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Companies like certainty. It allows them to plan, allocate people and other resources, and make investments in talent and capital. But companies with operations in China often find the employment laws uncertain in substance, application and enforcement.
While the labour law has provided a firm framework since it became effective on January 1, 1995, its application can vary from one location to another.
Many companies had hoped the Employment Contracts Law, which takes effect on January 1, would provide greater clarity.
While it is a step in the right direction, the new law confirms that China will continue to comprise an intersecting, overlapping patchwork of national, provincial and municipal rules when it comes to employer-employee relations. In other words, the employment laws will continue to lack definite, predictable substance and application.
As employers plan for the new law, they need certainty to assess risk and the future enforceability of their employment contracts. A fundamental question many companies are asking in connection with the new law is how it will affect existing contracts as of January 1.
Unfortunately for companies that need a definite answer, the law is fraught with ambiguities. The new law will probably apply retrospectively to many provisions of existing employment contracts – but not to all.
While companies are focusing on broad-scale decisions on converting temporary workers to full-time employees, the law’s nuanced provisions will require the same attention. These subtle nuances will affect the bottom line when making hiring, pay and termination decisions.
For example, the new law requires that employers enter into open-ended employment contracts with employees upon the second consecutive renewal of a fixed-term labour contract, unless legal justification exists for terminating the contract. The law makes clear that the counting of contract renewals will begin with the first renewal after the law takes effect.
The new law expands the circumstances requiring an employer to pay severance to an employee, and different rules and methods for calculating severance payments will apply depending on the reason for terminating the employee.
After January 1, companies will have to pay severance if they do not renew fixed-term contracts, but a company will not owe severance if an employee refuses to renew a contract containing the same or better conditions. The issue for 2008 is how to calculate severance liability based on this non-renewal provision.
The severance due will depend on a formula based on the employee’s tenure and average monthly income. Tenure will be measured from the law’s implementation date, which means the law will not have retroactive effect on that factor.
What remains unclear is whether the law will have retroactive effect on determining the employee’s average monthly income. Will the employee’s average monthly income be measured on a rolling basis for the 12 months immediately preceding the termination date, as it is under the present law? Or will it be annualised from January 1, 2008? The answer will affect human resources, payroll, and accounting policies and procedures next year.
The new law does instil greater definition in the existing employment regime – but unpredictability still lurks within. Until national, provincial or municipal authorities issue regulations to clarify the law’s various ambiguities, planning for the employment contracts law will require considerable flexibility and attention to detail.
The author chairs Paul, Hastings, Janofsky & Walker’s China employment law practice as a partner in Shanghai