Will the New Labour Contract Law of the PRC Increase Cost of Doing Business in China?

Probation Period

The old law gave the employer much discretionary power in deciding the period so long as it does not exceed six months. Also, the employer could terminate an employment contract during the probation period without any reason. However, under the New Law, the probation period varies in accordance with the contract terms. Article 19 of the New Law stipulates that if an employment contract has a term of not less than three months but less than one year, the probation period may not exceed one month; if an employment contract has a term of more than one year and less than three years, the probation period may not exceed two months; and if an employment contract has a term of not less than three years or is open-ended, the probation period may not exceed six months. If the employer needs to terminate the employment contract during the probation period, three days prior notice are needed for termination with cause. This shows that an employer cannot terminate a contract during a probation period because of major changes of circumstances or mass lay-offs.

Open-ended Terms

Before the promulgation of the New Law, employers are usually happy to choose to sign an employment contract with fixed-terms since they can easily terminate it after the one or two years arrangement. Nevertheless, the New Law has detailed provisions on the conditions when an employer has to sign an employment contract with open-ended terms, i.e,

(1) if the contract is renewed for the third time; or

(2) the Employee has been working for the Employer for a consecutive period of not less than 10 years; or

(3) when his Employer introduces the employment contract system or the state owned enterprise that employs him re-concludes its employment contracts as a result of restructuring, and the Employee has been working for the Employer for a consecutive period of not less than 10 years and is less than 10 years away from his legal retirement age.

Compared to agreements with fixed terms, an agreement with an open-ended term will not be terminated upon expiration of contract terms. Also, under agreements with open-ended terms, employees may seek reinstatement if the employer wrongfully terminates the agreement.

Liquidated Damages

Under the New Law, the only condition that an employer can claim for liquidated damages is if an employee breaks a non-competition covenant or a covenant on minimum service of one year. An effective non-competition covenant shall not exceed two years and it is only applicable to employees with confidentiality obligations. Also, an employer needs to pay compensation on a monthly basis during the non-competition term. If an employer is thinking of having a minimum service year covenant, it needs to understand that compensation applies only for those who receive professional or technical training paid for by the employer.

January 1 2008 witnessed the implementation of the New Law. Companies need to face all challenges it poses for human resources management by amendments to their employment contracts, internal regulations and confidentiality and non-competition agreement.