New employment legislation in the PRC offers enhanced rights to the country's workers. Guillaume Rougier-Brierre reports

On 29 June, 2007, the People's Republic of China's (PRC's) top legislature, the Standing Committee of the National People's Congress, adopted the Law of the People's Republic of China on Labour Contract. The new law gives legal protection to the vast majority of workers who had no way to protect their rights under the old system.

Although workers have been able to choose their own jobs since 1994, this new law strengthens their rights and may lead to the establishment of employee congresses. The legislation takes effect on 1 January, 2008, and is in response to new economic and social needs that have emerged as a result of heavy industrialisation and urbanisation in the PRC. The key features of the new law are outlined below.

The legislature's new policy discourages fixed-term contracts and encourages open-ended contracts, as the number of fixed-term contracts is now limited to two consecutive contracts between the same parties. If an employer wants to continue employing an employee after the second fixed-term contract expires, an open-term contract must be entered into upon the request of the employee. If the employer fails to sign an open-term contract, the employer shall pay the worker twice his wage, starting from the date on which an open-ended employment contract should commence. Employees have been given the unilateral right to demand an open-term contract at the end of the second term.

Employers are also required to provide written contracts that comply with minimum wage and safety regulations. Employees without a signed contract in the first month of employment are entitled to double pay each month up to the end of the first year. If no employment contract is signed within one year of the commencement of the employee's work, the parties are deemed to have concluded an open-term contract. Employers face risks if contracts are not signed or renewed in a timely manner.

Probation periods may now be included in the terms of the employment contract, the duration of which depends on the contract terms but cannot exceed six months. The employer may not renew the probation period simply to have more time to assess the employee's qualifications and the wages during the probation period may not be less than the lowest wage paid by the employer for another employee in the same position or less than 80% of the wage agreed upon in the employment contract. If an employer terminates an employment contract during the probation period, it must explain the reasons to the worker.

It is difficult to evaluate the consequences of this new rule because it seems to be contrary to the goal of the probation period.

The new law also provides specific details about non-competition clauses, which are limited to a maximum duration of two years and to senior managers, senior technicians and other persons with an obligation of confidentiality. The parties freely agree on the scope, territory and term of the competition restrictions. Both parties shall also agree on the amount of liquidated damages due from the employee should he breach his competition restriction, although the employment contract law does not provide a method for how to compute liquidated damages. The judicial requirement that the clause imposed on the employee is 'reasonable' had not been confirmed or rejected.

The new law clarifies that wages paid during active employment are not sufficient compensation but does not clarify how much must be paid in order to make non-compete clauses enforceable.

The law makes it harder to lay off employees and at-will termination is not allowed, as dismissal must be justified.

Termination of an employment contract may be for economic reasons but a special procedure must be respected. At least 10% of the total staff or 20 employees must be terminated in order to constitute a mass lay-off. This threshold may prevent employers from resorting to termination for economic reasons when only one employee or a few employees are concerned. New grounds for mass lay-offs have been added. Termination is now allowed when a business condition that was essential to the performance of certain employment contracts has fundamentally changed so that the employment contracts can no longer be carried out. When deciding which employees should be laid off, the employer is obliged to give priority to retaining those workers who have long fixed-term contracts, those who have open-ended contracts or those who are the sole income-earners in their family.

The new law provides clearer guidance with regards to remedies for unlawful termination. The employer shall continue to carry out the employment contract if requested to do so by an employee. If the employee does not make such a demand, or the performance of the contract has become impossible, the employer must pay the employee compensation equal to twice the normal rate of severance. The legal context for when reinstatement is deemed to be impossible remains unclear. In order to provide some protection for employees who, when dismissed, would have little chance of finding another job, the new law adds categories of employees who are legally protected from dismissal and covers employees who have worked in the same enterprise continuously for at least 15 years or who are less than five years from the legal retirement age.

Severance is payable when a fixed-term contract expires and has not been renewed, except when an employee refuses an extension offered by the employer that contains employment conditions not lower than those provided in the existing labour contract. The latter seems to go against the very nature of fixed-term contracts, the main purpose of which is to exempt the employer from any payment after expiration of the term.

The law places a ceiling on the calculation of severance payments which, to a certain extent, may be favourable to employers. If the employee's average monthly wage for the 12 months prior to the termination is greater than three times the average monthly wage in the municipality where the employment contract is signed, severance shall be calculated on this basis. The average wage-cap may significantly reduce separation costs for senior management employees. The computation of severance pay is based on the number of years worked with the employer at the rate of one month's wage for each full year worked. When an employee has worked for more than six months but less than a year, he is nevertheless entitled to receive one month's salary in compensation. The severance payment for an employee who has worked less than six months shall be half of his monthly wage.

Trade unions have been granted the power to block the application of internal rules in policies and procedures manuals. These changes will strengthen enterprise unions and may lead to the establishment of employee congresses. In practice, these employee congresses may be established at any single facility within a multi-facility business. While their role is not well defined, employee congresses may also be involved in collective bargaining.

The law is also innovative in other matters. For instance, it requires employers to sign a collective contract with the enterprise's trade union and brings about new provisions related to staffing firms. However, the legislation – a landmark in modern Chinese labour law – is most likely to be seen as a burden for local employers who, contrary to their foreign counterparts, are not used to demanding labour regulations.