Apart from some local regulations on such intricate matters as non-competition, as well as the development of the social security net, the 1995 Labour Law has remained remarkably untouched by legislative change. It is remarkable because the Labour Law is a product of an era when the state-owned sector still dominated China’s economy, and it is even more remarkable when you compare it to developments in almost every other area of law that reflect the speed and breadth of economic change.

Now all this is about to change.

On 29 June 2007, the Standing Committee of the PRC National People’s Congress adopted the PRC Labour Contract Law. The Labour Contract Law will come into effect on 1 January 2008, and will restate, supplement and make many sweeping changes to Chinese employment law.

The new Labour Contract Law is the product of two years of drafting deliberations. Three drafts have been publicly circulated and comments were submitted by a wide variety of interested parties (including foreign chambers of commerce) in a consultation process that is rarely seen in the making of Chinese law.

There is no question that the new law has changed many well-established rules and filled loopholes that have long been considered too favourable to employers. It is also apparent that the law will continue the inexorable trend towards unionisation of foreign enterprises, and strengthen the power of union representatives. But the immediate result could have been far worse for employers and the response to the Labour Contract Law from some employer lobbies has been positive.

Here are highlights of some of the important changes to the well-settled rules of employment in China:

•    Currently, an employee has no right of renewal of a fixed-term contract but under the Labour Contract Law, after two terms, the employer must renew the contract on the same terms or pay severance.

•    The maximum probationary period for labour contracts between one and three years has been reduced to two months (from three months).

•    The employer must notify the labour union in advance of its decision to terminate an employee and if the labour union believes the termination would be unlawful, it may request the employer not to terminate; the employer must respond to the labour union’s request in writing

•    Employees no longer need to request permanent employment terms after they have satisfied the requirements and permanent employment now appears to be a right after two fixed-term contracts rather than after 10 years of continuous employment.

•    Labour contracts must still be in writing but failure of the employer to sign a contract after one month of commencement of employment will require payment of double salary, and, after one year, will result in a permanent employment.

•    Non-compete agreements are recognised but non-compete period is reduced from three to two years, and compensation for the non-compete must be paid monthly after termination.

•    Liquidated damages payable under training agreements cannot exceed the training costs prorated over the agreed period of service after training.

•    Company rules and regulations are not binding unless negotiated and agreed by the labour union (or if there is no labour union, by employee representatives).

•    Liquidated damages for breach of labour contract are invalid (except for training contracts).

For overseas companies operating in China, there are several troubling aspects to the new rules. The new severance requirements for terminating employees who have been employed for two contract terms will increase the financial burden on employers to terminate employees. It will be particularly difficult for U.S. investors, who are still trying to get their heads around term employment contracts when they are used to the concept of ‘at-will’ employment. Ironically, it will have a negative impact on those employees whose employers decide to shorten contract terms (there is generally no minimum term) to avoid the impact of the new severance requirements.

As multinational companies become increasingly unionised, the increased power of intervention of union representatives in employee relations will be difficult to manage. It is one thing to have union representation in the formulation of labour policies that include the discipline and termination, but it is quite another to require the union’s blessing to terminate an employee for breaching these policies, which can often be a difficult question of degree and where unequivocal evidence of even serious breaches (e.g. dishonesty) can be hard to gather. Although the law says only that the labour union must be notified of terminations, and is entitled to express its views, in other related laws this is understood to mean that consent must be obtained.

There is no doubt that unscrupulous employers (particularly in the construction industry) have used arbitrary ‘fines’ on employees unjustly to penalise employees and reduce their pay. But modest fines are used by many MNCs to prevent serious breaches of discipline, such as smoking around inflammable materials, disabling safety equipment and failure to wear protective clothing. Fines are cut-and-dry and are often regarded by management as the fairest and most effective way to prevent potentially serious breaches of operating discipline.

The Labour Contract Law also leaves many questions unanswered and it will no doubt be followed by many national and local regulations for its “interpretation and implementation”. We can only hope that the gaps will be filled soon but in the meantime, employers and their legal advisors need to get themselves ready based on the law as it stands today.

Edward Epstein is Managing Partner of the Shanghai office of Troutman Sanders LLP, a leading multinational law firm with offices in the United States, Europe and Asia.  He has worked in China for more than 20 years, advising companies in a wide range of industries, including real estate, automotive, retail, insurance, chemicals, packaging, distribution and services. For more information, contact: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Last update : Tuesday, 04 September 2007

Keywords : Labour Contract System, Iron Rice Bowl, Employer, Employee, Rights, Labour Law

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