DLA Piper’s Head of Asia- Employment, Pensions and Benefits, Pattie Walsh, explores the reality of China’s new HR laws in practice.

There has been a great deal of discussion recently about the developing labour laws in China. The introduction of the widely-debated Labour Contract Law (“LCL”) on January 1, 2008, brought with it wide-spread criticism about the lack of clarity of the new legislation and the additional burdens that were said to be imposed upon employers. The unusually delayed LCL Implementation Regulations (which were not published until mid- September 2008) did little to address the areas of uncertainty and, notwithstanding the attempt in the Regulations to clarify key issues, in many respects confusion continued to reign. Now, as we approach the close of 2009, it is an appropriate time to assess how the law is operating on a day-to-day basis. One of the key disappointments of the LCL is that the hoped-for standardised approach to labour law issues in China now seems widely optimistic. In reality, regional variations continue to apply not only in the way the law is adopted and applied formally, but also in the variety of local practices adopted by the local enforcement authorities and agencies. Even the major cities of Beijing and Shanghai apply different rules when it comes to fundamental issues such as terminating contracts of employment, putting in place enforceable post-employment non-compete provisions, and unilaterally varying employees’ terms and conditions. This means that businesses operating in a variety of different locations in China will need to be sure of local variations and practices when planning staffing issues. In addition, simply reading the law will not really provide an understanding of the real employment law environment in a given location. Taking a step back and looking at labour law in China from a broad perspective, there are a number of key challenges for employers in China even leaving aside the regional variations and uncertainties about local enforcement. One of the key operational issues is the difficulty of terminating employment contracts lawfully. While the LCL does provide some basis for bringing the employment contract to an end, it is accepted that in any type of misconduct or "cause” dismissal, the evidential threshold is exceedingly high if the matter goes toarbitration or the Peoples’ Court; the odds are very much stacked in favour of the employee. Similarly, when it comes to managing poor performers or attempting to replace one skill set with another more relevant to the business and prevailing market conditions, such situations rarely amount to a sound, legal basis for terminating the contract. This is one of the key reasons that fixed-term contracts have been so popular in China. Prior to the implementation of the LCL, when the fixed-term came to an end it was open to the employer to renew the contract or simply let the relationship end lawfully. In addition, no termination payment was due. Rather than address tricky situations during the course of the employment contract, there was always the end of the fixed-term to resolve the situation. The LCL has altered this position fundamentally; economic severance is now due when a fixed-term contract comes to an end and, even more significantly, there is a clear limit on the number of fixed-term contracts an employee can serve before the contract converts into an indefinite contract (with all the consequential difficulties in terminating). However, there has been some good news for employers in that the LCL provides that when calculating economic compensation on termination (generally a month’s wages for each year of continuous service) the wages which are taken into account are capped at three times the local salary. Therefore for higher paid staff this will have some significance. One of the biggest challenges for employers operating within China (and a key area of non-compliance) is with regard to the legal obligations to pay overtime rates of between 150 to 300 percent of salary. These obligations pre-date the LCL and are contained in the Labour Law itself which was implemented on January 1, 1995. Employees are generally entitled to overtime pay when the individual works more than eight hours a day, 40 hours in a week or when work is undertaken on a rest day or a statutory holiday. These principles also apply to senior level employees. The only way to avoid paying overtime is for the employer to seek authorisation from the local labour authority that the employee may be subject to a comprehensive working system (which retains the overall limit on the hours worked but allows flexibility as to the period during which the hours are worked) or a flexible hours system (which allows higher ranking employees to work in excess of the 40 hours without being paid overtime). Looking forward, it is clear that understanding the labour law environment in China is not going to get any easier. In addition to the LCL, we have recently seen the introduction of new mandatory annual leave obligations, the first express requirement that consent be obtained before disclosing employees’ personal data and new discrimination law protection. There is also the drive by the All China Federation of Trade Unions to ensure all foreign businesses operating in China embrace unionisation. Therefore when considering the risks of doing business in China, it is clear that a failure to fully appreciate the complexity of the labour law obligations and requirements must be high up the risk list. ■

*Pattie Walsh is the head of DLA Piper’s regional Asia employment practice and has been a dedicated employment law expert since 1992. Pattie practised as both a barrister and a solicitor in England before being admitted as a solicitor in Hong Kong in 1996. Pattie advises on all aspects of both contentious and non-contentious employment matters with particular focus on multi-jurisdictional work, staffing issues arising from mergers and acquisitions and other re-organisations and out-sourcing situations across Asia.