Navigating China’s employment landscape can be difficult for any foreign company. Whether it is a first time hire or the drafting of multiple employee contracts, China’s labor laws and regulations are complex and require a high level of legal compliance.
It is extremely important for foreign companies operating in the country, to fully understand China’s local employment practices. From strict contract requirements to compensation structures, as well as unusual policies on probation periods, adhering to China’s employment regulations is crucial.
Several employment documents are required for both the employer and the employee, to formalize a work relationship.
The following documents are needed: Employment contract; the company’s Rules and Regulations; a Sign Off agreement, in which the employee acknowledges receipt and comprehension of the Rules and Regulations; a Trade Secrecy and Intellectual Property agreement, a Non-Compete agreement; and an Educational Reimbursement agreement.
Each agreement should include all personal information, such as contact address and numbers. The Non-Compete agreement should include terms (usually 12 months, the maximum term is 2 years) and the amount of compensation during the non-compete term.
The Education Reimbursement agreement should include the name of the training program, period of training, location, wage, and bonus provided during training, total training expenses and service period after completion of the training.
Rules and Regulations
The Rules and Regulations document is basically a handbook on Chinese employment law. Much of the content in this document is required by law and is therefore not optional.
This document lays out the basis of the relationship between executives and employees. It is especially important because China’s employment law system is very different from other Western countries.
China’s system is a contract employment system: all employees must be engaged pursuant to a written employment contract and during the term of that contract, it is difficult to terminate an employee. More precisely, an employee can only be terminated for cause and cause must be clearly proved.
Therefore, employers must maintain a detailed set of rules and regulations and discipline records to be able to establish grounds for dismissal. This is why the Rules and Regulations are so detailed and (from a Western standpoint) so negative in tone.
Chinese employment contracts specify the initial employment duration and the probation period. Termination post-probation can occur without subsequent issues.
Trade Secrecy and IP Agreement
Since employees work with proprietary information, it is a good idea to have them sign a Trade Secrecy and IP Agreement. Except for senior management, it is difficult to control employees’ behavior through a non-compete agreement, because they are not senior enough to be covered by such an agreement.
Because the company’s protection will be limited to the terms of the Trade Secrecy and IP Agreement, this document should be carefully reviewed.
Sign Off Agreement
This agreement formalizes each employee’s receipt of the Rules and Regulations and their agreement to abide by those rules. It is important that each employee signs this, to avoid claiming later that they did not receive it (a claim frequently made at labor arbitrations in China.)
A company may offer additional benefits to employees beyond the statutory minimums set forth in the Rules and Regulations. If a particular benefit is provided to all your employees, it should be included in the Rules and Regulations. If a benefit is for a specific employee, the benefit should be spelled out in the employment contract.
If an employee travels domestically or internationally for work, there should be a written travel expense policy.
The statutory rule on vacation for employees is as follows:
First year of service: No vacation.
Between 1 and 10 years of service: 5 days/year.
Between 10 and 20 years of service: 10 days/year.
20 years or more: 15 days/year.
These statutory limits are for the employee’s total years of employment (from the time they started working, regardless of employer).
The annual salary must be converted to a monthly wage. In many parts of China, it is customary to pay the salary on a 13-month basis, with the final month paid just before Chinese New Year.
This is optional, but it is important to state clearly if the company will be using this approach.
Many employees have come to expect this “New Year’s Bonus” and not paying it can cause problems. This expectation varies both by industry, the type of employee (i.e., factory workers vs. office workers), and the geographic location. Paying on a 13-month basis does not obligate a company to pay more in salary; just divide the annual salary by 13 instead of by 12.
When there is a bonus system (e.g., performance bonus, retention bonus, referral bonus, etc.), it should be set forth in writing.
It can be extremely challenging for foreign companies to navigate through the complex Chinese employment system. Ensuring meticulous attention to the creation, execution, and management of employment documents and adherence to local regulations is pivotal in safeguarding the interests of both the employer and employee.
Each set of documents – from the Employment Contract to the Educational Reimbursement Agreement, plays a key role in establishing a clear, compliant, and constructive employment relationship.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.