Chinas Labour Laws – Sweeping Changes Impact on HR Management 14 April 2008 Jeremy Sargent Managing Partner JSA Guangzhou Office

Introduction Sweeping changes to PRC employment law in 2008 Raft of new laws/regulations:- PRC Employment Promotion Law (1 Jan 08) PRC Employment Contract Law (1 Jan 08) Paid Annual Leave Regulations (1 Jan 08) Average Working Hours Circular (3 Jan 08) Labour Disputes Mediation/Arbitration Law (1 May 08)

Why the Changes? Pre-existing regime out-of-date and failed to address enormous changes in PRC labour market Rampant abuse of labour rights across the PRC 30% of PRC employees had written labour contracts Discriminatory recruitment practices Failure to pay social welfare contributions A hire and fire mentality Lack of employee participation Toothless labour unions Encourage awareness International pressure (??)

The Labour Contract Law Drafting Process Prolonged drafting process – over 250,000 submissions Four separate drafts Implementing Rules still not issued Uncertainties as to interpretation

Good or Bad? Generally, the changes are pro-employee Onerous new obligations on employers Criticism from employers, business groups, academics Increased costs to employers? Mass-layoffs underway – especially in Guangdong! Increasing number of labour disputes Shanghai – 4,500 labour arbitration cases in Jan/Feb % increase on Jan/Feb 08!

Key Changes: Recruitment (1) No discrimination on basis of race, gender, ethnicity, religious belief, carrying of infectious pathogens – Employee now has clear basis to claim damages for discrimination Note: Dongguan case in Jan 08 – Hepatitis B carrier awarded RMB24,000 after being rejected for a vacancy after medical test Employer may request basic information directly in relation to the employment Employer must provide full details of job to Employee (job nature, conditions, remuneration, safety, etc) Employer may not require lodging of ID card, deposit, other security (penalty: fine of RMB per worker and compensation for any losses)

Key Changes: Recruitment (2) Written labour contract must be concluded within one month of date of employment Penalty for non-written contract: Additional wages of 200%. After one year, open-term contract is deemed to exist Written contract not required for part-time contracts (hourly pay, max four hours per day on average and not exceeding 24 hours per week) If Employee still has a labour contract with an existing employer, both Employee and new employer may be jointly liable for any losses suffered by existing employer!

Key Changes: Term of Contract Labour contracts may be fixed term, open-term or based upon completion of agreed assignment Open-term contract must be concluded in certain situations when requested by the Employee including:- Employee has worked for the same Employer for 10 years consecutively Where two consecutive fixed-term contracts have been performed Penalty for non-compliance: 200% of wages and reinstatement of open-term contract Note clear whether payment of compensation for prior service extinguishes prior service period Controversial change in the law! Note: Huawei Enterprises mass resignations

Case Study (1): Beijing Court Case Feb 08 First reported court case under Labour Contract Law Facts Ms Zou, an employee, left China to work in Europe for 2 years Agreed her employment with Township Enterprises Mansion would continue for one year during her absence Her employer continued payment of social insurance (which Ms Zou later reimbursed) Ms Zou returned two years later and was told her job was no longer available Judgment Employment relationship had not been terminated Ms Zou was entitled to resume work Ms Zou was entitled to an open-term contract

Case Study (2): SOE Restructuring Ongoing JSA Case Facts Foreign investor acquired SOE in North China At time of acquisition, the labour contracts of existing employees were terminated and compensation paid Employees signed new two year fixed-term labour contracts with restructured company (now a JV) The two-year fixed term labour contracts due to expire in July Employees with over 10 years total service claiming right to demand open-term contracts Issue Did payment of compensation extinguish prior service period? Unclear from law

Key Changes: Probation Probation period may be included in full-time labour contracts with terms of over 3 months May only be included once Forms part of the term of the labour contract Wages during probation at least 80% of agreed wages Term of probation period depends on term of contract Contract up to one year – maximum probation one month Contract term between one and three years – maximum probation two months Contract term over three years or open – maximum probation six months Penalty: Order for correction and payment of normal salary for unlawful excessive probationary term

Key Changes: Formulation of Employment Rules Where Employer formulates, revises or decides on rules or major maters relating to the employment, it should hold discussions with employee representatives or all the Employees and listen to their opinions Employer should also negotiate with the labour union before making any decisions If labour union or staff objects to any issues, such issues should be corrected and refined through negotiation.

Key Changes: Termination of Labour Contracts Labour contract may be terminated by negotiation and consensus between Employer and Employee at any time – Employer is liable to pay economic compensation based on years of service An Employee may terminate his/her labour contract Upon three days notice during the probation period and upon thirty days notice thereafter Immediately where the Employer fails to provide labour protection, pay wages, pay social insurance contributions and where the rules and regulations of the Employer are unlawful and prejudicial to the Employees interests Immediately if part-time contract

Key Changes: Termination of Labour Contracts An Employer may terminate a labour contract immediately without compensation if Employee:- fails to measure up during probation commits a serious breach of Employers rules and regulations guilty of serious dereliction of duties and corruption causing significant damages holds a labour relationship with another Employer which severely impacts upon Employees performance Is subject to criminal proceedings If part-time contract

Key Changes: Termination of Labour Contracts An Employer may terminate a labour contract upon 30 days notice (or payment in lieu) and payment of compensation:- Following medical treatment period for non-work-related illness – if Employee is unable to take up original work or new position Where Employee is incapable of performing his/her job after training or transfer Where a change in objective circumstances makes performance impossible

Key Changes: Termination of Labour Contracts An Employer may not terminate a labour contract During an Employees statutory medical treatment period Where an Employee is suffering from a work-related injury or illness Where a female Employee is pregnant or nursing (up to 1 st birthday of child) Where an Employee has worked for the Employer for 15 years and is within 5 years of retirement age (workers M55, F50 and managers M60, F55)

Key Changes: Termination of Labour Contracts Economic compensation Based upon one months salary for each year of service (based upon average monthly salary for 12 months prior to termination – now capped at 300% of City Average. Maximum payment of 12 months salary Payment should be made within 15 days of termination - penalty for failure to pay: 50%-100% additional payment Not necessary for part-time contracts

Key Changes: Termination of Labour Contracts Unlawful termination by Employer Must reinstate the Employee if requested to do so by Employee Where Employee does not request reinstatement, or reinstatement is not possible, Employer shall pay additional compensation of 100%

Key Changes: Non-Compete Restrictions Labour contract may include a non-compete covenant Only applies to joining a competitor which engages in the production of same type of products or provision of same type of services Maximum two year period (previously three years) Employer must pay additional consideration at agreed amount (note local regulations on this too) Employee liable for breach – may include a default penalty to be paid by Employee in the event of a breach

Key Changes: Labour Disputes Mediation encouraged within the enterprise. Mediation centres to be established Dispute may be referred to arbitration directly or if mediation is unsuccessful Arbitration Period to bring arbitration increased from 60 days to one year Arbitration shall generally be completed within 45 days Arbitrators shall have minimum levels of qualification and experience (e.g. lawyers, legal academics, HR experts, etc)

Key Changes: Labour Disputes Employee may appeal to court if dissatisfied with arbitration Employers rights to appeal are limited. For disputes relating to unpaid wages (below certain amount), personal injury, time off work and social insurance, the Employer may only appeal under certain circumstances including defects in the arbitration process, wrongful application of law and concealment of evidence

Key Changes: Paid Annual Leave Employee with one years service entitled to paid annual leave Number of days depends upon years of service Less than 10 years service – 5 days paid annual leave years service – 10 days paid annual leave 20+ years service – 15 days paid annual leave May be waived by agreement – increased pay at 300% May be carried forward once to following year if Employer cannot give leave Not clear whether service period must be with same employer or how additional leave should be treated Implementing rules being drafted

Key Changes: Calculation of Working Hours and Wages Public holidays increased from 10 days to 11 days Working days Per year = 365 – 104 – 11 = 250 Per month = 250 ÷ 12 = Working hours per month = × 8 = Payable days per month = (365 – 104)/12 = 21.75

The End For further information, please contact: Mr Jeremy Sargent Managing Partner JSA Guangzhou Office 3404, North Tower, World Trade Center, Huanshi East Road, Guangzhou T: F: E: