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China HR: The 21 most asked HR questions about the Chinese labor law Part 2/2

(January 17th, 2014)

by Richard Hoffmann, ECOVIS Beijing China China HR, China labor law

The People’s Supreme Court issued a fourth Interpretation of the Chinese Labor Law, which came into force last year on February 1st 2013. The fourth interpretation contains more specific regulations for payments during the non-competition period, but at the same time, it raises more questions about how to correctly apply the existing laws. Ecovis Beijing answers the 21 most asked China HR questions in its two part series about the Chinese Labor Law. Question 11-21: How can you incorporate your interests in your labor contracts?

How can you maintain the confidentiality of the employees?

The written labor contract should have a confidentiality clause. By signing the contract the employee agrees to handle all information, e.g. trade secrets, confidentially. If the employee does not respect the confidentiality clause and as a result the company suffers losses, the company can make the employee liable for compensation payments. To make sure that this right will be enforced the confidentiality clause in the contract has to be well-drafted and accurate. Thus, it is better to leave this part to an expert.

When is it useful to have a noncompetition agreement?

Non-competition agreements usually apply for senior management or senior engineers because they have the greatest knowledge about the company’s strategy and secrets. It is important for foreign companies to use such non-competition agreement since they often have technical and/or management know-how, which they do not want to easily lose to their competitors. Such a non-competition agreement states that the employee shall not compete with the employer even after termination. This includes starting a new job or their own business. That is why this period is usually a tough time for the employees.

How much does the non-competition period cost?

During the non-competition period the employee shall receive at least 30% of his/her previous salary per month. Previous salary means the average salary obtained during the last 12 months and this also includes bonuses or any other extra payments. The maximum time frame for the non-competition period is 2 years. If the employer wishes to terminate the non-competition period before the official end, an additional three months compensation payment has to be paid. To prevent additional payments, as for terminating the non-competition period, the company should well estimate for how many months they can afford a non-competition period.

How well does the non-competition period protect me?

Of course it is difficult to monitor the terminated employee. However, if the employee breaches the agreed non-competition period, the employer has the right to demand compensation for all damages occurred.

How can you terminate an employee?

Termination is only possible if one of the statutory reasons applies or if the fixed-term contract expires. Any termination, which cannot be explained by the statutory reasons, is illegal and such a process for illegal termination can be very expensive for the company. Situations when an employee can be terminated can be classified into immediate termination, meaning a written notice 30 days in advance or a three days’ notice in advance under probation period.

When can you immediately terminate an employee?

  • If the employee is to be found incompetent during the probation period;
  • If the employee is investigated for criminal actions;
  • If the employee seriously violates the internal rules;
  • If the employee commits corruption or dereliction causing significant loss for the employer
  • If the employee has a second job, which makes it impossible for him to perform well, and the employee refuses to change this situation; then the company has the right to terminate him/her immediately without any severance payment.


When do you have to give a 30 days written notice for termination?

  • If the employee is still incompetent after training and position adjustment;
  • If the employee is unable to perform his job due to his or her health conditions after the legal sick leave period;
  • If the objective circumstances, under which the person has been employed, seriously changed; then the employee can be terminated with one month’s written notice with severance payment.


How expensive will the termination be?

Under certain circumstances the company needs to pay severance payments.  The total severance payment is then calculated:  average monthly salary x years of service. The average monthly salary refers to the average salary of the last 12 months before termination. This also includes bonuses and further extra payments. However, for the employer’s convenience, average monthly salary used for severance payment calculation cannot be more than three times the municipality’s monthly average salary. Thus, for Beijing since June 2013 (likely to be changed in June 2014) this would be RMB 15,669 only. For the years of service, any time period under 6 months, is handled as half a year. A time period above 6 months, is handled as a full year.

When do you have to pay severance for your terminated employee?

The severance payment, which is calculated as mentioned above, has to be paid:

  • If a fixed-term contract expires and is not renewed;
  • If the employer and employee agree to terminate the contract and this has been proposed by the employer first;
  • If the employee is terminated with a 30 days written notice under certain statutory circumstances;
  • If the company needs to release 20 employees or at least 10% of all employees because it undergoes changes as implied by the Enterprise Bankruptcy Law;
  • If the company closes down;
  • If the employee proposes termination because his/her employer was engaged in illegal action.


What is the employee handbook and why do we need it?

In addition to a labor contract, a company should have an employee handbook, as well. The employee handbook can be regarded as the “Code of Conduct” for the employees. In this handbook, internal procedures for leaves, sick leaves, and behavioral standards should be incorporated. The employee handbook gives the company the possibility to define expressions, which are formulated vague by the law. For example: the law says, that an employee’s position can be adjusted if he/she is incompetent. ‘Incompetent’ should also be defined in the employee handbook. Another example: the law says that an employee can be terminated immediately if he/she severely violates the internal rules. What ‘Severely’ should also be defined in the employee handbook. As such, the employee handbook shall cover:

  • Recruitment Procedures
  • Staff Performance and possible consequences
  • Confidentiality and noncompetition
  • Termination
  • Discipline Punishments
  • Approval Procedures for leaves and overtime


What role do Labor Unions play?

Generally speaking, a company needs to have a labor union. The labor union has to be informed about simply everything going on in the company and has the right to ask the company to change their actions. However, It is not mandatory to  get their agreement before any company action. It is important to keep the labor union informed, especially in the case of unilateral termination, in order to avoid disputes with the Labor Arbitration. The company also has the obligation to pay the labor union fees on a monthly basis.

Part 1 of our series: The 21 most asked HR questions about the Chinese labor law  Ecovis-Beijing can write and revise your labor contracts for any type of emplyoment in China including secondment contracts for expats. We also highly recommend to have an “employee handbook”! If you need more information contact us directly through the button below.

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Richard Hoffmann
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