Posted On: August 29, 2012
Employment Contract Basics
August 2012
The employment contract is the center of China’s employment system and is the basis for establishing an employment relationship between an employer and employee, and for setting out respective rights, responsibilities, and duties.
In this Alert we discuss various contract-related matters that an organization engaging employees in China must consider in order to achieve a compliant framework for healthy employment relationships.
Establishing a Written Employment Contract
An employer should enter into a written employment contract with an employee within one month of the employee beginning work. If the employer fails to execute such a written contract, then it risks several regulatory consequences (e.g., double salary fine for up to 11 months, default establishment of an open-ended employment contract).
There are certain details that must be set out in the contract, including (but not limited to) the remuneration, work address, job title and work hours.
Ending an Employment Contract
In general, an employment contract may end through one of four mechanisms (of which the first, second and third are extremely straightforward): (a) expiration of the employment term; (b) mutual agreement; (c) the employee’s resignation; or (d) the employer’s termination of the contract.The employee may end the employment contract through resignation by giving 30 days notice, or by immediately resigning if the employer is in breach of the employment contract.Termination by an employer may occur with 30 days notice or immediately. In order to terminate the employment contract with 30 days notice, the employer must demonstrate that the employee meets one of the specific conditions for such termination, which include (but are not limited to) the employee’s inability to perform his or her duties or a significant change in the objective conditions on which the employment contract was based (e.g., restructuring due to a merger).In order to terminate the employment contract immediately, the employer must demonstrate that the employee meets one of the specific conditions for immediate termination which include (but are not limited to) conviction of a crime or serious dereliction of duty and/or graft causing substantial damage to the employer.
Employment Contract Recommendations
In addition to the provisions required by law, an employment contract may include provisions that go quite far to creating a robust framework for a healthy employment relationship.
Probation Period
The probation period occurs at the beginning of the employment contract term and can last for a period ranging from one to six months (depending on the length of the contract term). Importantly for employers, the probation period provides a window of time during which the employer can assess the employee, and the employer may dismiss the employee without severance at any time during the probation period if the employee does not meet the recruitment requirements (which is one reason why the recruitment requirements must be set out in clear and sufficient detail).
Training
If the employer incurs out-of-pocket expenses to train an employee (e.g., airfare, hiring external trainers), the employee can be required to reimburse the employer if such employee separates from the employer prior to the end of contract term. This structure may enable to the employee to understand the value of the training, and may mitigate the risk of an employee separating from the employer prior to providing a return on the training costs.
Detailed Job Description
A detailed job description is essential to establish the employer’s expectations for the employee, in addition to forming the basis for any decision to terminate an employee for poor job performance. As such, it is advisable for an employment contract to include an appendix with a detailed job description that sets out not only the employee’s duties, but also the professional standards for executing such duties. Additionally, the employment contract may state that the employer may vary the position according to its needs.
Confidentiality
It is advisable for the employment contract to define information that is considered confidential (which may include trade secrets, intellectual property, clients, etc.) and prohibit the employee from using or divulging such confidential information.
Competition Prohibition
The employment contract may include a competition prohibition, which may apply during the employment contract term and/or after the termination or expiration of the employment contract term. If the competition prohibition applies after the termination or expiration of the employment contract term, the employer should compensate the employee for the duration of the competition prohibition in order for the prohibition to be effective.
Fiduciary Duty
The employment contract may obligate the employee to fiduciary duty, which sets a broad standard for an employee’s behavior by establishing that the employee has an obligation to act in the best interests of the employer. It is important to note that the concept of fiduciary duty is not defined or recognized in many jurisdictions.
Other Employment Issues
In addition to the employment contract basics set out above, employers in China should be aware of other employment issues that may apply, which include:
(i) The employee handbook, which sets out the employer’s rules, regulations and expectations;
(ii) Various types of employment-related contracts, which include a fixed-term contract, an open-ended contract and a project-based contract;
(iii) Part time employment;
(iv) Irregular work hours for employees who do not have a set schedule;
(v) Labor arbitration;
(vi) Severance requirements;
(vii) Local regulations affecting social insurance;
(viii) Overtime; and
(ix) Discipline records.
©2012 All content of this article is the property and copyright of China Solutions Inc and may not be reproduced in any format without prior express written permission. The content of this article is intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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