A big mistake that some business people make when starting an operation China is to believe that it is easy to hire, fire and manage employees. In many respects, when it comes to foreign companies, at least, China is not the Wild West, it is more like Sweden. Or France. So, before establishing your business in this country, it is essential to be familiar with China’s Labour Law that regulates what you can and cannot do with regard to hiring and firing employees. Beyond the regulatory aspects, it is also critical to have a good understanding of the dynamics of the employment relations.
You might also be interested in knowing the 10 Steps to open a Foreign Invested Company in China.
In China, the legislation is predominantly composed of the law articles coming from two sources. The first, the Labour Law of the People’s Republic of China was enacted in 1994. The second, the Labour Contract Law of the People’s Republic of China, was promulgated in 2007 in order to limit the excessive dismissal practices of some companies. By doing so, the government, wants to bring more protection to workers by making it more difficult for enterprises to lay-off massively.
In the context of a constantly rising number of labour dispute cases, the management of any company based in China must be extremely vigilant. When it comes to hiring an employee, or terminating his/her contract, the management must be certain that it is acting in accordance with China’s Labour Law. Chinese employees are notoriously litigious with foreign companies that are considered as having deep pockets by the judges.
In order to be legally valid, the employment contract must be written in Chinese. The typical penalty incurred is the payment of damages to the employee, to the tune of the double of the salary for each month of employment without a written contract.
Before rushing into drafting, it is important to have a clear idea of the framework you want to establish around the employer/employee relationship, in particular the duration thereof. Each one of the different types of contracts, fixed term and open term employment contracts, knows specific rules.
Keep in mind that if you want to start your activities in China by establishing a Representative Office, you will not have the right to directly employ Chinese employees. Such entities are to use the services of a registered labour agency that takes care of the recruitment campaign on its behalf. However, a Wholly Foreign Owned Enterprise can conduct conventional direct hiring.
Contrarily to the common belief in the first-time investors community, an employee cannot be discretionarily dismissed by his employer. For a contract to be terminated unilaterally by the employer, there must be a cause and a written notice given 30 days before the formal departure of the employee or the granting of an extra one month salary in compensation of the waiver of said period. The Labor Contract Law of the People’s Republic of China allows the employer to dismiss an employee with compensation in one of the following circumstances:
-The worker cannot work for the employing unit after a period of medical treatment for illness or injury incurred when not at work;
-The worker is incompetent for the post or another post to which he was assigned even after receiving training;
-The original labor contract cannot be performed and no agreement has been reached after consultation between the company and the worker.
Also, a severance payment (one month salary for each year of employment by the company) must also be paid to the dismissed employee.
Nevertheless, statutory causes such as serious neglect of work duty allow the employer to dismiss his employee without compensation nor notice. It is important to note, here, that should you wish to use this method to fire an employee, you would have to be extremely cautious and document very well the dereliction of duty. We recommend that you take contact with our HR specialist who will be able to help you strategize the dismissal procedure and to limit as much as possible adverse consequences for the company.
Mass layoffs are extremely regulated by China’s Labour Law and can often lead the management to prefer mutual agreements to terminate the employment contracts in exchange for negotiated compensations.
The Chinese legal system is very protective of the employees’ interests and in case of dispute, the employer bears the burden of proof and must demonstrate the existence of a cause allowing him to terminate a contract. In most cases, the Court rules in favor of the employee and can require the reintegration of the wrongfully dismissed worker. Beyond the disruption to the business and the obvious fact that reintegrating a dismissed employee compounds the problems which have led to firing in the first place, it is important to understand that it causes a major loss of negotiation power between the employer and all the other employees. Proceed with extreme caution.
The complexifying and constantly changing China’s Labour Law regulating the Labour Market and the rules concerning working time, allowances, insurance and paid leave, make it mandatory for any company seeking to do business in China to consult their legal counsel.
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