Labour Dispute

The year 2008 was a busy one in Chinese labor law circles. A new Labor Contract Law (LCL) took effect on January 1, 2008 and further guidance was provided on September 18, 2008 with the promulgation of the Regulations on the Implementation of the PRC Labor Contract Law (Implementing Regs). The Employment Promotion Law, also effective as of January 1, 2008, primarily proscribes certain forms of job discrimination. In addition, the Law on Labor Dispute Mediation and Arbitration became effective on May 1, 2008, and there has been a targeted and renewed focus by the PRC government to expand unionization rates among the foreign-invested sector. As expected, the Implementing Regs specify and clarify certain issues addressed in the LCL. On the other hand, the Implementing Regs are likely to have an adverse impact on the labor environment in China. One of the key goals behind this focus on labor is stabilizing labor relationships and promoting longer-term employment.

According to the LCL, a written labor contract is necessary for the establishment of an employment relationship. If a contract is not concluded within one month from the beginning of employment, employers will bear the legal consequence of paying employees double salary for those months that the employee worked without a written contract. In practice, this clause may cause employers to bear unfair responsibility in cases where employees purposefully delay signing written labor contracts in order to claim double salary. The Implementing Regs therefore provide a safe harbor for the employer such that if the employee, after being notified in writing, fails to conclude a written labor contract with the employer, the employer can terminate the employment relationship and notify the employee in writing. If such termination occurs within one month from the beginning of the employment period, no severance shall be paid; however, if such termination occurs after that period, severance must be paid. It is advisable for the employer to obtain a signed receipt (or proof that the employer fulfilled the duty of notification) from the employee and save the receipt in case a labor dispute occurs in the future.

The LCL also encourages employers to sign open-ended labor contracts with employees. In the past, employers in China typically engaged employees under a series of short-term contracts (e.g., a one-year contract) in order to avoid potential monetary liability associated with termination. It provided flexibility for employers in that an employer could fire an employee freely at the end of each short employment term by not renewing the labor contract and in the process not have to pay severance. However, under the LCL and Implementing Regs, short-term contracts are no longer an optimal choice in practice for two reasons. First, severance will now be owed even in the event of a non-renewal. Second, and a particular point of concern for human resources departments in China, a fixed-term contract will automatically be converted into an open-ended contract following the second renewal upon the request of the employee.

Another point of emphasis is that if an employer fails to sign a written labor contract with an employee for more than one year from the date that the employee begins work, it shall be deemed that the employer and the employee have concluded an open-ended labor contract. Practically speaking, this means that absent “just cause” as defined under the 1995 PRC Labor Law, the employee cannot be terminated without triggering the payment of statutory severance payments.

Under the LCL, there are only limited circumstances in which an employer has the right to obtain liquidated damages from an employee for his breach of contract. Breaching the service period of a training agreement is one of those circumstances. Note, however, that the LCL strictly limits the amount of such penalty, and the Implementing Regs further strengthened such limits.

According to the LCL, an employer may enter into agreement with its employees to specify their service period and the penalty for any breach thereof only when an employer pays training expenses for its employees' special professional technical training. What constitutes “special professional technical training” remains undefined and unclear in the LCL and Implementing Regs.

In terms of the amount of the liquidated damages, the LCL limits damages to the amount of the actual training expenses (training, travel, and other direct expenses) provided by the employer. Practically speaking, in addition to direct expenses paid for the training, employers also have to pay other indirect or hidden expenses, such as those costs associated with the time and internal resources devoted to arranging the training. Moreover, if an employee does not fulfill his service-period obligations, the penalty will not exceed the training expenses attributable to the service period that was left unfulfilled. Obviously, the intention of such rules is to drastically reduce the penalty burden on an employee if he breaches his contractual obligation regarding service term. Perhaps an unforeseen consequence will be that employers will have less incentive to provide training to their employees in light of the “job hopping” risks generally faced by employers in some of China's hotter job markets in Shanghai and Beijing.

From a practical perspective, labor cases are inevitably very fact specific, with the employer bearing a higher burden when it comes to evidence. Employers should, therefore, pay more attention to the new rules and make efforts to improve their administration and internal HR systems and controls to collect and maintain all necessary evidence. In addition, it will remain important for employers to monitor closely the local rules governing labor issues in the geographic areas in China in which they operate.

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