Local Labor Laws: Our Expertise

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Employee leasing has been found out as one of the best solutions for companies who want to set up a new office in a foreign jurisdiction or hire overseas employee.

But, you have to remember that there are still a lot of considerations to follow especially that it is a different country and there are a lot of differences in cultural backgrounds. One area of concentration when dealing business overseas is the labor laws of the country. Although it is possible to hire and outsource a global HR team like NNRoad, it is still important to know what they are doing. Of course, it is always better to avoid getting caught in the complications of violating employment laws than to spend a fortune with the penalties.Here, we will be talking about some of the most important local labor laws in China and what you can do as a business to avoid running into problems and severing the ties with one of the world’s most profitable countries to do business with.

China’s contract employment system.

Unlike in the United States where they follow a system called “employment at will”, China follows the “contract employment system”. What is the difference between the two? Employment at will is a system where an employer can hire and terminate employees for whatever reason at any time that they wish to do so. Contract employment system, on the other hand, is a system wherein the details of the tenure and the entire employment is put into writing and kept recorded. Many American companies run into problems with this law as the system that they are used to is very different than that of China.

Employers who hire employees in China without a written employment contract can be charged with penalties, administrative fines, and worse, face lawsuits.

The labor law of China states that if an employee is not issued an employment contract for more than a month since the start of his work, the employer must pay the employee twice the amount of his monthly wage in addition to an immediate writing of an employment contract.

If the lack of an employment contract extends to more than a year, the employee is now considered to be in an open-term employment contract. What is the effect of this on the employer? The employer has no choice but to retain the employee until his or her retirement age.

Mandatory provisions in China’s employment contracts.

China’s Labor Contract Law requires the employer to include the following provisions and clauses to the contract:

• Basic information of both the employer and employee such as the employer’s name, address, and legal representative or person-in-charge as well as the employee’s name, address, and national ID or passport number
• The specific duration and tenure of the employment contract and probation period if there is one
• The task description of what the employee is doing in the company
• The place of work
• The working hours
• Rest and leave time
• Salary
• Social insurance
• Any applicable labor protections and labor conditions and protection against occupational hazards

In some cases, locales require employers to specify any additional provisions such as benefits to particular employees. It may sound like a lot of work but that is what a company should be respected if it decides to do business with China.

Clarity of employment contracts and probation periods.

A probation period is like a safety net for employers. It is also a good way to test the employees before they are promoted as regular workers in the company. In China, the longer the employment term is, the longer the probationary period also is. Generally, for an employment term of more than three months but less than one year, a probation period of no more than one month can be set. For employment terms of more than a year but less than three years, the probation period cannot exceed two months. For employment terms of more than three years or an open-term contract, the probation period cannot be longer than six months. Additionally, only one probationary period may be used for the same employee.

In China, once an employee is already on his employment terms, it is quite difficult to terminate an employee unless there are enough grounds to do so. The safest employment term you can set is an initial term of three years. Such term can have a probation period of six months, which is a relatively good period to observe an employee’s performance and terminate them if necessary.

The working hour rules in China.

Most municipalities in China impose an 8-hour work day and 40-hour work week. This is the standard working hours system which is pretty much followed by most countries as well. However, there are two exceptions to the system: the “flexible working hours system” and the “comprehensive working hours system”. The flexible working hours system applies mostly to higher positions such as senior management or the people in sales. There are different categories of workers in China in different locals that are eligible for the flexible working hours system. This is advantageous to the employer as they don’t have to pay overtime wages to employees who work outside the basic and standard hours.

The comprehensive working hours may have the employees work beyond the 8-hour shift without having to pay for overtime provided that the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

It is also important to note that before an employer implement either of the two working hours system, the employer must first seek an approval from the local labor bureau. Additionally, once the request is approved, it doesn’t apply indefinitely. The employer needs to apply for a renewal for the implementation of the said working hours.

China’s statutory vacation period.

Typically, employees in China get Saturday and Sunday as their rest days every week. Any employee who has worked for a company for more than a year is entitled to a paid annual leave which is also called the statutory vacation period. It is based on the employee’s total years of service. They are as follows:

• More than 1 and less than 10 years of service: 5 days of vacation
• More than 10 and less than 20 years of service: 10 days of vacation
• More than 20 years of service: 15 days of vacation

Any unused vacation time in one year can be carried over to the following year but not the year after that. If the employer fails to allow its employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation.

Clarity in salaries.

We have mentioned above that a salary should be set in the employment contract. Most employers find paying a 13th month. While it is customary in many parts of China, it is not required. However, if you wish to do so, you must specify in writing the conditions and grounds on how an employee can receive a 13th-month pay.

Aside from this, if you have other bonus systems in your company, you should already detail them out clearly in the contract so you don’t have to be the one on the losing end when the time comes. For example, instead of paying a higher salary but no annual bonus, you may want a lower salary structure with an annual bonus which is usually paid in the early part of the following year. This will add no cost to you, but your China employee can benefit from the preferential tax treatment on his or her annual bonus, which means less individual income tax burden for the employee

Social insurance and housing funds.

Social insurance and housing funds are part of China’s statutory benefits for any employee in China. As an employer, you must contribute to your employee’s benefits. It includes pension, medical, work-related injury, maternity, and unemployment insurance. Depending on the local that your office is in, you may have to pay or contribute a different amount. Failing to pay will result in costly fines in the end and you will end up spending more than what you expected.

Chinese as the employment contract’s governing language.

Since you are doing business in China and your employees are from China, it just makes perfect sense that Chinese should be the governing language of the employment contract. Avoid using dual-language contracts as it may be put to costly disputes.

These are just some of the labor laws that exist in China. If you find them too mind-boggling or overwhelming, NNRoad can take over and handle this part for you. NNRoad is a team made up of experts across the globe, especially China. So, these people know the basics of the local labor laws of China. Additionally, if you wish to do business in a different country, NNRoad also has skilled individuals that can attend to your needs.