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Legal Update

Labour Contract Law Regulations Issued

25 September 2008
Mayer Brown JSM Legal Update
The final version of the Implementing Regulations ("the Regulations") on the PRC Labour Contract Law was passed in the 25th Standing Committee of the PRC State Council on 3 September 2008, and officially issued on 18 September. Although the Regulations clarify certain concerns of employers with respect to the interpretation and implementation of the Labour Contract Law, they also serve to increase ambiguities in other areas. This Client Alert highlights the main provisions in the Regulations.

I. Termination of Labour Contract
The Regulations do not introduce any new grounds for termination for employment.  They do however clarify that the employer and the employee are not permitted to agree on any termination ground other than those stipulated in the statute.
II. Labour Secondment
A.   Penalty on Secondee Company
The Regulations state that where a secondee company (i.e. a company hiring through labour agencies like FESCO) violates any of the labour secondment regulations, it may be required to rectify its conduct. Where such violation is considered to be serious, the secondee company may be exposed to a penalty of up to RMB5,000 for each seconded employee.
B.   Restrictions on Labour Service Agency
A labour agency is prohibited from recruiting any part-time workers for secondment purpose.
III. Scope of Coverage of "Employer"
The Regulations clarify that an accounting firm, law firm, fund/foundation and other like organisation legally established in the PRC are subject to the Labour Contract Law as employers.
IV. Labour Relationship without Written Contract
Where an employee fails to sign any written labour contract with the employer within one month of commencement of work and having been asked to do so in writing by the employer, the employer shall terminate the employment.  In such circumstances the employer is not liable to pay any economic compensation (i.e. severance) to the employee.
Where a labour relationship exists without a written contract for one month or more but less than one year, the employer is liable to pay twice the amount of the agreed remuneration to the employee as salary. Where the employee still fails to sign a written labour contract the employer must terminate the employment by written notice to the employee, and pay the statutory amount of severance to such employee.
Where no written labour contract exists for at least one year after the commencement of work (i.e. an oral contract exists for one year or more) the Labour Contract Law states that an indefinite term labour contract shall be deemed to have been executed between the parties.
In such case, the Regulations require the employer to pay the employee twice the amount of the agreed monthly salary for the period from the first day of the second month after the commencement of employment) until the last day of the 12th month after such commencement. An indefinite term labour contract shall be considered to have been concluded as of the date when the employee has been employed for 1 year, and a written labour contract shall be signed immediately thereafter.  
V. Continuous Service Period
The Regulations stipulate that where for a reason not attributable to an employee (like an administrative order, transfer of business and the like) the employee is transferred to work for a new employer and concludes a new labour contract with such employer, his/her service period with the previous employer shall count for the purpose of calculation of his/her continuous service period with the new employer.
Where the new employer is required to calculate the severance pay upon eventual termination or expiry of the transferred employee's employment then, if the old employer has paid the legally required severance to such employee for his/her past service period with the old employer, such past service period will not count for this purpose.
VI. Conflict of Local Regulations
Should the rules of the place where the labour contract is actually performed (the "Performance Locality") be different from those of the locality where the employer is registered (the "Employer Locality") then which local rules apply depends on the issues involved. For issues like the minimum wage, labour protection, labour conditions, protection from occupational hazards and local employees' monthly average wage, the rules of the Performance Locality shall apply. Where any relevant standard in the rules of the Employer Locality is higher than the rules of the Performance Locality, the parties can agree through negotiation on application of the rules of the Employer Locality.
VII. Minimum Amount of Special Training Cost
The Labour Contract Law provides that liquidated damages payable by an employee for breach of a service term would only be allowed where special training costs have been incurred by an employer for training the employee.  The new Regulations stipulate that such special training costs can include training fees and travel expenses during the training, and other direct expenses arising from such training.
VIII. Severance and Damages
Under the Labour Contract Law, where a unilateral termination by the employer is held to be a wrongful termination and where the employee does not request reinstatement of his/her job, the employer must twice the usual severance pay amount as damages to the employee.
It was unclear whether this double amount was inclusive or exclusive of the severance amount that might already have been paid to the employee at the time of the termination.  The Regulations now clarify that under such circumstances, the employer is not liable for any statutory severance pay as long as the said damages have been paid to the concerned employee, i.e. the double amount is "inclusive".
Severance pay is calculated on the basis of the length of period worked.  So the employee will get one month's salary for every year the employee has worked for the employer. "One month's salary" means the employee's average monthly remuneration during the last 12 months before the termination date. The Regulations clarify that all the employee's monetary remuneration including salary, bonus, allowance and subsidies, should be included for this purpose.
IX. Termination upon Retirement
The Labour Contract Law stipulates that a labour contract will be considered as expiring (no severance payable) where the employee is at the age of retirement and is entitled to enjoy his/her basic pension plan benefits. However, in the PRC an employee cannot enjoy such retirement treatment unless he/she: a) attains retirement age of 60 (male) or 55/50 (female) years old; and 2) has paid contributions to the pension plan for at least 15 years. The status of employees reaching retirement age but not entitled to pension benefits (due to failure to pay sufficient contributions) is not addressed.
However, the Regulations now make it clear that where the employee is at retirement age, his/her labour contract is considered as expired. This appears to conflict with the Labour Contract Law. Legally speaking, the Labour Contract Law is superior to the Regulations and therefore shall prevail in case of any conflict.  This provision of the Regulations may therefore be challenged by an employee forcibly retired without having accrued sufficient contributions.  
X. List of Employees
The Labour Contract Law requires each employer to establish a list of employees for future reference. The Regulations further stipulate that such list must include the employee's name, sex, ID number, address of his/her registered domicile, contact information, employment arrangement (e.g. direct employment or labour secondment), commencement date of employment, contract term, etc. In case the employer breaches this requirement, it may be ordered to rectify its conduct by the labour administrative authority and should it fail to do so, a penalty of RMB 2,000-20,000 may be imposed.
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