Labour law is a broad matter with which almost everyone comes into contact with at some point. The Chinese Labour Laws are quite comprehensive and not that different from those in Europe and can be seen as quite employee friendly. As labour law problems often arise, employers and employees are faced with many questions when terminating employment contracts. It is therefore important for both, employers and employees, to have an overview of labour law and to be familiar with common issues.

In this article, you will find the most frequently asked questions from our clients, answered by our labour law experts. This FAQ will give you an initial overview of typical labour law questions we frequently encounter. It is not a substitute for legal advice on a case-by-case basis.

Q: One of our employees will be prosecuted for a criminal offence. Can we terminate the employment contract with him without risk?

A: According to Article 39 of theEmployment Contract Law of the P.R.C., the employer is entitled to terminate the employment contract if the employee is prosecuted for a criminal liability. However, in order to do so, you need the verdict that the employee was actually guilty. Once the judgement has been issued, the employer may terminate the employment contract with the employee without compensation in accordance with the provisions of the law.

Q: What is the correct procedure in such a case and how is it carried out?

 A: The employer must pay particular attention to the following points, otherwise the court may consider the dismissal as unlawful dismissal or no dismissal:

  • Termination should take place within a reasonable time after the company has been informed of the employee’s criminal offences.
  • If the employer’s employee handbook contains termination procedures and the employee handbook has undergo the prescribed democratic process, you can follow the procedures agreed in it. Otherwise, the employer will send the employee a notice of termination stating the reason for the termination and the date of termination.
  • The notice of termination should be properly delivered to the employee with his or her acknowledgement, e.g. in person or by mail to the employee’s address for receipt of documents.

Before terminating an employment contract, you may try to talk to the employee and ask him or her to resign voluntarily. If the employee refuses to do so, the company can give him or her notice of termination.

The company also has the option to keep the employee until the end of the contractual employment term without offering a contract renewal. In this case though, the company has to pay a severance payment as for any other expired employment contract.

Q: What should our company bear in mind when terminating a labor service  contract?

A: For employment contracts, the legal basis is the Labour Lawand the Employment Contract Lawwhich regulate the provisions of the respective employment relationship.

However, the legal basis for service contracts, where the freelancer or self-employed consultant provides labor services to the company, are Contract Lawand other civil laws etc. Usually the termination clauses are specified in the labor service contract. If so, a notice of termination should be given in duplicate and bear the company’s seal. An acknowledgement letter on receipt of such notice should be signed or an registered letter with the postmark should be sent to the valid address and the company should keep the receipt.

Although the company has the right to terminate the contract by notice and does not have to pay compensation, the person affected might disagree with the company’s decision. This in turn could lead to reputational damage, or a complaint to the authorities.

We advise companies to consider the following important points when terminating a labor service contract:

  1. Keep the critical information and evidence:
  • If the personnel is retired, evidence such as age certificates can be collected.
  • The company should retain the originals of service contracts.
  1. How the company has reported the individual income tax of the personnel concerned is crucial, as those personnel should pay the individual income tax either according to the remuneration of labor services (service contracts), not according to the remuneration of employment. Failure to do so could result in tax violations.
  2. Instruct the personnel to hand over the work duly before the end of the service contract.
  3. In the event that the person to be dismissed has access or authorization to maintain important documents, keep them (company licenses, stamps, and other confidential information) in a safe place so that they cannot be misused, lost, or copied. Save the information to which the personnel have access in the event that the person makes deletions out of anger.
  4. Collect the contract information of the customers and contractors with whom the personnel are working and inform the customers in a timely manner of the personnel leaving.

Q: If a foreign employee has been recalled by the parent company, will the Chinese subsidiary have to pay severance payment?

A: If a foreign employee has been working in China with a work visa and work permit and the employment contract with the Chinese subsidiary has terminated without the faults of employee, the Chinese subsidiary must pay the settleme

The situation is different if the employment contract was not terminated by the Chinese subsidiary and the foreign employee voluntarily agreed to return to the parent company. In this case, the Chinese subsidiary does not have to pay any severance payment.

Q: If an employment contract has expired and has not been renewed, does the employer have to pay the severance payment?

A: According to the Employment Contract Law of P.R.C., a fixed-term employment contract expires if both the following conditions are met:

  1. the employer offers the same or better conditions than those laid down in the current contract;
  2. the employee refuses to renew the employment contract.

At this point, the employer is not obliged to pay any severance payment.

But what exactly defines “same or better conditions” in the new employment contract? Per definition this includes:

  • The company shall provide same or better conditions on the employee’s rights and benefits, e.g. salary, fixed bonus, social insurance and annual leaves.
  • The company shall not impose extra burden on the employee’s obligations, responsibilities and duties, like extra working hours, longer notice period for resignation.
  • The employee’s work position, type of work, place of work, etc shall keep unchanged.

A fixed-term employment contract also expires if one of the following conditions is met:

  • the employer refuses to renew the employment contract; or
  • the employer offers conditions worse than those specified in the current contract and the employee refuses to renew the contract.

At this point, the employer has to pay severance pay.

Q: Is it legally compliant to include a 90-day notice period for terminations in the employment contract? At the moment we have a notice period of 30 days. Would it be possible to increase the notice period for the employee and the employer to three or six months?

A: According to the Employment Contract Law of P.R.C., an employee can terminate the employment contract by giving 30 days written notice to the company. There are two interpretations of the 30-day notice rule though: According to one, this is a statutory rule and any provision in an employment contract that provides for a notice period of more than 30 days is invalid. As a result, the employee would still be able to terminate the contract with a notice period of 30 days. At the same time there is another interpretation according to which it is valid and enforceable if a longer notice period of more than 30 days is actually agreed on by both parties. In practice, there are precedents for both.

Thus, if the company wishes to include a notice period of more than 30 days in a contract, it is recommended to pay attention to the following points:

  • Make sure that the notice period of a longer period is a true intention or agreement between the parties.
  • A corresponding provision should be included in the employment contract.
  • A longer notice period can be especially important for positions with a high level of responsibility and/or those for whom it is difficult to find an adequate replacement on short notice, such as managing directors or department heads.
  • In the event that a longer notice period is agreed on and the employee fails to comply with this agreement, the company may file a claim before an arbitral tribunal to claim any actual losses or require continuing working until the agreed notice period.

Richard Hoffmann

Richard Hoffmann, ECOVIS Beijing

Richard Hoffmann is a partner at Ecovis Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis-beijing.com

Ecovis Beijing

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via service@ecovis-beijing.com.