Clarifications to China's New Labor Law Coming

From China Law Blog

By Andrew Grieve and Steve Dickinson (Andrew is a paralegal with Harris & Moure who is fluent in written and spoken Mandarin).

The Labor Contract Law continues to generate much controversy in China. As is typical of Chinese statutes, the law is unclear on many key issues. The usual way such ambiguities are resolved is through implementing regulations. On May 8, 2008, the PRC State Council issued a comment draft [in Chinese] of proposed Labor Contract Law Implementation Regulations.

Unfortunately, the proposed draft likely will not resolve important issues arising from the law, as they are short and mostly confined to simply repeating what is already stated in the law. This is unusual, since omplementing regulations tend to be longer than the laws that generate them. In a form of wish fulfillment, some commentators from Hong Kong have seen the draft regulations as an attempt to weaken the law. We do not view them this way. Other commentators within China have seen the regulations as an attempt to make the law even stricter. We also disagree with that view.

The reality is that the comment draft implementing regulations leave us pretty much where we started. Foreign companies operating in China need to continue focusing on dealing with the law as drafted.

The comment draft implementing regulations do clarify a couple of points that may have been ambiguous in the original law.

Probably most importantly, the regulations state that an open term contract comes into play once an employee has completed two fixed term contracts and the employer continues the labor relationship, or if the employee has been working for at least 10 years with the current employer. Only if the employee explicitly states that he or she wishes to enter into a new fixed term contract can this be avoided.

The new draft has some interesting things to say in this regard:

When seeking to determine whether an employee has been working for a full ten years, the draft regulations state that an employee's time with the old employer will be added to the employment period with the new employment if the worker's reason for having moved to the new employer was due to corporate plans or administrative decisions. This is clearly an attempt to prevent employers with multiple companies from using those companies to move employees around just before they would be eligible for the unfixed term contract.

At the end of the term of a fixed term labor contract, should there be a provision for automatic renewal and the employee continues to work, or if there is no provision, but the company makes no compensatory payment and does not complete the process for the termination of employment, the draft views this as a natural extension of the labor contract for a further fixed period of the initial contract. If this would make the employee eligible for an unfixed term contract, then unless the employee specifies otherwise, the contract is deemed to be on an unfixed term.

If a worker under one of the following circumstances has been employed for 10 full years and wishes to enter into an unfixed period contract, the employer is required to do so:

1) having been exposed to dangerous conditions and not having had a health check before leaving the position, or during the diagnosis or medical examination of a suspected occupational disease;

2) during the recovery period for a non-work related injury or illness

3) female workers during pregnancy, giving birth or breastfeeding.

This is an awkwardly written provision that grants an employee the right to an unfixed term contract by the simple accident of illness or pregnancy.

Under the law, termination of labor contracts can only be done under specific and narrowly defined set of circumstances. Since many companies have been trying to get around these requirements by building additional clauses into contracts specifying specific conditions for the termination of the contract, the draft also provides that:

Contracts cannot include termination clauses that fall outside of the scope of the labor contract law, additional responsibilities for breach, or other labor regulations (for example company regulations) that do not fall within the scope of the labor contract law.

The draft regulations also now restrict an employer's ability to levy fines or penalties against an employee to the following employee acts:

1) Serious violation of company rules and regulations
2) Serious dereliction of duty, embezzlement, damaging the interests of the employer
3) Entering into an employment agreement with a third party that affects the completion of tasks and refusal to remedy the situation
4) Entering into the labor contract under false premises or through intimidation
5) Being subject to criminal investigation.

This list is also found in the Labor Contract Law, so the draft essentially just clarifies that these are the only acceptable conditions and that no additional penalties may be incorporated into contracts.

Quite often, migrant workers do not want to sign written contracts, especially if they believe they will want to change jobs relatively quickly and/or go home and not come back during the Chinese New Year holiday. The draft regulations allow employers to protect themselves by terminating a labor relationship within one month of its commencement if the employee refuses to sign a written contract, without having to pay any compensation. Between this first month and the first year of employment, if no contract has been signed, and the employee still refuses to sign a contract, the employer may terminate the labor relationship, but is required to pay compensation on the basis of one month's wages for each full year of employment. It is still necessary to pay twice the monthly wage for each month of employment without a written contract, but the company now is able to terminate the relationship with the employee.

So while the new regulations do provide some clarifications, these are mostly aimed at closing loopholes and preventing companies from working around the Labor Contract Law. There is no substantially new content, and since the regulations are in draft, it is likely that some of the more inflexible measures, such as unfixed term contracts for sick or pregnant workers may see some challenge. The end result, however, is that employers must still plan to get in compliance with existing PRC labor law, including the Labor Contract Law. There is absolutely no indication that the Chinese government plans to back off from or weaken the provisions of that law. If anything, the current trend seems to be to move in an even more strict direction favorable to the worker.