Employment regulations may prove a burden for employers

    Many lawyers are concerned that local governments' own interpretations will, in effect, create different labour rules across the country.

    “Local authorities are entitled to interpret laws. But the problem in the past was that the local regulations were not just interpretations of the principles of the national law. In some cases, they contradict the national law, and that's where the problem is,” Durham says.

    If the same thing happens to the Implementing Regulations, it would completely oppose one of the Employment Contract Law's key objectives – to unify labour regulations in China.

    Pattie Walsh, partner at Minter Ellison Lawyers, says that one of the Employment Contract Law's goals is to “clarify the legislative environment, making it more consistent around the country.” Local regulations have been too often inconsistent in the way they implement the national law. The Guangdong guiding opinion of the Employment Contract Law² is one example of how provincial government's rules show a particular interpretation of the national law, Walsh says. “National law prevails over local regulations. But at the moment there is a great deal of scope for local regulations to differ from region to region.”

    This inconsistency will become a burden to employers who have companies in different cities and who are trying to meet the various local requirements.

Unclear guidance on contract renewal

One of the uncertainties in the Implementing Regulations that confuses and concerns employers is the lack of clear guidance on the requirements of fixed-term and open-ended contracts.³ According to the Law, after signing two fixed-term contracts in succession with employees, employers must provide open-ended contracts, unless they are “shown not to satisfy the conditions of employment” during the probation period or “seriously violate [the company's] rules and regulations”.

    Durham finds the rules ambiguous: it is unclear whether employers have a right not to renew a contract at the end of the second fixed-term contract.

    “What we originally thought is that at the end of the second fixed-term contract employers could still consider whether they would like to offer the employees open-ended contracts,” he says.

    But the Labour Bureau's interpretation is that employers do not have the right not to give open-ended contracts unless the specific circumstances mentioned above are found to be the case. Durham says it is disappointing that employers only have the first fixed-term contract's period during which to decide whether they want to terminate the workers or to keep them. Many organisations, including Foreign Enterprise Human Resources Services (Fesco) – a temp staffing agency in Shanghai – had been hoping for guidance on this issue in the Implementing Regulations, but they do not cover it at all.

    “You need to be very strategic about it,” Durham says. “Originally, most lawyers thought employers could have two contract periods for performance evaluation. But that doesn't seem to exist. Employers need to be very careful about it.”

    But not all counsel find the regulations unclear. Wilson Sung, of counsel at Jones Day, says that the rules have made it obvious that employers do not have the right not to issue an open-ended contract after the second fixed-term contract. What is vague, he says, is how to define the length of a fixed-term contract.

    For example, when a local company is merged with an international company, employees might be asked to sign a new contract with the new employer. In a situation like this, whether the new contract is defined as the first fixed-term contract or the second is unclear.

    It is crucial, says Sung, for employers to decide the time period before they sign the first fixed-term contract with employees. After the contract is signed, any amendments to the terms would immediately switch the contract to the second fixed-term contract.

    “Last year, we explained this problem to our clients,” says Sung. “They are very concerned about this. Most of them don't want to get to the open-ended contracts so quickly because they believe that would put them under a lot of pressure.”

Definition of a temporary worker

Meanwhile, temporary employment agencies, such as Fesco, and representative offices of foreign companies have been paying close attention to how temporary workers are defined in the final version. According to Article 66 in the Employment Contract Law, “placement will apply to temporary, ancillary or substitute positions”. Such definitions were then further expanded in the Draft of Implementing Regulations issued in May, stating that “organisations or staff agencies should employ labour dispatch workers on primary business, temporary posts (not exceeding six months) or positions whose original post-holder is on study leave or holiday”.

    However, the final version of the Implementing Regulations provides none of the definitions mentioned in the draft. The temporary worker has returned to having an undefined status.

    “The final version did not solve the problem on the placement section,” says Jay Chen, an associate at Fangda Partners. “The draft had originally clarified the definition of this subject, but now the final version has taken it out. This will affect the agencies in terms of their hiring of temporary workers.”

    But Sung says the fact that the government removed the definitions in the final version is actually of benefit to employers and temp agencies. A temporary worker can in fact have more definitions than the three provided in the draft, and it is difficult for an employer or temp agencies to hire a temporary worker who only satisfies the three definitions listed in the draft.

    “The definitions of a temporary worker were too general and broad,” says Liang Yanling, a partner at King & Wood. “It would be more efficient to let local authorities issue their own interpretation according to their own local needs.”

    It is also unclear whether or not a company is allowed to engage part-time employees. According to the Implementing Regulations, “a temp agency may not recruit temporary workers on other than a full-time basis”. Any employee who works four hours or less per day or 24 hours or less per week is considered a part-time worker. However, according to one partner of a PRC law firm, a multinational company is allowed to use an agency to hire a part-time worker for them.

    “In a discussion with a legislator of the National People's Congress in September, I asked him if a multinational company can use a temp agency to hire a worker for them on part-time basis. The legislator returned with an answer: 'Sorry, we didn't think about this question. But I think it is ok.'”

    With the permission of the legislator, the lawyer, speaking at the China Law & Practice China Summit, said that a multinational company may use temp agencies to hire part-time workers. However, the legislators' feedback shows that the government did not consider the provisions thoroughly when finalising the Implementing Regulations.

Increased termination burden

The government also failed to carefully consider how the terms of severance pay will affect employers.

    According to Article 27 of the Implementing Regulations:

“The monthly wage for the purpose of the severance pay specified in Article 47 of the ECL shall be paid based on the wages payable to the worker, including monetary income such as his/her hourly wage or piece wage and bonuses, allowances and subsidies. If the average monthly wage of a worker during the 12 months preceding the termination or ending of his/her employment contract was lower than the local minimum wage rate, his/her monthly wage for the purpose of severance pay shall be calculated based on the local minimum wage rate. If the worker has worked less than 12 months, his/her average monthly wage shall be calculated based on the actual number of months that he/she worked.”

    The lawyer says that the definition in Article 27 is a serious issue for employers, as it significantly increases employers' expenses. “It's not only based on the employees' basic salary; it includes everything: allowance, bonus and compensation,” she says.

    The legislator at the National People's Congress had said that they did not consider the consequences of the impact on employers. “We don't understand that it will happen in practice” was the legislator's answer, according to the PRC-based lawyer. But the legislator did come up with a solution: should a labour dispute arise, another regulation will need to be promulgated to remedy the situation. “Hopefully, the law will not be enforced so strictly,” the legislator said.

    “Employers must think twice about this definition before taking any action,” says the lawyer.

Local government takes up the task

Though most lawyers would agree that the Implementing Regulations are not totally clear, not all of them think that the government is putting the burden on employers. Chen Yan, a partner at Wang Jing & Co, says that the Implementing Regulations have in fact provided a lot of details to lawyers, and that it is impossible for the Implementing Regulations to explain every single rule in the Employment Contract Law. That is, the rules have not changed any core meaning or principles in the Employment Contract Law; they have only strengthened them.

    “I think the way the government chose to clarify the issues was to select those that were controversial and that had led to many debates. Others that had not been clarified were not crucial,” she says.

    While the Implementing Regulations are helpful to employers on some levels, Durham says that the final version is not dramatically different to the draft. “Most of them are just rewritten again in a slightly different order. They basically just take the provisions and write them all down again,” he says.

    So uncertainties remain. Though this is the final version of the Implementing Regulations of the PRC Labour Law, it is not the end of the story. Local authorities will take up the task of turning them into different provincial rules. The lack of consistency will be a significant challenge for employers who have companies in different locations. They will have to pay close attention to the legislative differences across provinces and make an effort to comply with local practices.

    “I am sure that this will leave a big question mark for lawyers and employers,” says Chen.

Endnotes

1. See PRC Employment Law in CLP July 2007

2. See Labour Law: State Council delays, as Guangdong makes it better in CLP September 2008

3. See Impact of the Latest PRC Labour Law Legislation on Existing and Newly Concluded Labour Contracts in CLP September 2008

Clarification of the Implementing Regulations of Employment Contract Law

Issue 1

The Regulations clarify that the “10 years of continuous service” by an employee, as mentioned in the ECL, is to be calculated as of the hiring date (Article 9)

Issue 2

Under the ECL, it was unclear which local rules apply to an employment relationship: those of the location of performance of the employment contract, or those of the location of the employer's registered address

    The Regulations provide that the former rules apply by default to the implementation of the standards for (among others) the employee's minimum wage, labour protection, working conditions and protection against occupational hazards, as well as to determine the average local monthly wage for employees in the preceding year. However, if the corresponding standards of the location of the employer's registered address are higher, and the employer and employee agree to adopt those standards, then such agreement will prevail (Article 14)

Issue 3

The Regulations clarify that fees for professional or technical training will include training fees that are documented by receipts, travel costs incurred during the training and other direct costs incurred on behalf of the employee in connection with training (Article 16)

Issue 4

The relationship between the service term of an employee and the term of a contract has now been clarified. Where a contract expires before the relevant service term, it will be extended until the service term ends. Where the parties have agreed otherwise, such agreement will prevail (Article 17)

Issue 5

The Regulations integrate the conditions for terminating contracts. While this does not alter the related provisions of the ECL, it makes them clearer and easier to understand (Articles 18 and 19)

Issue 6

Termination of all three types of contract (fixed-term, open-ended and a contract for the completion of specific task) triggers severance obligations under the Regulations. This includes where a contract for the completion of a specific task expires (Article 22)

Issue 7

The Regulations specify the following five circumstances under which an employee must compensate the employer when a contract with an agreed service term is terminated:

(1) the employee has committed a serious violation of the employer's policies and rules;

(2) the employee has committed a serious dereliction of duty or has engaged in embezzlement, thereby causing serious damage to the employer's interests;

(3) the employee simultaneously established an employment relationship with another employer, thereby seriously affecting his ability to perform work duties, and refused to rectify the situation following a request to do so from the employer;

(4) the contract was concluded or modified against the true intentions of the employer through the employee's use of fraud, or coercion, or through his exploitation of the unfavourable position of the employer; or

(5) the employee is under criminal investigation or being prosecuted. (Article 26)

By Isabelle Wan, partner at TransAsiaLawyers