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Global Tax Insights

Considerations When Setting up an Employment Contract in China

February 24, 2014

Important information on Chinese labor laws that dictate contract terms, salary stipulations and statutory vacation rules.

Written in conjunction with KLR China affiliate Sabrina Zhang, National Tax Partner, Dezan Shira & Associates

Establishing labor contracts in China is an essential, albeit complicated, process, and manufacturers setting up shop in the country should avoid moving forward before they fully understand the Chinese labor laws that dictate contract terms, salary stipulations and statutory vacation rules.

Chinese labor laws are typically more stringent and rigid than those followed by U.S. employers, and the below considerations and guidelines may serve as a starting point when manufacturers begin formulating their workforce needs.

1. Mandatory labor contracts
China’s Labor Contract Law requires that companies operating in the country provide workers with an employment contract. These contracts are generally comprehensive and formal, and outline whether workers will be hired on a fixed-term, open-term or variable-term basis. By law, there are several employment stipulations that must be included in the contract, and are as follows:

  • Name, domicile and legal representative or main person in-charge of the employer
  • Name, residential address and number of the resident ID card or other valid identity document number of the worker
  • Term of the labor contract
  • Scope of work and place of work
  • Working hours, rest and leave
  • Labor compensation
  • Social insurance
  • Labor protection, working conditions and protection against occupational hazards
  • Other issues required by laws and regulations to be included in the labor contract

According to the Labor Contract Law, an employer must ensure that it has completed a written labor contract with every staff member within one month of the employee commencing work. This is important because if such a contract is not in place by the end of the first month the employee will have the right to claim double salary for the period in which the company remains out of compliance with this regulation.

If the company neglects to complete such a contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous eleven months, they can also claim an open-term contract from the employer. This will mean that the employer loses the ability to terminate the contract of the employee at the end of the fixed-term contract.

2. Salary
A regional trend that often occurs in China is the expectation that salaries are paid on a 13-month basis, with the final month paid just prior to the Chinese New Year. Although this is not compulsory, it is common and expected in many areas of China, making it critical that U.S. employers outline whether they will adhere to this custom and put it in writing.
The mandatory social insurance system in China also adds 35-40 percent to the cost for the employer on top of an employee’s salary.

3. Statutory vacation rules
China imposes strict vacation rules among its workforce, with which U.S. companies must comply. These rules dictate that employees do not receive a vacation during the first year of employment. They are then required five days of vacation in years two to 9, and 10 days of vacation in years 10 to 19. For those employed 20 years or more, 15 vacation days are allotted.

4. Non-mandatory terms
Although many of the laws in China are inflexible, employees have some negotiating room in their contracts. It’s not uncommon for employees to negotiate terms such as probation periods, on-the-job training, confidentiality/non-disclosure conditions and breach of contract stipulations. Therefore, companies hiring Chinese employees should determine beforehand how flexible they will be in agreeing to certain terms, if only to make for a more consistent hiring process.

We also recommend that some reference be made to the company rulebook in the employment contract. This makes a clear association between the signing of the employment contract by the employee and their observation of the company rules.

5. Contract termination laws
China has very particular laws governing the termination of employment contracts, so U.S. company owners should be well-versed on what may constitute fair and unfair termination. There are also a number of scenarios in which owners are still bound by salary requirements, even in the event of a termination.

In the case of an employment dispute, the burden of proof will fall primarily on the company, so it is critical that the employer organizes all documentation relating to its employment relationships in a thorough and consistent manner.In the case of termination, to show that an employee is not properly fulfilling their job duties or has violated company rules, employment documentation from throughout the employment relationship may prove useful, including:

  • Offer letter/letters of intent
  • Labor contract
  • Confidentiality agreement
  • Non-competition agreement
  • Employee handbook
  • Job description
  • Appraisal forms
  • Employee registration form

6. Acknowledgment of contracts
Labor arbitration is a common issue in China, making it critical that companies operating in the country ensure they have a formal and signed document from employees acknowledging receipt of their contract. Failure to provide this document during an arbitration process could result in significant financial losses to companies.

Download our latest article on the advantages and disadvantages of doing business in China.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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