Episode 05: Hiring staff in China

Picture by Masca Yilan Yuen

In this podcast I inform you about the employment agreement in China - what are the things to pay attention to when you are hiring staff?

In this episode I want to give you information about hiring staff in China. Usually it is not difficult to find suitable candidates in China and I assume that you will do the necessary to check someone’s background, documents and references. If you enter into an employment relationship in China, you have to be aware that labor law is tricky: it has a lot of details so even for us as professional advisors it already feels like a minefield. Also, rules can be different from place to place. So what is the rule in Shanghai, does not mean that that is the rule in Chongqing!  

Then the next step is to provide the new employee with an employment agreement. It is very important that you will do this within a month because if you don’t do it, then the consequence is that the employee is entitled to double salary for the period after that month that he/she was not provided with a written employment agreement. If by the end of the year, the employer still failed to give this, the employment will be regarded as an open end contract instead of a fixed term.

As a foreign invested company, I would strongly advise to have a bilingual agreement with the employee.

In the employment agreement, you will need to mention the parties. The employer should be a Chinese entity as it is not allowed to employ people in China with an overseas company. If you do not have a Chinese entity, there are other options but these are not straight forward so it will be a bit more troublesome, expensive or risky.

If the employee is a foreigner, he/she will need a work and residence permit for working in China. If the employee is not already working in China, the application procedure takes several weeks to month so take that into account.

Then the employer has to decide on the term of the employment agreement. Choices are between a fixed term or an open end contract. It is custom to provide the employee with a fixed term contract if it is a first contract. The advantage of a fixed term contract is that the employment can end upon expiration only. Although the employer still needs to pay compensation if it decides to not renew, it is not needed to have a valid reason for termination. The valid reasons need to be the ones that are stated in the law and usually additional evidence is required to prove that this reason really exists and that the employer followed the mandatory steps. However for fixed term contracts, you need to remember that at a certain number it will be converted into an open end one. Which number this is, depends on the location of the employer. In Shanghai it is the third employment agreement while in Beijing it is the second one, so that is a big difference!

Besides the term of the agreement, the employment agreement has to state the start date, job requirements and work place, working hours with rest and leave, protection and working conditions, salary and social insurance, labor discipline, termination circumstances and consequences of violations of the labor contract.

Employees are entitled to have a minimum number of annual leave days which depends on the length of their own employment history meaning that this is includes previous employments. Overtime has to be compensated by the employer and can be up to 300% compensation so it is best not to state that the employee is expected to work overtime, especially since it is required to obtain upfront approval for structural overtime or a flexible working hours system. 

Optional clauses in an employment agreement are probation (length depends on the term of the employment agreement), bonus and expense arrangements, arrangements concerning company car, accommodation, home travel costs, education kids, study costs, etc., confidentiality clause, code of conduct, non-solicitation clause, intellectual property arrangements, hand over procedure including returning property to the employer.

 The non-competition clause is also a clause some employers will consider to insert in the employment agreement. This is allowed for senior key staff but an important circumstance in the consideration is that the employer needs to pay the employee compensation for the period that the employee has to respect the non-competition clause after termination. This needs to be a monthly payment and the amount is upon negotiation and if no amount is agreed and parties can not agree on this, local legislation will usually have a minimum mentioned which is probably around 20-30%.

Make sure that the agreement is signed and chopped in twofold and that this is in the employee’s file. Changes or renewals should be confirmed in writing in clear understandings.

 In my experience, labor arbitration committees and courts take the text in the law and regulation and in the employment agreement very literally so I advise employers to also use an employee handbook. This will contribute to clarity in the company and avoid misunderstandings and disputes.