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

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 © Simmons & Simmons 2009 2 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 3 / Doc ID: L_LIVE_APAC1:1074466v2

Discrimination in selecting employees

No sophisticated laws, but fundamental principles:  gender  ethnic group  race  religious belief Some incentives for encouraging employment of handicapped persons © Simmons & Simmons 2009 4 / Doc ID: L_LIVE_APAC1:1074466v2

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

© Simmons & Simmons 2009 5 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 6 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 7 / Doc ID: L_LIVE_APAC1:1074466v2

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?

© Simmons & Simmons 2009 8 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 9 / Doc ID: L_LIVE_APAC1:1074466v2

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

制） （不定时工作制）

Comprehensive working hours scheme

（综合计算工时工作 © Simmons & Simmons 2009 10 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 11 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 12 / Doc ID: L_LIVE_APAC1:1074466v2

Amendment of contract

 Difficult for employer to impose unilateral changes  Employee consent required to change a contract term © Simmons & Simmons 2009 13 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 14 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 15 / Doc ID: L_LIVE_APAC1:1074466v2

Other grounds for termination (LCL Article 41)

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 © Simmons & Simmons 2009 16 / Doc ID: L_LIVE_APAC1:1074466v2

Other grounds for termination (LCL Article 41)

 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 © Simmons & Simmons 2009 17 / Doc ID: L_LIVE_APAC1:1074466v2

Other grounds for termination (LCL Article 41)

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 © Simmons & Simmons 2009 18 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 19 / Doc ID: L_LIVE_APAC1:1074466v2

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? © Simmons & Simmons 2009 20 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 21 / Doc ID: L_LIVE_APAC1:1074466v2

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) © Simmons & Simmons 2009 22 / Doc ID: L_LIVE_APAC1:1074466v2

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） expatriates) - implications, advantages and disadvantages (for  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 © Simmons & Simmons 2009 23 / Doc ID: L_LIVE_APAC1:1074466v2

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”?

© Simmons & Simmons 2009 24 / Doc ID: L_LIVE_APAC1:1074466v2

Questions?

© Simmons & Simmons 2009 25 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 26 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 27 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 28 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 29 / Doc ID: L_LIVE_APAC1:1074466v2

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) © Simmons & Simmons 2009 30 / Doc ID: L_LIVE_APAC1:1074466v2

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?

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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 © Simmons & Simmons 2009 32 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 33 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 34 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 35 / Doc ID: L_LIVE_APAC1:1074466v2

Handling employment disputes and termination (Con’d)

 Timing issues  The role of and dealing with labour unions （工会） © Simmons & Simmons 2009 36 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 37 / Doc ID: L_LIVE_APAC1:1074466v2

Handling employment disputes and termination (Con’d)

 Notice periods, and garden leave – Notice period – Garden leave © Simmons & Simmons 2009 38 / Doc ID: L_LIVE_APAC1:1074466v2

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 © Simmons & Simmons 2009 39 / Doc ID: L_LIVE_APAC1:1074466v2

Questions?

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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 legal grounds (Beijing; 2009; http://www.chinacourt.org

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

) © Simmons & Simmons 2009 41 / Doc ID: L_LIVE_APAC1:1074466v2

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) © Simmons & Simmons 2009 42 / Doc ID: L_LIVE_APAC1:1074466v2

XIII.

PRC Labour Decisions (Con’d)

 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) © Simmons & Simmons 2009 43 / Doc ID: L_LIVE_APAC1:1074466v2

XIII.

PRC Labour Decisions (Con’d)

 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) © Simmons & Simmons 2009 44 / Doc ID: L_LIVE_APAC1:1074466v2

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

) © Simmons & Simmons 2009 45 / Doc ID: L_LIVE_APAC1:1074466v2

Q&A