On 29^th June, 2007, the Standing Committee of the National People’s Congress (SCNPC) promulgated the Employment Contract Law (ECL).

It represented a major milestone in the development and modernisation of China’s labour regulatory environment. However, the ECL is commonly viewed as being too biased towards employees. Some of its provisions—its limitations on employers’ ability to unilaterally terminate employee contracts and its requirements for statutory severance pay, for example—are seen by many to be overly protective of employees, increasing financial and compliance burdens on employers and dampening demand in the labour market in the long run. Sherry Gong and Chengcheng Wu of Hogan Lovells International LLP say that the 2012 amendment to the ECL did not effectively tackle these problems, and that the 2015 draft amendments do not appear to go far enough either.

With the aim of levelling the playing field for employers, countless appeals have been made over the years to the Chinese Government to revamp labour legislation. Despite the weight of protest, almost a decade has passed since the ECL was promulgated and only one amendment (Amendment) has been issued by the SCNPC, in December 2012. Unfortunately, the Amendment did not address the more heavily debated issues in the ECL, but instead focused on the qualifications for labour dispatch. The legislation was aimed at countering the proliferation of dispatch arrangements employed by some employers as a way of limiting their responsibilities by avoiding establishing a direct employment relationship with employees.

New draft regulations, however, appeared in 2015, in the form of the Draft Certain Regulations on Employment Contract Law (Draft). These were released on the Internet in an unremarkable way and of uncertain provenance, though allegedly circulated by the key employment regulator, the Ministry of Human Resources and Social Security Bureau (MOHRSS). However, despite its inauspicious appearance, the Draft has still sparked heated discussion among domestic and foreign enterprises.

It is uncertain whether the Draft will ever come into effect, and even if it does it will be further down the road, given that the SCNPC’s legislative working plan for 2016 does not include an amendment to the ECL. Nevertheless, studying the draft is helpful, as it may to some extent convey the current leading ideas and mind-set among legislators. In this article, we highlight amendments in the Draft that touch on critical issues in the ECL and that we think may have significant implications for labour practice in Mainland China.

Vague definition of ‘employer’

The current ECL defines ‘employer’ as enterprises, individual economic organisations, private non-enterprise entities, or other organisations within the territory of the People’s Republic of China (China).  However, it fails to provide a negative list for employers – for instance, it does not exclude enterprises established outside of China from the definition of ‘employer’. Without this exclusion, there is some confusion as to how the law treats a foreign company without a presence in China that hires Chinese nationals under labour contracts governed by the law of their home jurisdiction or as independent contractors – this is something we sometimes see foreign companies do, in practice. Although we think foreign companies are less likely be regarded as an ‘employer’ under the ECL, it is not clear whether it is a safe way for foreign companies to avoid their employer liabilities, and also whether this is fair to Chinese nationals.

Partially in response to this concern, the Draft, for the first time, excludes the following entities from the definition of ‘employer’: 1) a representative office of a foreign enterprise in China; 2) a foreign embassy or consulate; 3) a representative office of an international organisation in China; 4) family; and 5) individual entrepreneurs.

Under the Draft, companies yet to be established are required to conclude a written agreement with their employees before it is duly incorporated, and subsequently sign written employment contracts after its official establishment. Most significantly, the service period of employees would be recognised retrospectively from the first agreement. Under this rationale, the company to be established might well be regarded as an ‘employer’ in China.

Still an uphill battle to terminate employment contracts

Unilateral termination by employers is complicated under the ECL. Termination ‘at will’ is not allowed. If an employer wishes to unilaterally terminate an employment relationship prior to its natural expiration, it must have either statutory grounds or obtain the consent of the employee. When exercising a unilateral termination right in certain circumstances, the employer must notify the employee of its intention 30 days in advance or provide one month’s salary in lieu of notice. In most circumstances, the employer should pay severance to the employee, which is calculated based on his/her years of service. Even so, employers still face a substantial risk that they will be deemed to have wrongfully terminated the contract, in which case it would be required to pay double the amount of the statutory severance entitlement. Even worse, the company could be ordered to reinstate the employment relationship, with all the awkwardness that that might entail. The most common advice received from outside legal counsels is that the employer should choose termination by mutual agreement to mitigate the risk of wrongful termination. As a result, employers have to stump up higher severance to buy out the contract.

By contrast, the termination process initiated by employees is known to be substantially smoother and more flexible: they only need only to serve 30 days prior notice, or a mere three-day notice period if they are still within their probation period.

Unfortunately, the Draft does not address this issue directly.  It only suggests that, when calculating severance for years of service before 2008, employers can also use the cap of the monthly salary, that is, the amount equivalent to three times the monthly average salary of the local employees in the previous calendar year published by the local government. This proposed amendment may reduce the employers’ economic burden related to severance to a certain degree.

Concluding open-ended employment contracts

Under the ECL, employment contracts may have a fixed term with a natural expiration date. In practice, employers often want to keep their employees longer than this termination date and will renew/enter into subsequent contracts with its employees. However, by law, upon commencement of the second subsequent contract, the employment relationship becomes open-ended, unless otherwise agreed by the employee or some other exception applies.

Many employers dislike this provision and adopt various methods to avoid entering into contracts that would trigger open-ended employment. For example, an employer may try to break continuity by utilising a service company or affiliated company to sign the employment contract with its employee, or by terminating its first employment contract and concluding a second employment contract after an interval of a few months. Some local authorities, like the High Court of Beijing and the Beijing Labour Arbitration Committee, unequivocally prohibit employers from arrangements that are apparently designed to avoid the conclusion of subsequent contracts.

Addressing these issues, the Draft provides explicitly that four circumstances could be regarded as concluding a subsequent contract, including: 1) if the first contract extends upon its expiration (with exceptions); 2) if the second contract is concluded within six months from the expiration or termination of the first contract; 3) if the contract was concluded with an affiliated company; and 4) if the contract was concluded with a new entity after the former employer is deregistered and where there are no substantial changes to the business, the employee’s working place and his/her responsibilities.

While these rules tend to support eventual open-ended employment for continuously employed employees, they do appear to provide more firm guidance as to how long, for example, an employment relationship needs to be cut off for a contract not to be viewed as subsequent, adding welcome clarity. But the Draft does not address the basic consternation expressed by employers who disfavour open-ended contracts due to the difficulties associated with terminating employee contracts in general and open-ended employment relationships in particular.

Conclusion

Much like the ECL, the Draft raises as many questions as it answers, and in the field of labour few questions are easily resolved and the perfect balance of interests is hard to achieve. We expect that rather than bringing an end to the current discussion the Draft will merely provoke the beginning of another, and it appears the government also takes this view. During a press conference in February 2016, the minister of the MOHRSS stated that they had analysed the Draft and were currently studying the new problems encountered by employers, such as high corporate employment costs. We would expect that the current ECL will be revised or redrafted in the near future (though not in 2016), which will hopefully encourage greater employment and smoother employer-employee relationships in China.

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