Q&A: Labor Disputes and Labor Law Compliance in China

By Dezan Shira & Associates

Labor disputes often arise due to companies underestimating China’s strict labor laws, or even being unaware of them in the first place. Keeping up to date with China’s labor regulations and taking the proper precautions to prevent any disputes from occurring can save employers immeasurable hassle and stress.

When companies first arrive in China, they are eager to hire staff and start their business operations. Unfortunately, this eagerness for hiring staff can lead to the company not taking the correct measures when drafting their employment contracts. Provisions that should be included in employment contracts that are often overlooked include proper overtime rules, codes of conduct, performance standards, promotion standards, KPI, etc. Ensuring that the contract includes all the relevant information will go a long way in clearing up any misunderstandings between the employee and the employer, and can prevent costly labor disputes from occurring. It is important to remember that in China, in the event of a conflict, the burden of proof always lies with the employer.

Considerations for labor dispute mitigation

An effective way of stopping disputes before they appear is by preparing a staff handbook that contains the business’ codes of conduct and regulations. Staff handbooks, while not legally required, can provide companies with an excellent layer of protection. If written in a clear and concise manner, in addition to being signed by the employee, it will help make the employer not liable for any issue that is covered by the handbook. It should include regulations concerning NDAs, work hours and overtime rules, behavior standards, discipline procedures, etc.

Implementing a system that keeps track of work hours and overtime as well as keeping in compliance with China’s labor laws concerning work hours will help eliminate liabilities facing an enterprise. In addition, keeping track of staff’s taken and untaken leave is imperative to ensure that there are no blind spots if a legal case arises.

Terminating a contract in China is no easy task. If a manager wishes to end a contract, it is important to strictly keep in accordance with China’s labor policies. Before terminating an employee’s contract, disciplinary measures must be given out so that the employee understands not to commit another infraction, and in cases of incompetence, are to be given time to correct their performance. If and only when repeated offenses occur can termination be an option. Dismissal of an employee must be executed in compliance with China’s labor laws, otherwise not only will the employee have legal ground to file a lawsuit, but the company may also be fined by the Chinese government. From 2017 onwards, any enterprise that violates China’s labor regulations will have their offences made public.

This information and more was covered in our “How to Avoid Labor Disputes” webinar hosted by Senior Associate Stephen O’Regan, which can be heard here.

 Additional questions from the webinar are:

Q: How is compensation calculated for terminating an employee?

A: The compensation/severance amount is calculated as one month’s payment per year of employment (calculated as the average salary over the past 12 months). Severance payments are capped at three times the average monthly salary in the given location. It is important to check with your local bureau to be aware of what the regulations are for this issue in your specific region.

Q: Can we agree that the notice period for the probation term be one month?

A: Yes, if both parties agree on the probation term being one month and have it included in the initial employment contract, then the notice period can be one month. Please make sure when drafting your employment contracts that the notice period for the probation term be clearly stated so as to avoid any disputes from occurring.
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For more information on probation periods, please click here.

Q: When you talk about documenting efforts to retrain employees and provide them with feedback when someone is performing poorly, can this all be done via email, if there is a ‘read receipt’ included?

A: Email can be used but official written letters addressed to the employee are easier to enforce. The employee would be able to argue that he or she misunderstood the email, or was not aware of it due to technical issues with their computer, but if done with an official document requiring their signature, then the employee will have no legal recourse.

Q: Annual leave: are working years counted as (i) working in the company or (ii) general working experience?

A: It is counted as general working experience. If an employee has worked at a company for 20 years, and wishes to switch companies, they should be able to apply for annual leave according to their general working experience. We advise the employee to clear this issue up with their new employer before signing the employment contract.

For more information on statutory leave, please click here.

Q: Is the annual leave different if the contract is a secondment contract?

A: It will remain the same, because the same laws apply to both contracts.

Q: Can I provide monetary sanctions in the employees’ handbook (e.g. by deducting amounts of money from the employee’s salary in case of a minor violation)?

A: Sanctions can be implemented. E.g. if you are frequently late, pay gets docked five percent. It is important that the infractions be clearly defined to avoid confusion, and that the details of the sanctions be explained so that the employer is protected.

For more information on how to have staff handbooks define offences, please click here.

Q: For terminating a contract, would it be deemed acceptable if done through a mutual agreement between the employer and employee?

A: Mutual agreements are acceptable if both parties are in agreement and if the content is fair to the employee. The mutual agreement should be written on an official document and be signed by both parties stating that they understand the agreement.

For more information pertaining to these questions, please view our HR guides, which can be found here.

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