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ChinaBriefing 200712 en
ChinaBriefing 200712 en
December 2007
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In This Issue:
Background to the new Labor Contract Law effective January 1, 2008 New Employers Liabilities New Contractual Obligations written forms, probation periods, condentiality clauses, noncompetition, xed & open ended contracts, part-time employment and payment of wages New Severance & Termination rules What Foreign Invested Enterprises need to prepare for with existing and future staff
Plus: The Best of the China Brieng Blog our round up of all the past months need-to-know China business news
Dec
Welcome to the December issue of China Brieng and a timely examination of exactly what needs to be done to prepare
Chris Devonshire-Ellis Senior Partner, International Practice, Dezan Shira & Associates; Publisher, China Brieng
your China invested business for the new labor law regulations that kick in January 1, 2008. Foreign investors must get themselves into compliance and be prepared so they dont inherit potentially huge increases in overheads and liabilities. We provide a background to the new law, in addition to the implications, and importantly, what you need to do beforehand to prepare for it. The subject is a huge topic that affects every business in China. If you need assistance with preparing for these changes then please contact the rm Dezan Shira & Associates urgently at HR@dezshira.com. For ongoing up-tothe-minute comment of matters affecting your China business, please also visit our award winning China Brieng blog at www.china-brieng.com/blog Meanwhile, in what has been a watershed year for many businesses in China, may we wish all clients of Dezan Shira & Associates and readers of China Brieng a Very Merry Christmas and a Happy New Year. Well see you in 2008!
Alberto Vettoretti Managing Partner, China Practice, Dezan Shira & Associates; Vice-Publisher, China Brieng
Chris Devonshire-Ellis
Alberto Vettoretti
Sabrina Zhang
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All materials and contents 2007 China Brieng Media Ltd. No reproduction, copying or translation of materials without prior permission of the publisher. Contact: Editor@china-brieng.com
hinas economy is booming and a more active participation in the global marketplace requires stricter laws and regulations in compliance with world standards for working and employment conditions. Chinas labor law of 1994 provided a basic framework for employer and employee relationships. It was meant to be a guideline for companies in order to protect workers from poor treatment and hazardous working conditions. However, our experience has shown that these rules are poorly enforced, particularly in rural areas. In spite of existing labor laws, companies still underpay their staff, require them to work for extreme periods of time without rest and ignore health and safety measures. Many cases in which we have conducted due diligence with companies in China, we have come across non- or under-payment of wages or social welfare. This can be especially dangerous when acquiring companies or parts of companies as one may acquire all the liabilities as well. Foreign investors have to be in compliance with all the laws and regulation of the PRC even if local Chinese companies are not. Foreign investors are the number one target of legal and nancial control mechanisms in China. Before the Chinese authorities check local companies' compliance issues, they will check the foreign investor. Therefore, a foreign investor has to make sure they are in compliance with Chinas often changing laws and regulations. If you are not sure that you are in compliance, you are well advised to work with someone who can help. Make sure that your Chinese documents are in compliance with all laws and regulations. You are in China, only the Chinese version is the binding one.
TAX
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the Labor Contract Law of the Peoples Republic of China, set to come into effect January 1, 2008. The law applies to all employers within the People's Republic of China. In addition to commercial enterprises, it must be followed by government agencies, public institutions and social organizations. It governs the establishment of employment relationships as well as the performance and termination of employment contracts. The provisions prescribed by the law are meant to discourage employers from signing short-term labor contracts and will have a direct impact on employment costs. The aim of the new law is to improve the employment relationship, clarify rights and obligations of employees and employers and provide more stability and security for the employees in the PRC. In this article we will mainly focus on the implications for foreign invested enterprises (FIEs). The law will considerably change the requirements for both employer and employee and requires many companies, both foreign and domestic, to review their labor contracts. The new labor law is part of the general trend to unify legislation relating to domestic Chinese and foreign invested enterprises, although some people fear that the fast, and to a high degree compliant, implementation of the law by FIEs might lead to disadvantages versus local competitors.
Employers liabilities
Employers are liable for damages caused by invalid contracts, lack of mandatory minimum content in labor contracts, violating laws by company rules or failure
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to issue termination certicates. Penalties can be imposed by the authorities in cases where the employer keeps the employees ID card or collects security deposits from their employees, and when salaries are not paid in time or below the locally stipulated minimum levels. The same is true of nonpayment or no additional rest time for overtime work and nonpayment of severance pay after termination or expiration of labor contracts. Items that must be included in the labor contract company name, address and legal representation employees name, address and personal ID number term job description and location working hours, rest and leave compensation working conditions workplace safety/protection protection for job-related hazards social insurance
concluded for 12 months or more after commencement of work, the contract is deemed to be open-ended. Oral contracts are only permissible for part-time labor.
or failed to pay remuneration on time and in full). The employee may also still be able to ask for severance. An employer is not required to give a written notice prior to the termination of the contract during the probation period. Termination of contract is only possible however, if the employee does not meet the recruitment requirements. The employer will have to explain the reasons for dismissal to the employee. In that case no severance pay is required. However, the situation is different if the employee wants to terminate the contract during the probationary period: The employee is obliged to give a threeday prior notice to the employer, before terminating the contract. If the labor contract is project based or has a xed-term of less than three months, there can be no probation period.
Probation period
The parties can agree on only one probation period that cannot be extended. The law requires employers to pay their employees at least 80 percent of their contractual salaries and not less than the locally stipulated minimum salary. The maximum probation period is based on the term of the contract, thus: no probation period applicable if the contract term is less than three months one month, if contract term is between three months and less than one year two months, if contract term is between 12 months and less than three years six months, if contract term is more than three years Currently a lot of one-year xed-term contracts have a probationary period which amounts to three months. This will not be possible under the new law. The probationary period cannot be longer than one month for a one-year xed term contract; that is the maximum. But the situation chances completely with one additional day. If the term of the xed term contract is one year and one day the probationary period can than be two months. In case the employer fails to comply with the statutory probation periods, compensation following the salary standard applicable to the employee after the probation period has to be paid. Under certain conditions the employee may terminate the employment contract with immediate effect (e.g. if the employer failed to provide the working conditions as stipulated in the employment contract
Written forms
Make sure that you have written contracts. A written contract must be signed by both parties to establish the employment relationship. If the employer fails to enter into a written contract with an employee for more than one month but less than 12 months, the employer shall pay the employee twice the salary for every month without a written contract. As stated in Article 14 of the contract law, if there is no written contract
Condentiality clauses
Provisions on condentiality with regard to maintaining the condentiality of the trade secrets of the employer and to intellectual property may be included in the contract. If the obligations agreed in the contract are breached and cause the employer to suffer losses, the employee will be liable for damages.
Non-competition
The employer and employee may enter into a non-competition agreement; however, such an agreement should be limited to senior management personnel, senior engineers and any other employees having condentiality obligations. There are no restrictions regarding the scope, the geographic area and the terms.
Payment of wages
An employer is obliged to pay the salary, in accordance with the national regulations and the provisions of the employment contract, on time and in full. Under the current law, employees must hand in their complaints against unpaid wages at a labor arbitration tribunal; from 2008 onwards, they will be able to ask the court directly for an order to pay.
Termination prohibited
If an employee suffers from work-related injuries and is under medical observation, or it can be proven that the employee has lost ability to work due to occupational hazards or diseases, termination is prohibited. To ensure the diagnosis of such injuries, an exit health check-up for those exposed to occupational hazards is mandatory. Employers should not terminate contracts during medical treatment periods, pregnancy, connement or nursing periods. A special nontermination rule applies for employees that have worked for over 15 consecutive years for one employer and are less than ve years away from retirement.
By employer
Coming into immediate effect, the labor contract may be terminated if: the employee is found not capable of performing during the probation period; violates rules in a significant way; commits serious dereliction of duty or practices graft; becomes criminally convicted; establishes employment with another company which materially
Part-time employment
Part-time employees should work no more than four hours per day and no more than 24 hours per week for an employer. The maximum payment schedule is 15
salary is required as compensation. The compensation may not exceed one years salary and the average monthly salary is capped to three times the average salary of the employers location as ofcially published. The new law explicitly allows payment in lieu of notice. If the salary is three times more than the local average monthly salary, the compensation shall be calculated according to three times the local average monthly salary.
Priority must be given to employees who have a long xed-term contract, openterm contract, or are the sole breadwinner in the family. If the employer decides to recruit within six months of a mass layoff, the dismissed employees should be notied, and if they accept the same conditions as new applicants, must be given the position.
Company rules
Collective dismissals
Mass layoffs (20 or more employees or 10 percent of the total workforce) are only permitted if the employer has consulted the union or employee representatives, and proposed the action to the labor departments in accordance with the law. Collective dismissals are only allowed if one of the following reasons applies: the company is undergoing restructuring according to the Enterprise Bankruptcy Law the manufacturing or operating capacity of the enterprise is severely limited the enterprise switches its mode of production, introduces major new technology or adjusting its operations and, following modification of employment contracts, still needs to retrench employees major changes have occurred in the objective circumstances under which the labor contracts were concluded, such that the contracts could no longer be performed
A specic procedure must be followed in order to validly adopt company rules. The terms and conditions must be discussed by the employee representative congress (ERC) or employees at large. The ERC/employees at large will put forward proposals or comments. The management then negotiates with the ERC/union and publicly communicates the new regulations and policies to the employees. Any charges or revisions to the company rules must follow the same procedure.
Stafng agencies
The new law affects representative ofces which use the service of FESCO or other stafng agencies. The requirements for the agent are the following: RMB500,000 minimum registered capital, two year contract with employee with monthly pay, even without actual employment. A company using staffing agencies services will have to pay overtime and performance based bonus and benets, and apply the same pay standard and pay increase mechanism for all employees. The company may not send the employee
Unresolved issues
One of the main problems with labor laws in China is their enforcement. The central government drafts, passes, executes and enforces the law there is no division of power on the mainland. That means a system of checks and balances found in most developed countries does not exist in China. Many companies from Europe and the U.S. complain that labor laws in China are weakly enforced against Chinese entities, which frequently evade or ignore the law, whereas U.S. and European companies are monitored very closely. This is not only a burden, but also a chance to create a fair and humane working environment for millions of workers employed directly by FIEs, or as part of the supply chain the company overlooks. It remains questionable how local companies will respond and how provincial jurisdictions will interpret the law. Like any new law in China, there is plenty of room for broad interpretations and the main problem with this remains the inherent vagueness and lack of clarity and consistency within them.
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Chinese direct investment legal & tax expertise directly from Dezan Shira & Associates
Consumer prices in China pushed to tenyear high, low-income households feel pressure
Chinas consumer prices this fall reached the highest rates in more than a decade, driven mostly by skyrocketing food costs. While the government says that these price increases remain in line with the countrys economic growth, the impact on the lower-income families and individuals is going to become increasingly heavy. As the price of staple commodities continue to rise in China, so to will the anger and frustration of everyone who has been left behind by the countrys economy.
China has drafted executive regulations for a new corporate income tax law that will harmonize the domestic and foreign rates, and the final draft has been submitted to the State Council for approval. The income tax rate for foreign companies in special bonded zones, which previously enjoyed a preferential rate of 15 percent, will rise in stages to 18 percent, 20 percent, 22 percent, 24 percent and nally 25 percent, the same as domestic companies, over ve years, according to the final draft of the executive regulations for the new corporate income tax law.
www.china-brieng.com/blog/category/ feature
www.china-brieng.com/blog/category/ feature
Consider Delhi and Mumbai, and compare them with Beijing and Shanghai. Investing in China means having an Asian policy, and the giants of India should not be ignored. Different yes, but often refreshingly so; they are democracy in action, and it is a comparable, and some would suggest better, environment than Chinas oft shackled cities can offer.
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Read the entire China Brieng blog archives at www.china-brieng.com/ blog, Search for news and commentary by region or industrial sector and gain access to our special reports section with in-depth coverage of important issues as they occur.
Delhi Beijing, Mumbai Shanghai: Anything China can do, India can do too
China, plagued with both a growing pollution disaster and serious energy crutch, is looking for alternatives to its dependency on coal and other fossil fuels to power its economy. The recently concluded Methane to Markets Partnership Expo, co-hosted by the U.S. Environmental Protection Agency (EPA) and Chinas National Development and Reform Commission (NDRC), attracted more than 700 participants from 34 countries to discuss alternative ways to decrease methane output while harnessing the gas as an alternative energy source.
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Supplier Due Diligence Setting Up Ofces & Factories Obtaining Export Tax Rebates
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