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A Better Partnership


Jan 2008
January 15, 2008

China's New Employment Contracts Law -- Are You Ready for Compliance?

The Employment Contract Law (ECL) that became effective on January 1, 2008, has some employers scrambling to enter new employment contracts by January 31, and requires immediate attention to avoid double-wage penalties, preserve noncompete obligations, avoid undesired non-fixed term contract obligations and other unintended and potentially costly consequences. Heightened contracting requirements, restrictions on termination, increased severance obligations and other changes will likely result in increased HR administration costs. The ECL's passage should serve as a reminder to U.S. companies that the "at will" employment concept does not extend to the PRC.

Important changes under the ECL include:

  • Signed, Written Contracts. Formal contracts required for all employees (excluding part-timers) within one month of employment (or by January 31 in the case of employees hired before January 1) and in certain other prescribed circumstances, including upon concluding a non-fixed term contract at the expiration of the first renewal term of any fixed-term contract as now required by law.

  • Noncompete Provisions Limited. Post-employment covenants limited to two years. Payment of monthly economic consideration required during noncompete period.

  • Fixed-Term Contracts. Severance required on nonrenewal of fixed-term contracts. Upon expiration of the first renewal term of a fixed-term contract, the employer must provide a non-fixed term employment contract.

  • Non-Fixed Term Contracts. Employers must provide non-fixed term contracts in the following circumstances: before entering into the required non-fixed term contract upon expiration of the second term of any fixed-term contract, as mentioned above; upon renewal of an employee with 10 years of service; in restructuring where an employee has 10 years of consecutive service and is less than 10 years from retirement; and where a written employment contract is not concluded with an employee within one year of employment.

  • Employer Rules and Regulations. Upon establishing or changing employer rules or regulations affecting the immediate interests of employees (wages, hours, holiday, etc.), such rules and regulations shall be discussed by an employee representative congress and all the employees and the union/employee representative must be consulted.

  • Reductions in Force. Layoffs of 20 or more employees or 10 percent of the workforce require a pre-layoff explanation to union or all employees and a report to the Labor Administrative Department. Certain employees receive retention preferences. During the six months following a reduction, terminated employees receive notice and preference in any rehiring.

  • Terminations. Specific rules address probation periods, notice requirements and severance pay. Employer terminations may require prenotification of cause to the union. The union has the right to rectify unlawful termination. Unlawful termination may entitle the employee to reinstatement with back pay or twice the statutory severance without reinstatement.

  • Severance Calculations. In most circumstances, severance is required at the rate of one month's wages per year of service. Calculation of the monthly wage rate is capped at three times the average wage of employees in the region.

  • Order to Pay. The employee may apply to a court for an order to pay if the employer falls into arrears with the payment of labor compensation or fails to make payment in full.

Other ECL rules apply to collective contracts, labor dispatching contracts, part-time employment, and the employee's obligation to reimburse the employer for vocational expenses upon termination in certain cases.

U.S. companies with employees in the PRC should consider the following measures:

  • Inventory fixed-term contracts set to expire in the next year.
  • Calendar expiration dates of fixed-term contracts and track renewals.
  • Review employment contracts, labor management rules and regulations, employee handbooks, etc., for compliance with the ECL on content.
  • Review employment policies to determine whether necessary revisions require consultation with union or employee representative.
  • Inventory noncompete agreements for compliance with the new law.

For further information, please contact any of the following members of the Warner Norcross & Judd International Business Practice Group:

Craig Meurlin



Steven Palazzolo 


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