Employment Contract Law: Major Changes in Second Draft - International Law Office

Introduction

On December 24 2006 the Standing Committee of the National People's Congress conducted the second reading of the proposed Employment Contract Law. The committee reviewed the second draft, which had been prepared by the Law Committee. The second draft differs substantially from the first draft, which was submitted in December 2005 and released for public comment in March 2006; it was prepared in light of over 191,000 comments from the public. The committee will likely make only limited revisions on the basis of the feedback obtained from the second reading. The National People's Congress is expected to approve the law in the next few months, with the new requirements becoming effective later in 2007.

The changes in the second draft generally favour employers, partly by reducing the role of labour unions. Nevertheless, on balance the draft law significantly increases employee protection in comparison with current legislation. The law will be generally applicable to all employees from shop floor workers to general managers; the drafters rejected a proposal that was seriously considered in Summer 2006 to exempt senior managers from the law.

Despite extensive redrafting, the draft law still contains numerous instances of vague language. This leaves many provisions open to multiple interpretations, thereby reducing their effectiveness as reliable guidance for employers.

Fixed-Term Contracts

The second draft retains the requirement that employers must pay severance to employees whose fixed-term contracts are not renewed. However, it adds an important exception to this rule: employers are not required to pay severance if an employee rejects an extension offered by the employer that proposes terms at least equal to those enjoyed by the employee. The second draft prevents an employer from offering more than two fixed-term contracts to an employee; if an employer wishes to continue employing an employee after the second term expires, an open-ended contract must be signed if the employee so requests. This requirement reflects the government’s aim of encouraging long-term employment.

However, the second draft removes a provision that gave employees without written contracts the right to demand open-ended contracts. In addition, the new draft restates provisions in existing law that allow a fixed-term contract to be terminated if an employee is shown to be incompetent.

Employer Rules

The second draft modifies, but fails to clarify, the requirements regarding the procedure for issuing company rules. The procedure covers rules which have a “direct bearing on the immediate interests” of employees, such as those relating to compensation and working hours. Such rules are commonly found in employee handbooks and codes of conduct. The second draft no longer includes the condition that proposed rules require union approval. Instead, the rules must first be discussed by all employees or by an "employee representative congress" before being decided through consultations between the employer and a union or other employee representative.

The nature and extent of the required consultations are undefined; it is unclear whether merely notifying or seeking the opinion of employees is sufficient. The term 'consultation' could be interpreted as requiring negotiations between employers and employees. The consultation requirement also applies to “material matters” affecting the interests of employees. Therefore, even if the issuance of a company rule is not involved, it appears that employers may be required to negotiate with employees or unions when contemplating major policy changes affecting all employees.

Two new provisions create rights to challenge rules issued by employers.

First, unions and individual employees may file objections with employers if they believe that implemented rules are “inappropriate”. The rules must then be “improved” after consultations, which leaves open the possibility that such rules are unenforceable until employees or unions have given their consent following a further round of negotiations with employees.

Second, a new provision gives the Labour Bureau the right to order an employer to (i) change company rules that violate applicable laws, and (ii) indemnify employees for losses suffered as a result of the employer’s enforcement of such rules.

Probationary Periods

The second draft eliminates a cumbersome proposal that tied maximum probationary periods to the type of position held by the employee. Instead, it takes a simpler approach by linking the maximum probationary period to the duration of the contract. The maximum probationary periods are:

• one month for a contract of under one year;

• two months for a contract of between one and three years; and

• six months for an open-ended contract or a contract of over three years.

These limits would modify current national rules on probationary periods and many local regulations that specify maximum periods.

The second draft requires employers to pay employees at least 80% of their contractual salary during probationary periods. This new requirement is a compromise between preventing the relatively common practice of paying employees at much lower rates during such periods while giving employers a legal method of reducing the cost of employees who may not yet be fully productive.

Non-compete Requirements

The second draft reiterates existing requirements that post-termination compensation must be paid to a former employee in order to enforce a non-compete clause. However, the new draft fails to fill a gap in existing legislation by specifying a required amount of compensation. Limits on the amount of liquidated damages have been removed, thereby allowing parties to agree on the damages employers may recover if employees violate non-compete restrictions. Such damages may not subsequently be reduced unless a court finds that they were clearly excessive.

Secondment Contracts

The second draft states that the duration of initial employment contracts between seconded employees and labour service providers, such as Beijing Foreign Enterprise Human Resources Service Co or China International Intellectech Corp, must be at least two years. Such contracts must be renewed unless there are grounds to terminate the secondees for cause; thus, secondees' contracts may effectively be open-ended contracts.

The second draft also provides that secondment shall generally be used for temporary, auxiliary or substitute positions. A list of such positions will be announced later; secondment may possibly be limited to employees in non-core positions or certain industries. One change may result in increased costs for employers of seconded employees: the second draft provides that such employees have the right to receive equal pay for equal work. This rule may require employers to increase the salaries of seconded employees to match those of direct hires, effectively prohibiting two-tier wage systems. However, employers are permitted to reduce seconded employees' wages to the legal minimum during periods when they are not working.

Mass Lay-Offs

The second draft significantly extends an employer's right to terminate employees through mass lay-offs. Such terminations are permitted when the performance of contracts becomes impossible because of changes in economic circumstances, which raises the possibility that employers and employees could agree in contracts that (i) certain business conditions are essential to the performance of employment contracts, and (ii) any change to such conditions would be grounds for a mass lay-off.

However, an employer's ability to lay off employees is limited by new provisions that may give the majority of employees the right to claim priority from termination. The second draft grants preferential status to:

• employees with long terms of service;

• employees on long fixed-term contracts;

• employees on open-ended contracts; and

• employees with families to support.

The second draft states that at least 20 employees or 10% of the total staff must be terminated in order for such an action to be termed a 'mass lay-off'; existing law does not specify a minimum number or percentage of affected employees.

Training Contracts

The second draft reduces from six months to one the minimum length of training that an employer must provide to an employee under a training contract in order to recover training expenses from the employee where he or she does not serve the required term of service. However, the second draft retains other requirements (eg, the training must be off-the-job professional, technical or vocational training). Employers are unlikely to be able to recover expenses for in-house training programmes or tuition for academic programmes.

For further information on this topic please contact Andreas Lauffs at Baker & McKenzie's Hong Kong office by telephone (+852 2846 1888) or by fax (+852 2845 0476) or by email (andreas.lauffs@bakernet.com).