PRC Labor & Employment Law Overview Ying Li Partner, Hong Kong/Beijing November 14, 2012

PRC Labor & Employment Law Overview

Ying Li

Partner, Hong Kong/Beijing

November 14, 2012

PRC Labor and Employment Law Overview2

Agenda

• Introduction

• Pre-employment issues

• Employment contracts

• Employment termination

• Social benefits

• Vacations and paid leaves

• Restrictive covenants

• Stock incentive plans

• Labor dispute resolution


1. Introduction

• China’s new Employment Contract Law (“ECL”) came into effect as of January 1, 2008

• The legislative intention of the ECL is to better protect the interests of blue-collar workers, but it is technically applicable to all types of workers in China, including white-collar workers

• The implementation of the ECL alerted employees of their rights and the number of lawsuits filed by employees against their employers increased dramatically in recent years

• Foreign invested companies in China wishing to terminate an employee must be particularly vigilant to avoid costly labor disputes and penalties


2. Pre-employment issues

• Interview process What information should be disclosed to job applicants? What information can be requested from job applicants? Certain general principles of non-discrimination

• Offer letters Offer letters vs. written employment contracts Tips for writing an offer letter

• Pre-employment checks and screening Still a new concept in China Normally used for senior executives Difficult to carry out a thorough pre-employment check in practice


3. Employment contracts – written contracts required

• Time limit Within one month of start date

• Penalties for breach Within one year of start date: pay double the employee’s monthly

salary for each month without a written contract from the second month of start date

After one year of start date: deemed to have an open-term contract

• Mandatory clauses (official template contracts) Identification of parties Term of employment Job description and place of work Working hours, rest and leaves Remuneration and social benefits Details re working conditions and labor protection


3. Employment contracts – written contracts required (cont’d)

• Amendment of contracts Consent of employees required

• Special situation of foreign representative offices Hiring local employees through “nominal” employers like

FESCO

• Foreigners working in China Tax considerations Work permit


3. Employment contracts – term of an employment contract

• Probationary periods Depending on term of a contract, the probationary period can

be 1 to 6 months The minimum salary during the probationary period is 80% of

the starting salary for regular employees in the same position Restrictions on employer’s right to terminate unilaterally during

the probationary period Prove that employee does not satisfy the conditions for

employment, etc.


3. Employment contracts – term of an employment contract (cont’d)

• Fixed-term contract A contract with a specific expiration date Factors to consider in determining the length of employment term

Long-term employment strategy, business needs, the employee’s performance, competency and potential, etc.

• Open-term contract A contract without a specific expiration date

Commonly seen in common law jurisdictions Cannot be terminated based on the legal ground of contract expiration An employee is entitled to an open-term contract in certain specified

circumstances

• “One-off” contract A contract for completing a specific work Very rare in the reality


3. Employment contracts – working hours & overtime pay

• Working hours schemes Standard working hours scheme

8 hours a day and 5 days a week Automatically applicable to all types of employees unless a special approval for

flexible working hours scheme or comprehensively calculated working hours scheme has been obtained

Flexible working hours scheme - subject to special approval Comprehensively calculated working hours scheme - subject to

special approval

• Overtime pay Overtime hours on normal business days: 150% of regular rate Working hours on weekends: 200% of regular rate Working hours on public holidays: 300% of regular rate


4. Employment termination

• At-will employment is not permitted by PRC law

• Under PRC law, only employees are given the right to terminate an employment contract without cause by giving written notice, while employers cannot terminate an employment contract without cause

• Employers can only terminate employment contracts based on limited grounds expressly provided in relevant PRC labor laws and regulations


4. Employment termination (cont’d)

• Grounds for early termination by employers Termination by mutual agreement

No notice period required Statutory severance pay is required to be paid if the termination is

proposed by employer This route of termination can be a catch-all solution for an early

termination, in case a unilateral termination is legally flawed and thus may not be feasible

Unilateral termination without advance notice No severance pay required Causes include:-

Proved during probation period not to satisfy conditions for employment Serious breach of employer’s rules and policies Serious dereliction of duty or graft, substantially harming employer Additional employment relationship Pursued for criminal liability Deception or coercion in obtaining employment



• Grounds for early termination by employers (cont’d) Unilateral termination with 30 days’ notice or payment in lieu

Statutory severance pay required Must be for specific causes (i.e., non-work related illness/injury after expiration of

statutory medical treatment period, incompetence even after training or adjustment of position, or material change in objective circumstances relied on to conclude contract that renders it unperformable)

Certain exemptions Economic redundancy

Minimum 20 persons or 10% of staff if less than 20 persons Must be in specific circumstances (restructuring, serious difficulties in production

and/or business operation, change in production or major technological innovation, or other material changes in objective circumstances relied on to conclude contract that renders it unperformable)

Certain exemptions Statutory severance pay required Must go through statutory notification and “filing” procedures (virtually an approval

requirement)



• Severance pay Severance pay is calculated based on (i) the average monthly pay of

the employee during the previous 12 months immediately prior to the termination of his/her employment contract, or three times the average monthly pay of all workers in the city where the employee is hired (a fixed number published by local government on an annual basis), whichever is lower (collectively “Monthly Pay”); and (ii) the length of service period of the employee

An employee will be entitled to receive 1 month’s Monthly Pay for each completed year of service, with a cap of 12 months’ Monthly Pay 6-12 months: treated as 1 year < 6 months: 50% of Monthly Pay


5. Social benefits

• Statutory social insurance plans

− Pension insurance

− Medical care insurance

− Unemployment insurance

− Work related injury insurance

− Maternity insurance

− Housing provident fund


5. Social benefits (cont’d)

• Both employer and employee should make contributions to the statutory social insurance plans (except maternity and work related injury insurances)

• Specific percentages of contribution subject to local regulations In most provinces, an employer’s burden of various social insurances

contributions is about 45% of an employee’s base salary (capped at three times local average pay for the purpose of social insurance contribution), while an employee’s burden is normally around 20%

• Both employer’s and employee’s contributions to statutory social insurance plans are made on a pre-tax basis


6. Vacations and paid leaves

• Public holidays – 11 days each year

• Paid leaves Annual leave Marital leave Bereavement leave Maternity/miscarriage leave Paternity leave Nursing leave Sick leave (leave for illness and non-work related injuries) Work related injury leave


7. Restrictive covenants

• Non-compete covenants Generally allowed by PRC law Certain restrictions on non-compete covenants under PRC law

Only applicable to senior management staff, senior technical staff and other staff with confidentiality obligations

Maximum duration: 2 years

Reasonable compensation required

Remedy for breach Liquidated damages based on mutual agreement

• Non-solicitation covenants No specific laws and regulations in this aspect

Common understanding is that a non-solicitation covenant is not prohibited by PRC law


8. Stock incentive plans

• PRC domestic individuals’ participation in stock incentive plans of overseas listed companies – consideration of foreign exchange control New rules came into effect as of February 15, 2012 Types of stock incentive plans registerable under the new rules

stock ownership plans stock option plans stock appreciation right plans (SAR) restricted stock (unit) plans performance stock (unit) plans phantom stock plans employee share purchase plans other plans or schemes commonly seen in non-PRC jurisdictions

• No enabling regulation for PRC domestic individuals’ participation in stock incentive plans of overseas private companies

• Consequences of non-compliance


9. Labor dispute resolution

• Process Mediation Arbitration Litigation

• Tips for preparing for defense of a labor case Rules and policies Performance monitoring Periodic appraisals and performance reviews Warnings and disciplinary proceedings Employee investigations


Ying LiPartner, Hong Kong/Beijing

Ying Li is a Partner in the Corporate Department, resident in our Hong Kong and Beijing offices. Having been based in China and Hong Kong for over 18 years at leading international law firms, Ying’s practice focuses on labor and employment, China-related cross-border investments, mergers and acquisitions, and private equity.

Ying regularly advises international employers and management in all aspects of PRC labor and employment law, including employment contracts, restrictive covenants, employee benefits and incentive plans, outsourcing, immigration, social welfares, sexual harassment, investigations, termination and large-scale layoff, restructuring and collective bargaining, and labor disputes. Ying also frequently counsels multinational companies on localizing their internal HR policies and manuals in compliance with PRC legal and regulatory requirements, and provides strategic and preventive guidance. His clients cover a wide variety of industries, such as banking and finance, IT, telecommunications, media, entertainment, sports, hospitality, manufacturing, infrastructure, natural resources and energy.

Ying obtained his J.D. degree from Harvard Law School and LL.M. and LL.B. degrees from Peking University. Formerly a law professor at a leading law school in Beijing and a visiting scholar at Harvard Law School, Ying is a frequent speaker on legal and regulatory developments related to labor and employment, mergers and acquisitions and corporate finance in China and is quoted extensively by the press.

t: +852.9641.3062 [email protected]


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PRC Labor and Employment Law Overview

Ying Li

Partner, Hong Kong/Beijing

November, 2012

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PRC Labor & Employment Law Overview Ying Li Partner, Hong Kong/Beijing November 14, 2012