Local labor rules come into conflict with new national law

September 27, 2007 Posted by China Briefing Reading Time: 2 minutes

SHANGHAI, Sept. 26 – Currently in China, labor contracts are regulated by the Labor law of the PRC and over 25 separate employment contract regulations by individual provinces and cities. These current regulations and rules are now being challenged by the recently passed Contract Labor, set to take effect January 1, 2008. Here we look at the differences between the labor regulations already on the books in Shanghai and the new law.

Written contract
Under Shanghai’s rules, all individual employment contracts must be concluded by written contract for each employee. The Contract Labor law strengthens this position by entitling employees who are not given a written contract within the legal term limit double wages per month to an open-term contract.

Less flexibility for the employer
Compared to Shanghai’s rules, the national law shortens the maximum allowable probation period for new employees, reducing flexibility for employers during the probationary period. However, during this period, employers have more flexibility in terminating their relationship with the employee.

Based on the new labor law, there are three types of labor contracts: fixed-term contracts; open-term contracts; and employment contracts with a term to expire upon the completion of a certain job. The employer should offer the employee an open-term contract under certain circumstances such as concluding a renewal of employment contract after said employee has signed two prior fixed-term contracts with the same employer.

Less liability for the employee
The maximum term for non-competition restrictions set out by the new labor law – two years – is shorter than the regulation of the current rules in Shanghai – three years. In addition, the application of non-competition restrictions is limited in key employees such as senior management, senior technicians, and other employees who have confidentiality obligations.

Termination of contract
It’s well known that employers may not terminate an employee “at-will.” However, compared to Shanghai’s current rules, the Contract Labor Law stipulates additionally that the employer can terminate an employment contract if the employee has additionally established an employment relationship with another employer.

As to the amount of termination payment, the new law adds limits on the calculation by stipulating the maximum amount. This maximum amount is absent in the current rules for Shanghai.

Finally, please keep in mind that the Contract Labor Law will be not be effective till January 1, 2008 which means that current employment contracts, signed under the current rules in Shanghai or elsewhere in China, will still be legal and enforceable until their termination.

For business advisory services, assistance establishing, structuring or operating a business and contract drafting in Shanghai, please contact Olaf Griese in the Shanghai office of Dezan Shira & Associates at shanghai@dezshira.com, tel. [21] 6358 8686.