Legal View: Employers face tougher rules

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Human resources managers face a challenging year in 2007. Changes are expected in employment contract law and there is increased pressure to allow the establishment of unions in companies.

The arrival of unions is often accompanied by Communist party cells at the enterprise level. The government- sponsored All-China Federation of Trade Unions, the umbrella labour organisation, is pushing for more collective bargaining. Newly established foreign-invested enterprises may also have to establish a supervisory board with a third of members elected by employees.

For foreign investors, the focus of attention is the draft employment contract law, which is likely to lead to major changes in employee rights and employer obligations.

An unprecedented 191,000 comments were received from the public in response to the March 2006 draft.

Although most comments were submitted by employees and unions, foreign investors and chambers of commerce weighed in with submissions. The draft law even caught the attention of politicians in the US and Europe. Some of the major highlights of the new draft are, in summary:
■Fixed-term contracts. Most companies use fixed-term contracts because of the difficulty of terminating employees in China. The December draft limits their use to two terms before an open-term contract must be signed. In addition, employers have to pay severance to employees if fixed-term contracts expire.
■Training bonds. Many companies try to prevent early resignation by employees they have spent time and money training by requiring minimum periods of service and repayment of all or part of training costs in the event of early resignation. The December draft requires that, for this type of agreement to be enforceable, there must be a minimum training time of one month and it must be full-time, off-the-job training. Thus, employers cannot impose training bonds on distant learning courses or internal training.
■Company rules/Codes of Conduct. Company rules and codes of conduct are important instruments in maintaining discipline in the office and compliance with policies. Under the December draft, unions or employee representatives must be consulted prior to implementation. It is unclear what exact procedures must be followed in order for this consultation requirement is satisfied.
■Mass lay-offs. Current law does not provide a clear legal basis for mass lay-offs except in extreme circumstances. The December draft allows mass lay-offs but makes these subject to consultations with the union or employee representatives. They will also depend on social selection criteria – for example giving greater protection to employees who are the sole breadwinner in a family. These procedural requirements are triggered if 20 or more employees or 10 per cent or more of the workforce is to be terminated.

Comments from the business community appear to have had an impact. Whereas the March 2006 draft offered a substantial increase in protection for employees and a greater role for unions than existing law, a draft completed in December 2006 scaled back protections for employees and sharply curtailed the role of unions. On balance, the new draft is more employee-friendly than current law.

Andreas Lauffs is a partner with Baker & McKenzie in Hong Kong.
Jonathan Isaacs also contributed to the article.

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