Employment Contracts in China – To Terminate Or Not To Terminate?

China’s employment laws continue to be a work in progress, but remain a tricky proposition for the newcomer. Our HR clients and professionals establishing themselves in China tend to seek advice from counsel and consultants to clearly understand how to navigate the current framework of regulations. We’ve provided a brief summary of the backdrop behind China’s current framework as well as a closer look into the term and termination rights of employment contracts in China, as an example.

As a bit of background, prior to the 1990’s, employment regulations in China had traditionally been determined on a regional or local level. As it continued its economic development and began the quest to join the World Trade Organisation, China established a set of Labour Laws, enacted in 1995. This set of laws was designed to provide a general standard for employee rights in areas such as promotion, work hours, wages, social security, and others. After it successfully joined the WTO in late 2001 and foreign investment continued to flow into its promising economy, China required even more specific guidelines to standardise employment practices in line with the internationalcommunity (and thus ensure continued investment inflow). These guidelines came in 2008 in the form of the Labour Contract Law, which provides for specific regulations covering the engagement of individual employees with an employer.

Under “common law” countries such as Australia, the United Kingdom and the United States, “freedom of contract” principles also applies to employment contracts, providing for the legal obligations of a specific relationship to be determined by the parties’ agreement, in line with principles of equity and fairness as determined by the courts. While such contracts are held to “industry norms” and “course of dealing” practices, they do not have the mandatory requirements that are specified in China’s more codified Labour Contract Law. It is therefore important for Human Resource departments to be adequately aware of these laws and seek the guidance of counsel familiar with China’s Labour Laws.

As an example, one difference between the labour contract practices of common law and China’s Labour Law is the right to terminate employment. Under Common Law practices, especially in the United States, employment is on an “at-will” basis (unless specified otherwise), enabling EITHER the employee or employer to terminate the relationship, subject to notice period requirements in the contract. In China’s Labour Contract Law, however, employment under an “indefinite” (un-specified) term is terminable “at will” ONLY by the employee, relegating the employer to specific instances in which they may end the employment relationship, such as employee fraud or misconduct, material change in the circumstances of the company, incapacity of the employee due to non-work injury or violation of expected standards during a probationary period.

An example of this occurred for one of our clients (a multi-national firm) who contracted to employ an executive. Subsequent to this but prior to the executive starting, the company went through a major acquisition and as a result the position no longer was available. They were able to nullify the employment contract due to this material change.

While an employer is generally unable to terminate an employee without due cause, the employer can structure the employment term under two, more defined, arrangements, such as “definite” (fixed period) or “piece-meal” (dependent on completion of specified objectives) terms. Utilising these employment structures will allow the employer to retain some control over the period of employment. There are additional circumstances, however, that will allow for these definite terms to become “indefinite”, such as when a fixed term contract has been renewed and there is an intent to enter into the same term for a third time or when the contract is verbal (non-written) and the relationship has existed for more than one year.

For example, if a company has an Organisational Development specialist on its staff primarily to complete a project that has been extended, one more extension of that contract would result in that OD specialist’s employment to be considered an indefinite contract, thus prohibiting the employer from terminating that employee without due cause (as noted above).

It is therefore critical for employers and potential employees entering or currently in the China market to keep in mind the more defined requirements of China’s laws, whether negotiating individual contracts or making larger scale determinations for the organisational framework, Identifying the right employment relationship can be a difficult process in China – it’s important to make sure the details of China’s Labour Contract Laws are fully understood so as to avoid unintended consequences.