs
 Employee liability also limited to amount allocable to
unperformed portion of lock-in period
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Working Hours and Overtime
 Normal working hours ( 8 hours per day, 40 hours per week)
 Overtime payment (or time off in lieu)
 150% for normal OT, 200% for weekends and 300% for public
holidays
 Implement clear internal policy and guidelines
 Can employee be exempted? does a special scheme apply?
• Irregular working hours scheme（不定时工作制）
• Comprehensive working hours scheme（综合计算工时工作
制）
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Flexible working hours schemes
Irregular working hours scheme

Remuneration under contract already covers certain potential overtime

Applicable to senior management staff and certain sales staff

Needs to be registered with and approved by the local labour bureau

There is no definition of "senior management staff" nor "sales staff" and
applications are approved on a case-by-case basis

Approval may vary from location to location
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Flexible working hours schemes
Comprehensive working hours scheme

Engaging staff to work for “X” number of hours over a certain period of
time

No need to pay overtime if the employee does not work for more than
an average of 8 hours per day and 40 hours per week over a
cumulative period of time

Applicable to employees engaged in sales or transport, or other
employees for whom the system is “suitable”

No definition as to what “suitable” means

Needs to be approved by the local labour bureau and the applications
are considered on a case-by-case basis
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Amendment of contract
 Difficult for employer to impose unilateral changes
 Employee consent required to change a contract term
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IV.
Termination
Termination for “cause” (LCL Article 39) – no notice or severance
 Proved during probation period not to satisfy conditons for employment
 Material breach of employer’s rules and regulations
 Serious dereliction of duty or graft, substantially harming employer
 Additional employment relationship
 Pursued for criminal liability
 Deception or coercion in obtaining employment
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Other grounds for termination (LCL Article 40)
With minimum 30 days’ notice (or payment in lieu) and
severance
 For non-work related illness / injury after expiry of statutory
medical treatment leave period
 Incompetence even after training or adjustment of position
 Major change in objective circumstances relied on to
conclude contract renders it unperformable
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Other grounds for termination (LCL Article 41)
Mass lay-offs （经济性裁员）
Minimum 20 persons (or 10% of staff if less than 20 employees)
Must be in specific circumstances:
 Restructuring under Bankruptcy Law
 Serious difficulties in production and/or business operations
 Change in production or major technological innovation
 Other major change in objective circumstances relied on to conclude
contract renders it unperformable
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Other grounds for termination (LCL Article 41)
 Notice and severance applies
 Must explain circumstances to all employees (and labour union if
applicable) at least 30 days in advance
 Must consider views of employees and labour union
 Must file report with labour bureau (in some locations) – effectively an
“approval” requirement
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Other grounds for termination (LCL Article 41)
Priority issues for mass lay-offs:
 Employees with long-term fixed term contracts
 Employees with open term contracts
 Employees that are sole provider to their family and whose family has
an elderly person or minor to care for
If new hires are made within 6 months of staff reduction, must give
preference to re-hiring staff laid off
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Exemption from termination
Exemptions apply, unless termination is for “cause” (Article 39)
 Female employee during pregnancy, maternity leave or nursing period
 Occupational disease confirmed
 On statutory medical treatment leave
 Engaged in job exposed to occupational disease risk and no predeparture health check
 Working for employer continuously for at least 15 years and less than 5
years from retirement age
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V.
Employee handbook（员工手册） and policies
 Regional or country-specific?
 What and how much detail to provide?
 The required consultation process - what are the options?
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Employee handbook（员工手册）and policies (Cont’d)
 Rules and policies or other material matters (and any changes) that
have a “direct bearing on the immediate interests of employees)
 No definition of “consultation” and little formal guidance
 Must involve all employees or employee representatives
 Must involve labour union (if any) in consultation process
 Must consider feedback from employees and labour union, but no
express “approval” requirement
 Final version of rules and policies must be published
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Employee handbook（员工手册）and policies (Cont’d)
 Apply principle of reasonableness
 Allow reasonable time for consultation process
 Document the process – keep formal records of process
and any feedback, plus reasons for discounting any
feedback
 N.B. Handbooks and policies are very important for
supporting employment contract (especially re termination)
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VI.
Employment arrangement “structuring”
 Labour dispatch arrangements - use for representative offices
 What laws apply - the interaction of national and local level regulations in the
PRC
 Direct employment in the PRC or secondment arrangement（派遣） (for
expatriates) - implications, advantages and disadvantages
 What documentation is required?
 How and when will the documentation be provided and signed
 Independent contractors（独立缔约人）
 Recognition of free-lancers under the Beijing High Court/Labour Arbitration
Commission Meeting Minutes
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Employee –v- independent contractor
Some general criteria likely to be considered:
 Working exclusively for company?
 Working at company premises?
 Assigned employee number?
 Using company equipment and materials?
 Company handbook and policies apply?
 Basis of payment – fees or regular “salary”?
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Questions?
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VII.
Inventions, confidentiality and non-compete agreements
 Employee inventor remuneration and first right of refusal on
transfer of technology
 How to structure non-compete provisions and which
employees are covered - duration, industry and
geographical scope, reasonable compensation?
 Non-solicitation provisions - clients, employees
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Non-compete provisions
 Maximum 2 years
 Scope restrictions
 Must pay employee financial compensation on a monthly basis
 No national law guidance on “compensation”
 Local regulations and guidelines apply
 Best to specify amount or basis for calculation in the agreement
 Liquidated damages
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VIII. Corporate Governance
 Reports to regulatory authorities and employee threats
 Whistleblowing schemes
 Specific qualifications and experience requirements for
certain positions/industries
 Company chops and who can bind the company
 Scope of authority for senior personnel
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Corporate Governance (Cont’d)
 Liability of legal representative, directors and “responsible”
personnel
 Compliance audits
 Labour unions and company business – e.g. right to attend
board meetings
 Data privacy and data transfer
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IX.
M&A Situations
 Due diligence
 Key personnel – who do you want and who are you getting
 Implications of asset deal
 Implications of share deal
 Restructurings and transfer of employees (e.g. rep office to
WFOE)
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Share Deal
 Buyer takes over existing workforce
 Buyer takes on existing liabilities
 How to retain and motivate staff after transaction completed
 Is termination/retrenchment possible before or after
transaction?
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Asset Deal
 No automatic transfer mechanism for employees to follow assets
 Buyer can be selective
 More complex process – transition plan and communication
 Conditional offer letter and resignation letter
 Incentives to join buyer
 Liaison between buyer and seller
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X.
Stock options and share plans
 Incentive and helpful for staff retention
 No clear body of law
 Limit number of participants
 Foreign exchange issues – SAFE
 Tax implications
 Separate from employment contract
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XI.
Managing the employment relationship
 Performance monitoring and management
 Appraisals and performance reviews
 Warnings and disciplinary proceedings
 Underperformance（表现不好）-v- incompetence（不能胜
任工作）
 Employee investigations
 Whistleblowing
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XII.
Handling employment disputes and termination
 Grounds for termination - is there a clear ground for lawful termination?
– Grounds
– Legal consequences of unlawful termination
 Evidential requirements – do you have all the documents and other
evidence you need?
 Mass lay-offs（经济性裁员）- communication with employees and the
labour bureau
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Handling employment disputes and termination (Con’d)
 Timing issues
 The role of and dealing with labour unions（工会）
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Handling employment disputes and termination (Cont’d)
 Negotiated or mutual terminations – use of release and waiver
agreements （免责和弃权协议）
 Severance
– Is severance payable to a leaving employee?
– Calculation formula for severance payment
 Enforcing confidentiality clauses
 Specific issues with expatriate and high-level staff
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Handling employment disputes and termination (Con’d)
 Notice periods, and garden leave
– Notice period
– Garden leave
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XIII. Labour Arbitration and Litigation
 What is the process - labour arbitration or courts?
 How long does it take?
– Arbitration
– Litigation
 Rights of appeal
 Some statistics on the outcomes of cases (source: Internet news
reports)
– In Shanghai
– In Beijing
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Questions?
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XIV. PRC Labour Decisions
 Employment contract related cases
–
Company ordered to pay double wages for issuing letter of appointment
without signing labour contract (Shanghai; 2008; http://www.labour-daily.cn)
–
Employer unit told to repay social security insurance to employee for lack of
legal grounds (Beijing; 2009; http://www.chinacourt.org)
–
Employer told to refund fees for reversing the decision to employ worker
after medical examination (Beijing; 2009; http://www.chinacourt.org)
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XIII. PRC Labour Decisions (Con’d)
 Termination related cases
–
Employing unit lost the lawsuit for unlawful dismissal due to different penalty
standards for the same issue (Shanghai; 2009; http://www.51labour.com)
–
Company told to compensate department manager RMB 237,000 for
unlawful layoff (Shanghai; 2009)
–
Employment unit loses dismissal case against security guard who was fired
instantly (Shanghai; 2008)
–
Employer publishing dismissal announcement in the newspapers is legal
(Beijing; 2009)
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XIII. PRC Labour Decisions (Con’d)
 Confidentiality obligation related cases
–
Appeal for Protection of Business Secrets Rejected Due to Lack of
Evidence (Beijing; 2009; http://bjgy.chinacourt.org)
–
Beijing No.2 Intermediate People’s Court, Civil Division, No. 1637 of 2004
(Beijing; 2004)
–
Shanghai No. 1 Intermediate People’s Court, Criminal Division, Final
Judgment No.343 of 2003 (Shanghai; 2003)
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XIII. PRC Labour Decisions (Con’d)
 Non-compete obligation related cases
–
Non-competition clauses nullified if no agreement on economic
compensation (Beijing; 2009; http://bjgy.chinacourt.org)
–
Non-compete clauses nullified for appointing employee's duties only
(Beijing; 2009)
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PRC Labour Decisions (Con’d)
 Non-discrimination related cases
–
Employer told to compensate for employment discrimination due to hepatitis
B (Shenzhen; 2008; http://www.chinacourt.org)
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Q&A