2008: The Year of Broadening Employee Rights and EEO Protections in China

The primary goals of the ECL are threefold: extending employment relationships, increasing the leverage and rights of the individual employee in the workplace, and increasing the authority and prevalence of trade unions in the workplace.

(i) Open-ended employment contracts favoured
As a starting point, the ECL seeks to extend the length of the employment relationship between employees and employers by making fixed-term contracts less desirable to employers and curtailing their viability. Previously, employers were afforded considerable flexibility by employing workers on consecutive, short-term, fixed-term employment contracts. Employers had the option of renewing them annually or choosing not to renew them, generally without incurring any financial liability. That same degree of flexibility has disappeared with the ECL. Now employers must enter into open-ended employment contracts with employees in the following three circumstances, unless the employee requests otherwise:

(a) upon the second consecutive renewal after January 1 2008 of a fixed-term employment contract, unless legal justification exists for terminating the employment relationship;¹

(b) if an employee has 10 or more years of service, upon the employee's contract renewal; or

(c) if an employer enters into a written employment contract for the first time with an employee who has at least 10 years of consecutive service with the employer and is less than 10 years away from the legal retirement age.

If an employer fails to enter into an open-ended contract in one of these three circumstances, the employer must pay the employee double his/her monthly wages starting from the time that the employer should have executed an open-ended contract. Moreover, if an employer fails to enter into a written employment contract with an employee within one year of the employee's date of hire, the employment relationship will become open-ended as a matter of law.

(ii) Termination of an employment contract and severance
An employer or employee may not arbitrarily terminate an employment relationship. Rather, employers must have cause, as specifically provided under PRC law, and employers and employees alike must generally provide notice of termination, unless PRC law provides otherwise.

Enhancing the rights of employees, the ECL expands upon the types of legally permissible grounds under which an employee may summarily quit the company. In addition to the grounds previously set out in the PRC Labour Law, the ECL allows an employee to terminate an employment contract without notice where the employer:

(a) fails to provide the working conditions in accordance with the employee's employment contract;

(b) fails to pay the employee's wages on time and in full;

(c) fails to pay the legally required social insurance contributions for the employee;

(d) has rules and regulations that violate laws or regulations and harm the employee's rights and interests; or

(e) has used deception or coercion as a means to conclude the employment contract.

The ECL grants a new entitlement to severance to an employee who terminates his/her employment under any of these grounds. Hence, these new grounds provide employees with significant new rights in the event that an employer does not perform its obligations with respect to pay, safety and social insurance.

Further, the expiration of a fixed-term employment contract that an employer does not renew now requires the payment of severance, unless the employee refuses to renew the contract and it contains the same or better conditions than the previous contract. This new provision has eliminated the cost-free ability that existed under the PRC Labour Law to let a contract expire as a means to terminate an employment relationship and guarantees that employees will receive some form of payment when an employer terminates their service in this manner.

Although the number of circumstances under which employers must pay severance has increased, the ECL tempers a “highly paid” employee's right to severance by capping the amount of severance that is payable to that highly paid employee in two ways. The calculation of severance is generally based on an employee's tenure and average monthly salary. First, the ECL places a ceiling on the amount of salary that is subject to severance. If an employee earns more than three times the average monthly wage of employees for the previous year in the area where the employer is located, then the severance rate is capped at that amount. Second, the employer need not pay more than 12 months of severance for such employees.

The calculation of severance has become a complex exercise under the ECL. As a basic matter, entitlement to severance varies according to the grounds on which an employer ends the employment relationship. Severance is not always dependent on the employee's full tenure with the company. In contrast, for many new grounds under which severance payments are required, tenure is measured as of January 1 2008, the effective date of the ECL. Further, the cap on severance, which is discussed above, will not apply to severance entitlements that were accrued before the ECL's effective date. This essentially creates a two-tiered severance calculation system, which preserves an employee's severance entitlement under the pre-ECL laws and regulations.

The ECL also provides employees with greater rights in the face of unjustified terminations. If an employer terminates an employee without legal justification, the ECL requires the employer to reinstate the employee at the employee's request. If that is “impossible”, the employer must pay the employee double the severance specified under the new law. For employers, having a defined formula to calculate the maximum financial penalty for unjust dismissals is quite helpful. Nonetheless, before employers may use this option of paying double severance as a means to guarantee a termination from a financial standpoint, they should consider the risk of a potential award of reinstatement because the law does not define what makes reinstatement “impossible.”

Data Privacy
The strengthening of individual employee rights extends to data privacy as well. The ECL provides that the employer may only require an employee to provide basic information directly related to the employee's employment contract. Under Article 13 of the Employment Service and Employment Administration Regulations, effective as of January 1 2008, an employer must keep its employees' personal data confidential and must obtain an employee's written consent before it may make the employee's personal data public. Nonetheless, the regulations contain no guidance as to what constitutes “personal data.” Hence, while these provisions promote the protection of data privacy, the question of what data is protected remains.

STRENGTHENING OF TRADE UNIONS – THE EMPLOYMENT CONTRACTS LAW
With the privatization of many companies in the PRC, disputes between employees and employers have become more common. In order to preserve harmony in the workplace and give employees greater rights in privately-owned enterprises, the PRC government is using trade unions as one means to establish greater co-determination by employees in the companies for which they work. Indeed, the ECL increases the pressure on companies to establish a trade union. The plain language of the new law assumes that a trade union already exists in every company.

The ECL grants trade unions increased authority in the operations of companies, particularly through Article 4. Article 4 provides that employers must formulate rules and regulations that govern the workplace and must develop these internal rules with the involvement of the trade union. Further, Article 4 places an obligation on employers to consult with the trade union, listen to its opinions and negotiate with it on the formulation or implementation of the employer's policies that have a direct bearing on the “immediate” or “vital” interests of the employees. Topics that fall under this category of “immediate interests” include compensation, benefits, working hours, leave, holidays, job safety, social insurance, training, discipline and work quotas. Thus, Article 4 suggests that in order to bind employees with a new or amended policy that falls under Article 4's wide umbrella, a company must satisfy the consultation requirement. An employer faces the risk that if it does not comply with the consultation requirement, an arbitration commission or court may deem the policy unenforceable.

The full effect that this consultation requirement will have on the overall operation of employers in the PRC remains unclear. Only time will tell how the trade unions will use this increased participation in areas traditionally left to the absolute discretion of management.

STRENGTHENING OF EMPLOYEE EQUAL OPPORTUNITY RIGHTS – THE EMPLOYMENT PROMOTION LAW
The EPL aims to improve and increase employment opportunities by curtailing discrimination in employment practices, including hiring and recruitment. It declares that all “workers shall be entitled to the right of equal employment.” Essentially, it seeks to protect applicants and employees against discrimination on the basis of “ethnicity, race, sex, religion, etc.” Notably, the EPL specifically includes the term “etc.” in the list of categories protected against discrimination. Presumably, the use of the term “etc.” signals an expectation that local authorities throughout the PRC will retain the discretion to interpret the EPL to include other protected categories on an ad hoc basis. The ECL further identifies other protected categories that include women, disabled persons, infectious disease carriers, and rural workers. Based on the EPL, employers may not vary employment conditions or impose restrictions on recruitment based on any protected category, save for certain types of jobs which the government regulates (i.e., prohibition of women from working in underground mines or lifting heavy items).

The EPL's prohibition concerning discrimination against infectious disease carriers, which includes Hepatitis B carriers, signifies the PRC government's acknowledgement that Hepatitis B carriers, who are otherwise healthy and able to work, need specific protection. According to some reports, there are 120 million Hepatitis B carriers in China – nearly 10% of the population. It has been quite common in the PRC for employers to ask potential hires about their medical history or administer medical check-ups to determine if candidates are carriers of Hepatitis B and make hiring decisions based on the results. Article 30 of the EPL codifies the prohibition against an employer rejecting a qualified candidate on the basis of his/her status as a carrier of an infectious disease.

With respect to sex discrimination, the EPL provides that “women are entitled to equal labour rights as men” and may not be refused employment based on their sex. Restrictions on female employees in relation to marriage and childbirth are expressly prohibited by the EPL. For example, in the past some companies penalized female employees who got married (which entitled them to paid marriage leave) or had a baby (which entitled to them to paid maternity and nursing leave) during the first few years of their employment. The EPL expressly prohibits such practices. To the extent that a company does continue to maintain such restrictions on its female employees, presumably the ECL's provision permitting an employee to resign without notice and with severance if an employer's rules violate the law and harm the employee's rights and interests would apply.

The EPL also prohibits discrimination against migrant workers by seeking to eliminate discrimination based on a worker's origin. In recent years the large number of workers who migrated from rural areas to urban areas in search of jobs has exacerbated the occurrence of discrimination on the basis of worker origin.

Disabled persons are also afforded greater rights and protections under the EPL. The EPL encourages enterprises to create new positions, supports the employment of unemployed and disabled persons, and grants preferential tax treatment to enterprises that employ a specified ratio (which has not yet been released) of disabled persons.

The EPL signifies the PRC government's desire to curb discriminatory practices. While the enforcement measures and penalties for noncompliance are general and vague, the new law does arm individuals with the right to bring a lawsuit to enforce their EEO rights. The EPL also encourages labour unions, communist youth leagues, women's associations, associations for the disabled and other social organizations to ensure the EEO rights of employees. While it may be unclear as to whether the PRC government will increase enforcement activity with respect to unlawful discrimination, companies should expect employees and/or organizations to use lawsuits as a way to enforce the rights and protections afforded them by the EPL.

In conclusion, the amount of change in the PRC employment law regime in 2007 was unprecedented. Undoubtedly, the establishment of myriad, new national employment laws in 2008 strengthened employee rights in the workplace. Employers and employees alike are reviewing these developments and endeavouring to digest their impact on current policies and procedures. Enforcement and compliance will likely be a gradual, evolving process as these new laws and regulations leave significant room for interpretation. This is particularly true with respect to the ECL, as the national implementing regulations continue to be outstanding and the issuance of local implementing regulations will follow thereafter. Thus, the degree of enforcement and compliance throughout the PRC will remain cloudy, as there are numerous variables that still need definition.

*About the Authors

K. Lesli Ligorner, a partner at Paul, Hastings, Janofsky & Walker LLP, is based in the firm's Shanghai office and chairs the firm's Mainland China Employment Practice. Monica Lynn Debiak, an associate, is based in and chairs the employment law practice in the firm's Beijing office.

Endnotes

1. See ECL, Articles 14(3), 97. It is our understanding that the interpretation of this provision, at least in some parts of the country, will specifically exclude the decision not to renew a fixed-term employment contract as a basis to end the employment relationship, thus requiring employers to enter into open-ended employment contracts upon the second renewal date, unless statutory cause to terminate the employee exists.