Intellectual Property Law

China?s Latest Labor Contract Law

By Martha L. Arias

Entrepreneurs worldwide are closely following the development of China?s labor contract laws.  These laws definitely impact both foreign investors in China and those acquiring products made in China. China?s latest modification to its labor contract law was approved in 2007 and became effective on January 01, 2008.  Employers must follow this new law in regards to employees hired on or after January 01, 2008.  This article provides a synopsis of China?s 2007 labor contract law modification.

One of the most important modifications introduced by China?s labor contract law 2007 is the need of a written contract for each employee hired on or after January 2008. Employers were not required to execute new contracts for existing employees.  Employers, however, were required to comply with the rules introduced by this 2007 legislation. There are three types of labor contracts under this new law: fixed duration, non-fixed duration, and project duration contracts.  A written contract must be executed on the first day of the job, or no later than one month from the employee first day on the job. If the employer does not execute a written contract within one month from the employee first day on the job, but less than one year, the employers must pay that employee double the salary for each month the employee was working without a written contract. If the employer fails to execute a written contract for more than one year after the employee first day on the job, the contract will automatically be deemed a non-fixed labor contract. If the labor contract is signed prior to the start of the employment, the contract is deemed to commence the first day of the job.

China?s 2007 labor contract law considered invalid the following contracts: (1) when employee?s consent is obtained through threats or duress; (2) when their provisions violate other laws and regulations; and (3) when the employee?s rights through negotiation are eliminated. These contracts include those that include employee?s renunciation of severance or any other statutory benefit.  Another important modification of China?s 2007 labor contract law is the modification of probationary periods.  No probationary period is allowed for labor contracts less than three months or specific projects.  Contracts for more than three months or one-year fixed term will have a probationary period of no more than one month.  Contracts of one-to-three years fixed duration may have a probationary period of no more than two months.  Contracts for more than three years or non-fixed duration contracts may have a probationary period of no more than six months.

China?s 2007 labor contract law introduced the severance benefits for employees. The amount of severance is one month salary for each year of employment, up to twelve years. Employees working for over six months but less than one year will receive one month salary as severance. The severance of employees working less than six months will be calculated in the amount of half of a month salary. Employers are to pay severance in the following cases (1) when the employer terminates the labor contract for cause (employee?s incompetence or change of job circumstances); (2) when the employee terminates the contract for legal reasons (failure to obtain payment, employer?s violations, etc); (3) lay-offs due to bankruptcy laws; (4) employer-employee termination agreement; (5) when the employer terminates a fixed-term contract at its expiration date (some exceptions apply); (6) when the employer closes its business, goes bankrupt, dissolves, or is ordered to close; and (7) other situations stipulated by law.

The central effect of imposing employers to execute written contracts is the protection of China?s employees.  Fixed term contracts were abolished and firing employees became costly for China?s employers. Fixed term contracts, for instance, now require payment of severance at the end of the contract; a payment not required under previous labor law.   Thus, let?s wait and see if products made in China will continue to be as price-competitive as they are now.  It seems that China has entered a new labor law era that protects employees, but also creates additional financial responsibilities for employers.

Full post as published by IBLS Internet Law Blog on December 21, 2009 (boomark / email).