China’s Labour Laws
You have found the perfect employee, but what next? We will help you navigate through the Chinese Labour Laws to make the process easier for you.
According to the Chinese Labour Laws, a foreign firm without a registered entity in China cannot employ staff, whether local or foreign. They can only do so through a WFOE. Representative Offices can outsource hiring their staff through HR service providers, such as FESCO or CIIC, which, of course, will come at a price.
If you do not have a registered business in China, you can hire through your HQ or regional office, such as a subsidiary in Hong Kong but only on a contractual consulting basis. The upside in this case is that the arrangement would not be under Chinese Labour Law and thus not subject to restrictions on probation, notice periods, jurisdiction, etc. A clear disadvantage to the employee is, however, that he or she would have a complicated tax situation and will not be part of the social security system. For this reason, a consulting contract is only a temporary solution. Please note that if you hire a non-Chinese national under a consulting agreement, China will not provide a working permit to him.
In China, it is common practice for employees to sign an offer letter, which acts as a binding agreement, before the official contract. The employment contract is often times only signed on the first day of work but no later than one month after the on-boarding.
We recommend having two variants of the contract, one for senior level positions and one for the rest. This is necessary so you can implement stricter measures on non-competition and non-disclosure clauses, overtime, rights and obligations depending on the job title. Obligations of a senior level employee may include being the beneficiary of a company bank account or handling the company stamp, a task that comes with great legal responsibility. Never underestimate the power of the company stamp: with it, a person can open and close bank accounts and sign off on contracts and agreements even when he or she is not a major decision maker, a loophole that is easily abused.
Non-competition clauses, on the other hand, should be used only in specific cases and in critical industries. Compensation must be paid on a monthly basis, even if the former employee has found a new job. In Shanghai, this amount is at 30% of the monthly salary. These clauses are limited to a maximum of 2 years after contract termination. Non-disclosure and confidentiality terms in employment contracts, on the other hand, are highly recommended and should come with a high penalty.
Why the Employee Handbook is Important
In general, China’s Labour Laws are employee-friendly, meaning the employer needs to make sure there is no room for interpretation in his or her terms of employment. This can be achieved through the Employee Handbook, which carries substantial meaning, especially when an employee is terminated (more info below). For example, if you fail to clearly state your rules on overtime in the Handbook, your employee could claim payment from you. Don’t forget to cover the following in your Handbook: working hours, leave policies, travel expenses, chop & signature rules, bank account access, compliance guidelines, IT policies, and contract termination.
China’s Labour Law only provides a limited number of scenarios that allow an employer to legally dismiss his or her staff. While some situations allow for immediate termination of employment without severance, others require a 30-day notice period or 1 month’s salary and severance. Some reasons for dismissal without severance include: unsatisfactory performance during probation, criminal activities, or not complying with company rules (Employee Handbook!).