China question: What are some of the key things I should look at when drafting employment contracts?

Timing

PRC law requires that a written employment contract must be signed within one month of commencement of employment, otherwise, the employee may claim double monthly salary from the second month until a written contract is signed. Moreover, if the unwritten contract period exceeds one year, then an open-ended employment relationship would be deemed to have been established between both parties (the double salary will cease accordingly). Therefore, it is important for the employer to sign an employment contract with the employee within the one month period.

The policies of an employer, such as the employee handbook and disciplinary rules, are the most important basis for the employer to discipline its employees (immediate termination of employment is a type of disciplinary action which can be applied as per the specific provision of the employer's policies). However, these policies cannot bond the employees unless they have been provided to them, and in case a dispute arises, written receipts signed by the employees would be the most direct, and in many cases, the only evidence to prove that such policies have been provided to the employees. It is important that employees are required to sign off company policies at the same time as signing employment contracts.

The last thing is record keeping. In most, if not all, labour dispute cases, employers are required to shoulder the burden of proof, especially in cases regarding termination. Therefore, it is important for an employer to keep its employees' files (including employment contracts and signed receipts for policies), for the purpose of defending itself in any legal proceedings.

Zhou Bo, Fangda Partners, Shanghai

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The international perspective

On July 1 2013, the amendments to the PRC Employment Contract Law (中华人民共和国劳动合同法) (ECL) took effect. These aim to restrict the use of agency workers. As a result, we expect that many companies may choose to convert agency workers to direct hires to comply with the amendment.

Under the ECL, an employer must enter into an employment contract with a full-time employee one month after the employee reports to work (no employment contract is required for part-time employees). If the employer fails to do so, the employee may claim double wages as statutory damages for absence of a written contract.

Content of a contract

The ECL requires that an employment contract include certain items, including information regarding term, scope of work and location, compensation, working time and leave, compensation, social insurance and occupational protection, work conditions and protection against occupational diseases, as well as details regarding the employer and employee.

Usually, an employment contract is either a fixed-term contract or an open-ended one. Because of the difficulty in terminating an employee in China, employers prefer to have fixed-term contracts with employees so that they may choose to terminate employees by non-renewal of the contracts upon expiration. Under the ECL, an employee is entitled to an open-ended contract after he or she has two consecutive fixed-term contracts with the same employer or has consecutively worked for the same employer for 10 years or longer. When converting an agency worker to a direct employee, because the staffing agency and the user entity are separate legal entities, legally speaking, the user entity still may enter into a fixed-term contract with the employee even if he or she already has signed two fixed-term contracts with the staffing agency.

The employment contract should specify under which working hours system the employer works. There are three working hour systems under PRC law, standard, flexible and comprehensive. Standard working hours are similar to non-exempt status under US law. Under this system, employees' working hours are eight hours per day and five days per week. Employees are entitled to overtime pay or compensatory time-offs if they work overtime. Flexible working hours are similar to the exempt status, under which there are no limits for work hours and the employees are not entitled to overtime pay. Only senior managers, salespersons and out of office workers can be subject to the flexible working hours system. The comprehensive hours system is where an employee's work hours are calculated based on a given calculation cycle, so on a weekly, monthly, quarterly or yearly basis. Employees are not entitled to overtime unless their work hours in the cycle exceed the statutory hour limits.

Although not legally required, an employment contract usually includes other items like probation period, confidentiality obligations, invention assignment requirements, personal data protection, non-solicitation and non-compete. The ECL allows an employer to subject an employee, who is a senior manager, a senior technician or has access to trade secrets, to a maximum of two years' non-compete period after the end of employment. In return, the employer is required to pay non-compete compensation to the employee on a monthly basis during the non-compete period. The non-compete compensation generally should not be less than 30% of the employee's average wages. Some provinces, like Jiangsu and Tianjin, require a higher compensation amount. Therefore, it is important to check with the local regulations to ensure the proper compensation amount.

Recognition of service years

When converting an agency worker to a direct hire, it is critical that the employment contract recognises the worker's previous service years with the staffing agency. If the user entity fails to do so, the worker might have a claim against the staffing agency and user entity for severance for termination of the employment contract with the staffing agency.

Language and execution

The ECL does not require that an employment contract be written in Chinese, but local regulations in some provinces, for example in Jiangsu and Shanghai, do require an employment contract to be written in Chinese. These local regulations usually allow an employment contract to be written in a foreign language at the same time, but the Chinese version prevails in case of conflicts.

Note that in some cities in China, employers are required to file the employment contract with authorities or, at least, have employment contracts verified by local labour authorities. As such, employers should confirm whether such filing or verification is required in the cities in which they are located.

Gordon Feng and Erika Collins, Paul Hastings, Shanghai