China looks to tighten labour rules

China's concern for social stability is reflected in two recent draft labour law rules issued for public comment. The effect will be to increase HR costs for some employers.

The two recent drafts, which concern labour dispatch practices and labour disputes, are:

• Labour Contract Law draft amendments, circulated for comment by the Standing Committee of the National People's Congress (comments must be submitted by 5 August 2012); and
• Interpretation on several Issues Concerning the Application of the Law to Labour Dispute Cases (comments must be submitted by 28 Jult 2012)

Betty Tam, Karen Ip and Andrew Tortoishell provide an overview of the key proposals

Restricting labour-dispatch practices

The draft amendment to the Labour Contract Law aims to change labour dispatch practices, under which businesses choose to outsource workers from third-party dispatch agencies rather than directly employing the workers themselves. This can result in cost-savings and make it easier to terminate the relationship with the worker. The draft amendment, however, would severely restrict current practice.

Under the draft amendment:

• Workers can be dispatched only for "temporary, auxiliary or substitute positions". Temporary positions cannot be for longer than six months; auxiliary positions are those that support the main business line; and substitute positions are for covering employees on vacations or study leave. The current rules, by contrast, are generally taken to permit long-term dispatch relationships in a wide variety of positions.
• Minimum registered capital requirements for labour-dispatch company engaged in labour dispatch business are increased from RMB500,000 to RMB1,000,000.
• Employers and dispatch agencies violating the law may, in serious cases, be fined between RMB5,000 and RMB10,000 per dispatched worker. 

As a result of the draft amendment, employers currently relying on dispatched workers might be required to directly employ more workers. This would increase payrolls, and make future down-sizing more difficult and more expensive. 

Once the revised Labour Contract Law is issued in final form, it is likely that detailed implementing rules will also be issued. 

Labour dispute guidance

The draft interpretation circulated by the Supreme People's Court clarifies various labour dispute issues. Although the Supreme People's Court interpretations are only strictly binding on the various People's courts, it is likely that labour arbitration institutions will find the interpretation to be persuasive. 

Some of the key provisions include:

• Employers can only rely on workplace rules, such as employee handbooks, during a labour dispute at court if the employer can demonstrate that employees have had due input into the formulation of such rules. This is specifically aimed at ensuring compliance with Article 4 of the Labour Contract Law, which states that input from employee representative meetings or employee congresses is required for formulating or modifying a company's rules and regulations, or making decisions on important matters, which have a direct bearing on the immediate interests of workers. 
• A foreign-national (including persons from Hong Kong, Macau and Taiwan) can only claim rights under Chinese labour law if the foreign national has obtained a work permit. Merely signing a Chinese labour contract is not sufficient. 
• A post-employment non-competition provision in a labour contract will not be binding if an employee exercises a statutory right to terminate his/her labour contract due to certain non-compliance or wrongful acts of the employer, or if the employer wrongfully terminates the labour contract.
• If a labour contract includes post-employment non-competition provisions, but does not specify the compensation to be paid, then (i) a court will not enforce the obligation, or (ii) if the employee has already performed his/her non-compete obligation, the employee can claim monthly compensation equivalent to his/her average salary in the past 12 months. By contrast, some local regulations, contemplate that payments as low as 20% are sufficient compensation. An ex-employee will be released from a non-compete obligation if his/her ex-employer fails to pay the compensation for more than one month. 

The draft interpretation is intended to increase compliance with the Labour Contract Law by increasing the costs, financial and otherwise, of noncompliance. Employers should aim for full compliance with Chinese labour law. Foreign nationals working in China should ensure that all required procedures are duly completed. 

Looking forward

While it is not known when or in what form the draft rules will be issued, it remains clear that the Chinese government continues to be concerned about maintaining stability in China's workforce and that the cost of stability will be shared with employers.