a strategic and practical approach to structuring, managing and terminating employment relationships...

A Strategic and Practical Approach to Structuring, Managing and Terminating Employment Relationships in the PRC

Fiona Loughrey (Partner, Head of China Employment Group)

Matthew Durham (Consultant, China Corporate Group)

Yijia Jin (Associate, China Employment Group)

Presentation organised by CCH

Shanghai – 3 March

Beijing – 5 March

2 / Doc ID: L_LIVE_APAC1:1074466v2

© Simmons & Simmons 2009

I. Introduction

Current trends and an overview of the employment environment in the PRC

Impact of the Labour Contract Law 2008 （劳动合同法）

Increasing number of claims

– Statistics (in China)

– Hotspots



II. Pre-employment issues

The interview process - what information can be requested?

Pre-employment checks and screening - what is permitted and what information is available?

– Legitimacy

– Feasibility

Basic information that relates directly to the employment



Discrimination in selecting employees

No sophisticated laws, but fundamental principles:

gender

ethnic group

race

religious belief

Some incentives for encouraging employment of handicapped persons



III. The employment contract

Written contract （书面合同） . Time limits and penalty.

Fixed and open term ( 固定期限或无固定期限 )

Use of probation periods （试用期）

Job description （工作说明书）

Training bonds （服务期）

Working hours and overtime

Amendment of contract

Termination provisions



Written Employment Contract

Enter into within one month of commencing employment

Contract must specify:

name of legal representative of employer

name, domicile and ID no of employee

term (duration) of contract

job description and place of work

working hours, rest and leave

remuneration

details re working conditions and labour protection



Probation periods

Maximum probation period will depend on term of the contract e.g. 1 month for contracts of less than 1 year, 2 months for contracts of 1 year or more but less than 3 years, 6 months for contracts of 3 years or more

Employers can (potentially) pay 20% less during probation

Additional restrictions on employer’s right to terminate unilaterally without notice or severance during the probation period – prove that employee does not satisfy the conditions for employment, etc.

Employers will need to be more diligent in monitoring new joiners on probation and ensuring they have sufficient evidence to justify any termination during such period



Fixed and Open Term

Fixed or open term （固定期限或无固定期限）– the two fixed terms rule. Regional differences in interpretation?

Under LCL an employer may only have two fixed term contracts with an employee. After that, if a further contract is entered into it must be open term

Starts from first fixed term contract entered into or renewed after 1 January 2008

What duration to choose?

The employer must also pay severance on the expiry of a fixed term contract without renewal, unless the employee rejects a new contract on the same or improved terms

Implications: fixed term contracts more expensive for employers. Employers will also need to consider carefully how long fixed term contracts should be for

Treat first contract with new hire as quasi “probation” period?



Training Bond

Agreement specifying ongoing term of service

Must be “professional technical training”

Paid for by employer with “special funding”

Liquidated damages – must not exceed training costs

Employee liability also limited to amount allocable to unperformed portion of lock-in period



Working Hours and Overtime

Normal working hours ( 8 hours per day, 40 hours per week)

Overtime payment (or time off in lieu)

150% for normal OT, 200% for weekends and 300% for public holidays

Implement clear internal policy and guidelines

Can employee be exempted? does a special scheme apply?• Irregular working hours scheme （不定时工作制）• Comprehensive working hours scheme （综合计算工时工作

制）



Flexible working hours schemes

Irregular working hours scheme

Remuneration under contract already covers certain potential overtime

Applicable to senior management staff and certain sales staff

Needs to be registered with and approved by the local labour bureau

There is no definition of "senior management staff" nor "sales staff" and applications are approved on a case-by-case basis

Approval may vary from location to location



Flexible working hours schemes

Comprehensive working hours scheme

Engaging staff to work for “X” number of hours over a certain period of time

No need to pay overtime if the employee does not work for more than an average of 8 hours per day and 40 hours per week over a cumulative period of time

Applicable to employees engaged in sales or transport, or other employees for whom the system is “suitable”

No definition as to what “suitable” means

Needs to be approved by the local labour bureau and the applications are considered on a case-by-case basis



Amendment of contract

Difficult for employer to impose unilateral changes

Employee consent required to change a contract term



IV. Termination

Termination for “cause” (LCL Article 39) – no notice or severance

Proved during probation period not to satisfy conditons for employment

Material breach of employer’s rules and regulations

Serious dereliction of duty or graft, substantially harming employer

Additional employment relationship

Pursued for criminal liability

Deception or coercion in obtaining employment



Other grounds for termination (LCL Article 40)

With minimum 30 days’ notice (or payment in lieu) and severance

For non-work related illness / injury after expiry of statutory medical treatment leave period

Incompetence even after training or adjustment of position

Major change in objective circumstances relied on to conclude contract renders it unperformable




Mass lay-offs （经济性裁员）

Minimum 20 persons (or 10% of staff if less than 20 employees)

Must be in specific circumstances:

Restructuring under Bankruptcy Law

Serious difficulties in production and/or business operations

Change in production or major technological innovation

Other major change in objective circumstances relied on to conclude contract renders it unperformable




Notice and severance applies

Must explain circumstances to all employees (and labour union if applicable) at least 30 days in advance

Must consider views of employees and labour union

Must file report with labour bureau (in some locations) – effectively an “approval” requirement




Priority issues for mass lay-offs:

Employees with long-term fixed term contracts

Employees with open term contracts

Employees that are sole provider to their family and whose family has an elderly person or minor to care for

If new hires are made within 6 months of staff reduction, must give preference to re-hiring staff laid off



Exemption from termination

Exemptions apply, unless termination is for “cause” (Article 39)

Female employee during pregnancy, maternity leave or nursing period

Occupational disease confirmed

On statutory medical treatment leave

Engaged in job exposed to occupational disease risk and no pre-departure health check

Working for employer continuously for at least 15 years and less than 5 years from retirement age



V. Employee handbook （员工手册） and policies

Regional or country-specific?

What and how much detail to provide?

The required consultation process - what are the options?



Employee handbook （员工手册） and policies (Cont’d)

Rules and policies or other material matters (and any changes) that have a “direct bearing on the immediate interests of employees)

No definition of “consultation” and little formal guidance

Must involve all employees or employee representatives

Must involve labour union (if any) in consultation process

Must consider feedback from employees and labour union, but no express “approval” requirement

Final version of rules and policies must be published



Employee handbook （员工手册） and policies (Cont’d)

Apply principle of reasonableness

Allow reasonable time for consultation process

Document the process – keep formal records of process and any feedback, plus reasons for discounting any feedback

N.B. Handbooks and policies are very important for supporting employment contract (especially re termination)



VI. Employment arrangement “structuring”

Labour dispatch arrangements - use for representative offices

What laws apply - the interaction of national and local level regulations in the PRC

Direct employment in the PRC or secondment arrangement （派遣） (for expatriates) - implications, advantages and disadvantages

What documentation is required?

How and when will the documentation be provided and signed

Independent contractors （独立缔约人）

Recognition of free-lancers under the Beijing High Court/Labour Arbitration Commission Meeting Minutes



Employee –v- independent contractor

Some general criteria likely to be considered:

Working exclusively for company?

Working at company premises?

Assigned employee number?

Using company equipment and materials?

Company handbook and policies apply?

Basis of payment – fees or regular “salary”?



Questions?



VII. Inventions, confidentiality and non-compete agreements

Employee inventor remuneration and first right of refusal on transfer of technology

How to structure non-compete provisions and which employees are covered - duration, industry and geographical scope, reasonable compensation?

Non-solicitation provisions - clients, employees



Non-compete provisions

Maximum 2 years

Scope restrictions

Must pay employee financial compensation on a monthly basis

No national law guidance on “compensation”

Local regulations and guidelines apply

Best to specify amount or basis for calculation in the agreement

Liquidated damages



VIII. Corporate Governance

Reports to regulatory authorities and employee threats

Whistleblowing schemes

Specific qualifications and experience requirements for certain positions/industries

Company chops and who can bind the company

Scope of authority for senior personnel



Corporate Governance (Cont’d)

Liability of legal representative, directors and “responsible” personnel

Compliance audits

Labour unions and company business – e.g. right to attend board meetings

Data privacy and data transfer



IX. M&A Situations

Due diligence

Key personnel – who do you want and who are you getting

Implications of asset deal

Implications of share deal

Restructurings and transfer of employees (e.g. rep office to WFOE)



Share Deal

Buyer takes over existing workforce

Buyer takes on existing liabilities

How to retain and motivate staff after transaction completed

Is termination/retrenchment possible before or after transaction?



Asset Deal

No automatic transfer mechanism for employees to follow assets

Buyer can be selective

More complex process – transition plan and communication

Conditional offer letter and resignation letter

Incentives to join buyer

Liaison between buyer and seller



X. Stock options and share plans

Incentive and helpful for staff retention

No clear body of law

Limit number of participants

Foreign exchange issues – SAFE

Tax implications

Separate from employment contract



XI. Managing the employment relationship

Performance monitoring and management

Appraisals and performance reviews

Warnings and disciplinary proceedings

Underperformance （表现不好） -v- incompetence （不能胜任工作）

Employee investigations

Whistleblowing



XII. Handling employment disputes and termination

Grounds for termination - is there a clear ground for lawful termination?

– Grounds

– Legal consequences of unlawful termination

Evidential requirements – do you have all the documents and other evidence you need?

Mass lay-offs （经济性裁员） - communication with employees and the labour bureau



Handling employment disputes and termination (Con’d)

Timing issues

The role of and dealing with labour unions （工会）



Handling employment disputes and termination (Cont’d)

Negotiated or mutual terminations – use of release and waiver agreements （免责和弃权协议）

Severance

– Is severance payable to a leaving employee?

– Calculation formula for severance payment

Enforcing confidentiality clauses

Specific issues with expatriate and high-level staff



Handling employment disputes and termination (Con’d)

Notice periods, and garden leave

– Notice period

– Garden leave



XIII. Labour Arbitration and Litigation

What is the process - labour arbitration or courts?

How long does it take?

– Arbitration

– Litigation

Rights of appeal

Some statistics on the outcomes of cases (source: Internet news reports)

– In Shanghai

– In Beijing



Questions?



XIV. PRC Labour Decisions

Employment contract related cases

– Company ordered to pay double wages for issuing letter of appointment without signing labour contract (Shanghai; 2008; http://www.labour-daily.cn)

– Employer unit told to repay social security insurance to employee for lack of legal grounds (Beijing; 2009; http://www.chinacourt.org)

– Employer told to refund fees for reversing the decision to employ worker after medical examination (Beijing; 2009; http://www.chinacourt.org)

http://www.labour-daily.cn/

http://www.chinacourt.org/





XIII. PRC Labour Decisions (Con’d)

Termination related cases

– Employing unit lost the lawsuit for unlawful dismissal due to different penalty standards for the same issue (Shanghai; 2009; http://www.51labour.com)

– Company told to compensate department manager RMB 237,000 for unlawful layoff (Shanghai; 2009)

– Employment unit loses dismissal case against security guard who was fired instantly (Shanghai; 2008)

– Employer publishing dismissal announcement in the newspapers is legal (Beijing; 2009)

http://www.51labour.com/




Confidentiality obligation related cases

– Appeal for Protection of Business Secrets Rejected Due to Lack of Evidence (Beijing; 2009; http://bjgy.chinacourt.org)

– Beijing No.2 Intermediate People’s Court, Civil Division, No. 1637 of 2004 (Beijing; 2004)

– Shanghai No. 1 Intermediate People’s Court, Criminal Division, Final Judgment No.343 of 2003 (Shanghai; 2003)

http://bjgy.chinacourt.org/public/paperview.php?id=57932




Non-compete obligation related cases

– Non-competition clauses nullified if no agreement on economic compensation (Beijing; 2009; http://bjgy.chinacourt.org)

– Non-compete clauses nullified for appointing employee's duties only (Beijing; 2009)

http://bjgy.chinacourt.org/

http://bjgy.chinacourt.org/



PRC Labour Decisions (Con’d)

Non-discrimination related cases

– Employer told to compensate for employment discrimination due to hepatitis B (Shenzhen; 2008; http://www.chinacourt.org)


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