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Legal Update

New PRC Labour Contract Law

10 July 2007
Mayer Brown JSM Legal Update


The PRC Labour Contract Law (the "New Law") was passed by the Standing Committee of the National People's Congress of the PRC on 29 June 2007. The New Law will come into force on 1 January 2008, and is regarded as another major milestone for the PRC labour and social security legislation. This update identifies some of the major changes and new requirements under the New Law in areas including contract termination, employee handbook/manual formulation, seconded workers, oral contracts and part-time employees.

Full Update

1.     Oral Contract

A written labour contract shall be concluded within one month from the commencement date of employment, failing which the employer shall pay twice the amount of the payable remuneration to the employee as salary. The employee shall be paid in accordance with the standard specified in the collective contract or be paid at the same level as another employee holding the same position is paid in case there exists no collective contract or the collective contract is silent on such issue.

The New Law mandates the set up of employee records for inspection and clarifies that an employment relationship takes effect only from the date employment actually commenced.

In case the employer fails to conclude a written labour contract with the employee within one year after the date when the employment actually commenced, it shall be deemed that an indefinite term labour contract has already been executed between the employer and the employee.

2.     Termination Of Employment

    (a)   New Categories of Non-terminable Employees

    Under the current PRC Labour Law, there is a list of the categories of employee who cannot be terminated even if his / her employment contract has expired, such as a pregnant employee. Under the New Law, the list would be expanded to include

    • any employee who has worked continuously for the employer for at least 15 years and is within 5 years of legal retirement age; and

    • any employee engaged in occupational disease-prone work who has not had a medical examination to determine he is free from such disease, or is in any diagnostic or observation period pending such determination.

    (b)   Contract Term

    In accordance with the New Law, in case an employer and an employee have entered into a fixed term labour contract twice successively and the parties intend to renew such contract upon its expiry, an indefinite term labour contract shall be signed if requested by the employee.

    If the employer fails to sign an indefinite labour contract with the employee, it shall pay twice the amount of the payable remuneration to the employee as salary since the date when it is liable to conclude an indefinite labour contract with the employee.

    (c)    Severance Payment

    Up until now, severance payment has not been payable upon the natural expiry of an employee's contract. Under the New Law, it shall be payable upon such event unless it is the employee who did not wish to extend his/her service and the employer had offered no worse terms than those in his/her last contract.

    The severance payment shall be calculated on the basis of the length of period worked, which is equivalent to one month's salary for every year the employee has worked for the employer. Any period of six months or more but less than one year shall be counted as one year. Half a month's salary shall be paid to the employee for a period of less than six months.

    The New Law caps the monthly rate of severance payment at 300% of the locality's average monthly salary and the total number of months at 12 months.

    (d)   Employee Breach: Limitations on Liquidated Damages

    The employee may be bound by the employer to serve for a pre-determined period (on pain of paying liquidated damages if in breach) only where the employer has incurred separate training costs in providing professional skills training for the employee. The liquidated damages cannot be more than the proportionate costs of such training based on the remaining pre-determined period.

    (e)   Layoff

    If an employer undergoes restructuring pursuant to bankruptcy law, falls into production or operational difficulties, needs to retrench staff despite having varied its labour contract following any change of business type, significant technical upgrading or change of business operation model, is unable to perform the labour contract because of the material change in the objective situational factors such contract was based on at the time it was entered into, and such employer intends to lay off at one time 20 or more employees or (if less than 20) 10% or more of the total employees of the company, it shall inform the trade union or all the staff 30 days in advance, consider their views, and report to the labour authority.

    (f)     Notice to Labour Union

    In case of an employer's unilateral termination of a labour contract, it shall notify in advance the trade union of the reason for such termination. If such termination has been in violation of the laws, regulations or any provision under the labour contract, the trade union may request the employer to rectify such violation and the employer shall take the union's opinion into consideration and notify the union in writing of its final decision thereon.

    (g)   Consequences of Wrongful Termination by Employer

    If an employer terminates the employment contract of an employee in breach of the New Law, the employee may request for specific performance, i.e. reinstatement to his/her job position. If the employee does not so request or the contract is no longer capable of being performed, the employer shall pay twice the usual severance payment amount as damages to the employee.

3.     Employment Manual / Handbook Formulation

    (a)   Union / Worker Body Acquiescence

    Under the New Law, any provision in the company's employee manual, handbook or other set of work rules and regulations or any decision on major matters regarding the employee's salary, working hours, rest and leave, labour safety and health, insurance and welfare, training, labour discipline and work quota control or other issue directly involving the personal interest of employees can be finalised only after discussion with, and proposals and suggestions by, the workers' council or meeting, and negotiation on equal basis with the union or workers' council.

    In the process of implementing such manual, handbook or other rules and regulations, the union or any worker who considers any provision therein inappropriate may raise the issue with the employer and the provision shall be amended after discussion.

    (b)   Compensation

    Any work rules or regulations set by an employer which violate these laws shall be void. The labour authority will give a warning to require the employer to make a rectification. The employer shall be responsible to make compensation for any damages caused to any employee because of such work rules or regulations.

4.     Contract/Seconded Workers

    (a)   Labour Agency's Obligations

    Under the New Law, where a labour services agency (which shall have at least RMB500,000 registered capital) hires a contract worker for secondment to other companies to work, a fixed term labour contract with at least a 2-year term shall be entered into.

    (b)   Secondee Company's (i.e. Defacto Employer's) Obligations

    The secondee company shall execute a secondment contract with the labour agency defining their respective rights and obligations. They shall determine the secondment period according to the actual requirements of the post. The seconded company shall be jointly and severally liable with the labour agency for any loss sustained by any contract worker seconded to the seconded company, arising from any violation of the New Law by the labour agency.

    (c)    Restrictions

    Signing several consecutive secondment contracts for a continuous service term is prohibited. The employer is prohibited from establishing a labour service agency and seconding contract workers to itself or an affiliated company.

5.     Probation

    (a)   Term

    Under the New Law, a probation period should not exceed one month if the term of the labour contract is between 3 months and less than one year, and not exceed six months if the term is three years or longer, or indefinite. If a labour contract has a term of between 1 year and under 3 years, the probation period shall not exceed 2 months. There shall be no probation requirement in case of a labour contract with a term less than 3 months.

    (b)   Salary Difference

    The New Law stipulates that the salary of the employee on probation shall not be less than the lowest salary for the same post or 80 percent of the salary upon confirmation as agreed in the labour contract.

    Only one probation period may be set by an employer for an employee.

    (c)    Termination during the Probation

    During probation, the employer may terminate the employment contract only upon proof that the employee has not fulfilled recruitment requirements and shall provide the employee with a reason.

    The employee shall give a three day prior notice to the employer if he/she wishes to terminate the labour contract during probation.

6.     Non-Compete Covenant

    (a)   New Minimum Period

    The New Law shortens the maximum period of a non-compete covenant from the present 3 years to 2 years.

    (b)   Compensation to Employee and Liquidated Damages to Employer

    The New Law provides that an employer and an employee may enter into a non-compete covenant and agree that the employer shall pay monthly compensation to the employee who undertakes non-compete obligations during the non-compete period. If the employee breaches the covenant, he/she shall pay liquidated damages to the employer as may be agreed between them.

    (c)    Applicable Staff

    The applicability of the non-compete covenant shall be limited to senior management staff, senior technical staff and other staff with the obligation of confidentiality.

7.    Arrears Of Wages

The New Law states if an employer fails to pay wages on time, an employee may apply to court directly to obtain an order to pay his/her wages. Previously, since this was an employment matter, there was a 60-day arbitration time bar. The employee had to proceed to arbitration before going to court.

8.    Collective Contract Dispute

Under the New Law, if an employer violates a collective contract and infringes on the rights of an employee, the trade union may request such employer to undertake relevant responsibilities. If there are any disputes arising from the implementation of the collective contract, the trade union may file an application for arbitration or bring a lawsuit under its name.

9.    Validity Of The Labour Contract

It is provided in the New Law that the labour contract may be deemed invalid or partly invalid if it contained a clause which is aimed at or has an effect of exempting the employer's statutory obligations or eliminating the employee's rights.

10.  Part-Time Employees

A part-time employee shall work for the same employer no more than 4 hours per day and 24 hours cumulatively per week and be paid based on the actual hours he/she has worked for the employer.

An oral labour contract is allowed between the employer and the part-time employee.

The part-time employee may be employed by one or more than one employer at the same time provided that the latter labour contract shall not adversely affect the employee's continued performance of his/her obligations under the earlier labour contract.

Probation is not allowed in a part-time labour contract. Either party thereto can terminate the labour contract at any time. The employer is not obligated to pay any severance payment to the employee for such immediate termination.

For further information, please contact:

Position: Partner
Phone: +8621 61201066 x516
Fax: +852 2103 5437

Position: Partner
Phone: +852 2843 2203
Fax: +852 2103 5066


  • Andy S. Yeo
    T +86 21 6032 0266
  • Duncan A. W. Abate
    T +852 2843 2203

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