CHINA EMPLOYMENT HANDBOOK
Article by David Cui
Attorney at Law
Employers either domestic or foreign are expected to cope with the increasingly complex legal framework that now governs China employment law. Ignorance of the law can lead to complaints and even the possibility of costly legal action. The China Employment Handbook unravels this web and brings all the relevant information together.
Written by the experienced lawyer in the field, The China Employment Handbook is a goldmine of practical, hands-on expert advice. It identifies both the legal essentials (what employers are required to do), the non-legal essentials (actions that are not legal requirements but are fundamental for effective people management) as well as how to protect both parties interests and rights. Topics include: staff recruitment, writing employment contracts, paying staff, Working hours and holidays, writing a staff handbook, personnel records and data protection, handling discipline and staff grievances, terminating employment, welfare and benefit, working with trade unions, trade secret production, secondment and individual income tax.
Staff Recuitment
Most foreign corporations choose not to directly employ local Chinese employees. Under China – PRC employment law a foreign investment enterprise such as a WFOE can enter into any employment contract with local PRC staff, An FIE may enter into employment contracts directly with PRC or non-PRC nationals and would normally deal with the settlement of salaries and other statutory benefits due to its staff directly. Under China PRC employment laws a WFOE can enter into individual labor contracts with each individual PRC employee and is required to submit the labor contracts for certification by the local labor bureau.
As to a representative office which must employ local staff through an authorized foreign enterprise service corporation such as Foreign Enterprise Service Company (FESCO). The local staff working in a representative office (RO) is technically speaking not employees of the representative office, but employees of the foreign enterprise service corporation seconded to the representative office. This peculiar feature does not carry much practical significance in terms of the actual performance of work by employees.
RO will have to enter into a contract with FESCO for the relevant PRC national to provide services to RO. The salary and other statutory benefits due to such RO personnel may be settled through FESCO which will charge a fee for handling such matters. RO and the relevant PRC national may enter into a supplemental contract regarding the details of the terms and conditions of the employment.
RO personnel may be non-PRC nationals who are employees of the foreign company but seconded to RO. A non-PRC national seconded to RO as the chief representative or an ordinary representative would continue to be employed under a foreign employment contract with the overseas employer.
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Employment of Expatriates
A foreign national seeking employment in China and applying for the visas and permits must:
• be at least 18 years of age and in good health;
• possess the necessary professional skills and job experience required for the intended position;
• not have a criminal record;
• have an employer;
• hold a valid passport, or other international travel document which can serve in lieu of a passport; and There are four steps to employment of a foreign national in China.
1. Obtaining an employment permit
The employer must first file an employment application with local labor authorities in accordance with the Regulations for Employment of Foreign Nationals in China, and the Regulations for Employment of Taiwan, Hong Kong and Macao Residents on the Mainland. A foreign national may only be recruited after the employer is licensed.
Since provincial and local labour departments have considerable autonomy in employment matters, procedures vary from region to region. It is important to bear this in mind when preparing to work in China.
For representative offices in China, there is no need to apply for an employment permit in hiring a foreigner as its chief representative. The employer must, however, seek approval from the appropriate approval authority in China. The authority will issue a working card for the employee and based on this the employee can apply for an employment visa.
2. Obtaining an employment visa
Upon approval and issuing of an Employment Permit, of the P. R. China for Foreign Nationals, the authorized organization shall issue a verification notice and a permit. The foreign national then shall apply to a Chinese Embassy or Consulate General abroad for the work visa against the permit, verification notice and an effective passport.
3. Obtaining an employment certificate
The enterprise shall apply to the local labor authorities to get an employment certificate for the foreign national against the permit, the employment contract signed with the foreign national and an effective passport within 15 days after the foreign national enters China.
The validity of the employment certificate will be restricted to the region as specified by the local labour department.
4. Obtaining a residence permit
A foreign national who has already an employment certificate shall apply to the public security authorities for a residence permit against such a certificate. In case of employment of Taiwan, Hong Kong and Macao residents, the enterprise shall report to local labor authorities and receive an employment certificate upon their approval. A Taiwan, Hong Kong and Macao resident who have already been approved to work in Chinese mainland shall apply local public security bureau for a temporary residence against the employment certificate within 30 days of entering China.
Employment restrictions
Laborers shall not be discriminated against in employment, regardless of their ethnic community, race, sex, or religious belief. China’s National Labor Law forbids employers to hire workers under 16 years of age and specifies administrative review, fines and revocation of business licenses of those businesses that hire minors. Laborers between the ages 16 and 18 are referred to as “juvenile workers” and are prohibited from engaging in certain forms of physical work including labor in mines.
Employers must also implement occupational health and safety programs in the workplace, and conduct regular physical examinations for employees in hazardous occupations.
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Writing employment contracts,
Before both sides sign the employment contract, either party should talk to a lawyer. It would cost you a lot less to avoid the problems by getting a lawyer to review it in the first place as they can comment on what IS in the contract rather than what MIGHT be in.
Term of Contract
In China, the term of an employment contract is either fixed term, flexible term or taking the completion of a specific amount of work as a term. In case an employee has worked in the same organization for ten years or more and the parties involved agree to extend the term of the employment contract, the employee has the right to ask for a contract without a fixed term.
Form and Main Clauses
All job agreements in China must be made in writing, not orally. The latter is not legally binding under the PRC Labor Law. Please beware that, under China law, the employee still have powerful employee contract rights even without a written contract conditioned that he/she has the evidence to prove the employer’s payment on a regular basis or the timecard which can also be considered to be a contract.
The contract in writing generally contains the following clauses:
Required clauses: term of a labor contract, work assignment, labor protection and working conditions, labor remuneration, labor discipline, conditions for the termination of the labor contract and liabilities for the violation of the labor contract;
Agreed clauses: probation term, business secrets, training, modification of contact and so on;
Specific agreement: agreements on post, confidentiality, training, retirement, lay-off and lengthy holiday.
Collective Conract
The staff of an enterprise may conclude a collective contract with the enterprise on matters relating to employment remuneration, working hours, rest and vacations, occupational safety and health, insurance and welfare. It is not a mandatory requirement for foreign investment enterprises to sign such contracts and which do not replace individual contracts, but provide a framework that must be observed in the individual contracts.
Language
The contract may be signed in a Chinese and a foreign language version, but in case of discrepancies, the Chinese version controls. Only the Chinese version can be registered.
Employee’s Negotiation Tips
If some of the phrasing is confusing, the employees are advised to ask your company what certain things were when you are going to sign. It is employer’s responsibility to disclose what their contract implies and made it in writing. If they lie or mislead you then you have a case against them. Though, if they are a good company they would be more than happy to clarify the contract with you.
In addition, if you (employee) do wish to make a change to the contract and not want to reject their offer be sure to do the following. Say that you are continuing to consider their offer and are not rejecting their offer but you wish to suggest the following change… Doing this ensures that you have legally protected your position by not rejecting their offer, but can still “suggest” changes to the contract without the contract becoming null and void before you even sign it.
Probationary Period
The purpose of set up a probationary period is to enable the employer to decide whether the worker is suitable before he/she is taken on staff.
This is not mandatory in China. Employers may require a probationary period. The term of the probationary period varies in correspondence with the term of the contract, but the maximum probationary period shall not exceed six months. If a contract term is less than one year, the probationary period is one month. If the term ranges from one year to three years, the probationary period would be no more than three months. The longest period will be six months if the contract is more than three years. During this period, either employers or employees may terminate the contract.
According to Chinese Law, a separate probationary contract will not be valid, and in the event of a dispute, this type of contract will be treated as a formal contract of employment.
The enterprise may terminate its contract with an employee who does not meet requirements during the probationary period.
Invalid Labor Contract and Its Effect
A labour contract concluded in violations in laws or administrative decrees, or by resorting to such measures as cheating and intimidation is considered invalid. An invalid labor contract shall have no legal binding force from the very beginning of its conclusion. The invalidity of a labour contract shall be confirmed by a labor dispute arbitration committee or a people’s court.
Where a part of a labor contract is confirmed as invalid and where the validity of the remaining part is not affected, the remaining part hall remain valid.
In accordance with the Measures Governing Compensation for Losses Resulting from Violation of Labor Contract Stipulations of the Labor Law of PRC (Enacted as of May 10, 1995), if the employing unit is responsible for invalid or partially invalid labor contracts, the employee under which shall be entitled to the compensation for the losses.
Liability Provisions under China Labor Law
The Labor law generally emphasizes civil liability for breach of contract as and incentive to compliance with contractual obligations in place of administrative sanctions. In the law, disciplinary violations are treated as a breach of contract, entitling the employer to terminate the employee (Article 25), rather than as a violation of administrative regulation. The employer may no longer prevent a worker from quitting by refusing permission, but may sue the worker and/or his new employer for damages.
The employer and the employee may agree to stipulate the compensation or damages clause in the labor contract to remedy the losses brought by either party’s violation.
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Compensation
In the event that either party breaches any of the provisions of this Contract and this results in the other party incurring losses, the party in breach shall be liable to compensate the other party for the corresponding losses;
Damages
If the employee terminates the contract earlier, other than as provided in law or clauses of the contract, the employer shall have the right to claim a certain amount of money as damages.
Please do understand that there are breaches and material breaches each which allow different remedies, therefore both sides should specify clearly and specific about the definition or scope of the breach and the damages or compensation thereof.
Implementation Rules of Shanghai Employment Contract
Regulation of Shanghai Municipality on Labor Contract adopted by the Session of the Stand Committee of the Shanghai People’s Congress, came into effect on May 1st, 2002. In late April, 2002, the Shanghai Administration of Labor and Social Security issued the Notice on Several Issues regarding Implementation of Shanghai Municipality Employment Contract Regulations (the “Notice”) to clarify and interpret the Regulations.
Jurisdiction and Majors
The Regulation provides the details for the conclusion, performance, alternation, dissolution and termination of the labor contracts within the Shanghai area.
Definition of Employer and Employee
According to the Notice, “employers” subject to the Regulations include all types of for-profit enterprises, sole proprietorships, incorporated and unincorporated non-profit organizations (the “employer”) and all government agencies in Shanghai municipality.
Domestic workers, professional insurance agents, full-time students who work on a part-time basis, and those who provide independent services are not protected under the Regulations.
It should be noted that although the regulation is ambiguous on its applicability to the contracts involving non-PRC citizens or those from Hong Kong, Macau and Taiwan, the Regulation shall deserve the attention due to the special mandatory nature of Labor Contract Law of PRC rather a kind of contract under the Contract Law of PRC.
Confidentiality and Business Secret
The regulation also provides that the labor contract parties can include confidentiality clause in their labor contracts or reach secret information agreement separately.
Penalties
For laborers who are in breach of the service period or trade secret, the penalties can be imposed.
Formation and Workers type
Besides, the regulation also stipulates that the labor relationships shall be established as long as the obligation has been performed in spite of the conclusion of the labor contracts. Special articles for non-fulltime worker, in other words, worker by hours have been included in the regulation.
Paying Staff
The Labour Law provides a minimum wage requirement, which is determined at a provincial level. For example, as of 1 July 2004, the hourly minimum wage for part-time workers is RMB6.8 (including all social insurance contributions) in Beijing and RMB5.5 (excluding all social insurance contributions) in Shanghai. However, these municipalities only regard employees who work not more than 4 hours each day as part-time workers. By way of comparison, the monthly minimum wage for full-time workers is RMB545 (excluding all social insurance contributions) in Beijing and RMB635 (excluding all social insurance contributions) in Shanghai.
The 1993 Regulations on Minimum Wages in Enterprises (amended in October 1994) require all provinces, autonomous regions, and directly administered municipalities to set minimum wage standards and report them to the Ministry. Employers that fail to meet these standards may be ordered by the Chinese Ministry of Labor and Social Security (MOLSS) and/or its local counterpart to pay the outstanding remuneration and penalty in the amount of 100% to 500% of the outstanding remuneration to its employees. This is substantially more than under the Old Regulations, which provided for more lenient penalties (i.e., 20% to 100% of the outstanding remuneration). Employers must also deduct and withhold employee individual income tax, social security and related payments. Its purpose was to protect workers from market forces that would drive the income of the lowest paid workers below a fair and decent level.
It is worth noting that wages in China in theory are subject to “collective bargaining” between representatives of employers and employees (at least in cases where the labor union so requests, provided that the company has commenced business operations). The employer should also hear the labor union’s opinion in the board of directors before making any resolution on personnel-related matters such as wage levels.
The mandated minimum wages are formulated by the relevant local authorities and vary from location to location.
Payment Time and Means
Wages shall be paid monthly to laborers themselves in the form of currency. The wages paid to laborers shall not be deducted or delayed without justification. Enterprises should pay monthly wages in cash to their workers at least once a month. Workers employed on an hourly or weekly basis may be paid daily or weekly. Enterprises should pay temporary staff or project-based staff immediately after they have completed their job according to the relevant agreement or contract.
Welfare and benefit
The employing unit and laborers must participate in social insurance and pay social insurance premiums in accordance with the law. Employers must pay living subsidies and provide medical treatment allowances for all PRC employees. Employers and employees must also participate in the PRC social insurance system for unemployment, old age pensions, medical treatment, work-related injuries and maternity care. In addition to these mandatory subsidies, employers may also introduce incentive schemes such as bonuses or allowances. These schemes must be paid out of an employee bonus and welfare fund which is created from the employer’s after-tax profits.
For example, both employers and employees must contribute to a workers’ pension fund. The employer is required to contribute 20% of a staff’s monthly salary, while the employee contributes 8% of his or her monthly pay; similar payments are made to medical insurance schemes with employers forking out the larger share. But such contributions vary from region to region. Foreign firms tend to provide more generous medical plans than their local counterparts to attract staff and both employers and employees also contribute to a national scheme set up to help the jobless.
Working hours and holidays
China practices an 8-hour workday, 5 days a week, a 40 hour work week working hour system. (Article 36: The state shall practice a working hour system under which laborers shall work no more than eight hours a day and no more than 40 hours a week on average) (as of May 1, 1997)
Restrictions apply to overtime work. The employing unit may extend working hours due to the requirements of its production or business after consultation with the trade union and laborers, but the extended working hours for a day shall generally not exceed one hour; and such extended hours shall not exceed three hours a day and only under the condition that the health of the laborer is guaranteed. However, the total extension in a month shall not exceed thirty-six hours.
This means that overtime work should never exceed three hours a day, making the longest legal shift permitted 11 hours. It is illegal to work more than 9 overtime hours a week. That caps the longest legal workweek allowed at 49 hours.
Under the PRC Labor Law, generally overtime pay is to be 150% of the normal base wage, 200% for work on non-holiday rest days when substitute rest cannot be arranged, and 300% for work on public holidays.
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Employees’ leave
The statutory holidays are provided in the PRC Labor Law, including New Year’s Day, Lunar New Year’s Day, International Workers’ Day, National Day and other public holidays as provided in the PRC laws and regulations.
Employees are only entitled to annual leave after one year’s service with the same employer. The amount of annual leave varies according to work obligations, qualifications, and other factors, but normally does not exceed two weeks a year. Employees are also entitled to home leave if they are required to live away from their spouse or parents. Employees visiting their spouse are entitled to 30 days home leave per year. Home leave to visit parents is either 20 days per year or 20 days per four years, depending on whether the employer is married.
China has a 5-day week system, and Saturday and Sunday are not included as working days.
Employment termination
Employment termination is complicated in the PRC and employers should exercise caution when sacking employees. You should also have a proper knowledge that it is not very easy to terminate or suspend any employee if you conclude the contract with him/her which is to assume that everyone coming to work for you will someday have to be terminated. Therefore keep track performance in a standardized way is a must for you to have in mind always.
1. No notice is required if an employment contract is terminated during the probation period and the employee has failed to meet employment requirements, or if an employer can demonstrate that the employee has seriously violated the employer’s rules and regulations or has committed other offences, engaged in graft or is charged with a crime.
2. Employers are required to provide 30 days’ notice prior to dismissing employees or terminating labour contracts. Under PRC Labour Law, an employer cannot dismiss an employee without a cause. To terminate an employment contract under the PRC Labour Law, an employer must demonstrate that the laborers can neither take up their original jobs nor any other kinds of new jobs assigned by the employer after completion of medical treatment for their illnesses or injuries not suffered during work; No agreements on a alteration of labor contracts can be reached through consultation between and by the parties involved when major changes taking place in the objective conditions serving as the basis of the conclusion of these contracts prevent them being implemented; that an employee is “incapable of performing a job and remaining unqualified even after training or moved to another post” and under circumstances which employer experiencing serious economic difficulties, the employer can lay off workers after he has solicited the views of the enterprise trade union and has submitted report to the labor authorities; workers cannot be terminated simply to improve productivity and efficiency. Employers however must give priority to laid-off employees if they recruit again within six months after a layoff.
3. An Employer Shall Not Rescind a Labor Contract If : 1) an employee suffers from an occupational disease or a work-related injury and has been confirmed as being totally or partially unable to work; 2) an employee suffers from an illness or injury for which medical treatment within a stipulated period is allowed; 3) a female employee is pregnant, on maternity leave or within the stipulated period for nursing.
4. Employers may indicate in the contracts certain circumstances under which they can terminate the contract as long as they don’t violate the statutory provisions.
FIE employers are required to pay an employment severance payment when the employment contract is terminated. One month’s wage is payable to a departing employee for each completed year the employee has worked.
Under China – PRC employment Law generally provides that the WFOE may terminate the direct relationship with thirty days of notice and specifically defined cause. Termination in China for less than cause subjects the employer to legal action in a very fluid legal environment. Termination of a FESCO engagement also requires thirty days of notice.
Often Overlooked Points
There are a lot of important points that the investor usually overlooked and running the risks of violation and penalties thereof after they executed the contract with the employee. The following are the key points that foreign investor should have in mind:
1) China practices an working term of 8-hour workday, 5 days a week, a 40 hour work week;
2) There is a daily quota limitation;
3) No Forced Overtime/Overtime Strictly Limited to Nine Hours a Week/ Legal Work Week Capped at 49 hours;
4) All Overtime Work Must Be Paid at a Premium;
5) After one year, all workers are entitled to paid annual vacations;
6) Detaining Workers Wages, Fines or Mandatory Deposits is Illegal;
7) Companies Must Join and Pay into Social Security;
No Discrimination Against Women;
9) The Right To Organize Independent Unions;
10) Every Worker Has the Right to a Written Work Contract.
In addition, you should also take into account the accuracy of an applicant’s CV conduct physical examinations of new employees.
Resignation
Although the labor contract has the clause on the length of service period, China’s laws grant employees the right to resign. The Constitution of China protects the laborer’s right to work, which should include both the right to establish labor relations and the right of terminating such relations. Article 31 of the Labor Law of the People’s Republic of China, which came into effect on January 1, 1995, establishes the right to resignation of laborers. It specifies the conditions for premature termination of labor contract as: (1) To notify employing unit 30 days in advance; (2) to notify the employing unit in writing; (3) to notify the employing unit without having got the consent of the unit; (4) a laborer shall pay default fines to the employing unit if the labor contract has the provisions on responsibilities for the breach of contract by terminating labor contract in advance. But if the labor contract does not contain provisions on the responsibilities for the breach of earlier termination of contract, it shall run the risk of being regarded as the employing unit having given up the demand for default fines and the laborer needs not to pay default fines.
In addition, employees can resign without notice during the trial employment period, or at any time when the enterprise has violated the labor contract and encroached the lawful rights of the employees under Chinese law as follows:
• where no notice is required: the employer has ‘coerced’ workers with violence, threats or illegal restrictions on personal freedom;
• where the employer fails to pay wages or provide working conditions as agreed to in the labor contract; or
• at any time during his/her probation period.
Labor Dispute Settlement
According to the China Labor Law and Regulations, whenever a labor dispute arises between a worker and an enterprise, either party may apply to the labor dispute mediation committee at the enterprise for mediation. If the mediation fails or if neither party wants mediation, then they may apply to the local labor dispute arbitration committee for arbitration.
Generally speaking, arbitration and litigation are the most helpful ways to settle labor disputes. The parties involved in the dispute can apply to the labor dispute arbitration committee for arbitration within sixty (60) days from the date the dispute arises. The Labor Dispute Arbitration Committee will arbitrate the case and issue an arbitration award. However, this award is not final. If the relevant parties fail to agree to the arbitration award, they can file a lawsuit on the case to the relevant People’s Court, which will then make a final decision on the case. In China, the two parties involved in the dispute are not allowed to file lawsuits directly to the People’s Court. They must apply for arbitration first.
Burden of proof
To prevail in a civil case, the general rule is that “he who asserts must prove”, i.e., the burden rests with the plaintiff (the party bringing the action).
There are some exceptions to this rule, one of them is the rule in labor dispute resolution due to the great disparity between employee and employer in terms of related strength.
The Interpretation on Several Questions Concerning the Application of Law in Trying the Cases of Labor disputes promulgated by the Supreme People’s Court of PRC states the burden of proof of just discharge, suspension, reduce remuneration and the calculation of employee’s term of employment for cause shall be on the employer.
Therefore, the burden of proof of good cause for leaving work shall be on the employee, and the burden of proof of misconduct shall be on the employer.
Writing a staff handbook
From an employer’s perspective, the handbook should only contain provisions that are going to help the employer with respect to employment issues. In China, however, according to law, the administrative authority exercises tight control over the termination and suspension of employment contract. So an employee can not be fired at any time without cause which is much different from the practice of western countries. There should not also provide that the handbook can be modified or amended by the employer at any time and for any reason.
It certainly could be a problem for an employer to include provisions in a handbook that don’t reflect actual conditions of employment or that may impose unintended duties or obligations on the employer. (Believe it or not, this happens all the time when employers simply decide to copy over and use a “canned” set of policies and procedures they have taken from somewhere else without making sure that the handbooks conform in all respects to their particular business operations.)
An employee handbook will usually include:
• Working hours and days and break times
• Overtime rules
• Sick days and sick leave policies
• How sick leave is accumulated
• Health and other benefits
• Official paid holidays
• Vacation policies How vacation time is accrued and rules as to how and when employees can take it
• Procedures for specific work duties
• Dress codes
• Safety and hygiene rules
• A statement that the handbook “has been passed by the worker’s congress with due procedures” which means such handbook could be incorporated into the employment contract as part of it.
It’s extremely important to have employee handbooks drafted by or at least reviewed by legal counsel periodically in order to make sure that they comply with applicable law and take into account that might not be so obvious.
It should also be noted that you should present each new employees with an employee handbook on their first day on the job, you won’t accidentally overlook anyone and have the employee sign and date a statement that he or she has received the handbook. That way, you can prove at a later date that the employee had the information in the handbook.
Harassment and Discrimination Claims
Up to now, China does not have the specific law on harassment and discrimination in workplace however its top legislature is now formulating the Law on the Protection of the Rights and Interests of Women. In which sexual harassment will be expected for the first time be recognized as a crime and become punishable by law; also according to the draft amendment, no one shall be allowed to subject women to sexual harassment and all work units shall take measures against sexual harassment in working places.
Nevertheless it is still difficult to define exactly what constitutes sexual harassment a problem with which governments all over the world have struggled.
China employment Legislation
The “Labor Law of the People’s Republic of China” effective from 1 January 1995, PRC Trade Union Law, promulgated on 28 June 1950 and revised on 3 April 1992 and 17 October 2001, are the principal Chinese labor laws.
Supplementary laws have also been issued for particular aspects of employment, including:
• The Regulations on Labour Management in Foreign Investment Enterprises (the Labour Management Regulations), adopted in 1994;
• The Regulations of the State Council Governing Working Hours for Workers, adopted in 1995; and
• The Provisional Administrative Measures on Wage Incomes of FIEs, adopted in 1997.
China labor law governs all employment relationships: it covers all forms of business organization, encompasses both blue-collar and white-collar occupations and applies equally to companies owned by domestic interests and employers which are affiliates of foreign companies.
Labour practices vary between regions as provincial and local labour departments have fairly wide discretion in handling local labor matters.
Trade Secrets Protection
In order for business information to qualify as a trade secret, the information must:
1. not be generally known or ascertainable through legal methods;
2. provide a competitive advantage or have economic value; and
3. be the subject of reasonable efforts to maintain secrecy.
Which generally include: product formula, survey methods used by professional pollsters, recipes, a new invention for which a patent application has not yet been filed, marketing strategies, client lists, manufacturing techniques, computer algorithms, etc.
During the course of business, you may have to disclose your business secrets to your employees. What happens when you have a disloyal, untrustworthy, and dishonest employee? The employee may know your secrets. Is there anything that you can do to stop that employee from disclosing your secrets to others?
The best way to protect yourself is to have the employee sign a nondisclosure agreement (sometimes called a disclosure agreement or confidentiality agreement) before you disclose any secrets. If someone signs a nondisclosure agreement and later uses your secret without authorization, you can sue for damages.
Nondisclosure agreements vary in format. Generally, they contain these important elements:
Definition of what is and what isn’t confidential information;
Obligations of the receiving party, and
time periods.
You should also get in the habit of having all employees, consultants, independent contractors and potential business partners routinely sign confidentially agreements if they may receive or have access to any of your company’s trade secrets.
In addition, during the course of business, you may have to disclose your business secrets to your employees. But what happens when these employees leave your company? They know your secrets and there is nothing stopping them from telling others. By requiring your employees to sign a non-compete agreement, employees must agree not to work for a direct competitor for a certain amount of time after leaving your company. The theory behind this is that after a certain amount of time, your trade secret may no longer be valuable or will have changed as your business advances.
However, in China, there are restrictions imposed on enforcing non-compete agreements against employees such as the length for non-compete and the compensation thereof.
In China, there is protection against disclosure of a trade secret which imposes liability on the enterprises who employ the persons with confidentiality agreement not expired. Article 10 of the Unfair Competition Law, prohibits business operations from engaging in any of the following acts:
1. obtaining the trade secrets of any rightful party by theft, inducement, duress, or other illegal means;
2. disclosing, using or allowing others to use the trade secrets of any rightful party obtained by illegal means; or
3. disclosing, using or allowing others to use trade secrets in breach of an agreement or the confidentiality requirements imposed by any rightful party.
There is also third-party liability. Third parties who obtain, use, or disclose business secrets that they knew or should have known to have been infringed by any of the methods in (1)-(3) above, will be deemed to have infringed the trade secrets of the rightful party.
In case of a suspected infringement of one’s trade secrets, there are both judicial and administrative actions which can be undertaken to enforce one’s rights.
The infringed party can institute proceedings in one of the people’s courts to seek compensation for damages under Article 20 of the Unfair Competition Law. In cases where damages cannot be reliably calculated, the amount of profits obtained by the infringing party can be used as the basis for the compensation claim. In addition, expenses and fees arising from investigating and obtaining evidence of the infringement can also be included in the claim for damages.
For administrative enforcement for infringement of one’s trade secret, the offices of the Administration for Industry and Commerce (AIC) above the county level will, after an investigation and determination of wrongdoing, order the infringer to cease its infringing acts and impose a civil fine of at least RMB10,000 but less that RMB200,000. If the infringer does not comply with the cessation order, a fine of more than twice and less than three times the amount of the value of goods sold will be imposed. All decisions of the Administration for Industry and Commerce may be appealed to the people’s courts.
While the most important point to protect your right is take self protection measures from the very beginning to ensure that an employee will not steal, copy or disclose confidential information, the employer should be sufficient to establish that the material in question was deemed to be confidential and adequate measures had been established for its protection. That determination is essential if one is to effectively undertake any type of enforcement action against an infringer of one’s trade secrets.
If an employee has departed your company by reason of resignation or termination and gone to work with a competitor, then the first step to take is to give immediate notice to the new employer of the employee’s continuing obligation to not disclose your trade secrets. This can be accomplished by sending a registered letter to the new employer, indicating that the new employee has knowledge of trade secrets, the general subject matter of the trade secrets, an explanation of the legal basis for the employee’s obligation to maintain secrecy (for example, a Non-Disclosure agreement), and that by virtue of the foregoing, the trade-secret owner may have a cause of action against the new employer.
For Third Party Liability to arise, the new employer must know, or have reason to know, that its new employee had access to trade secrets and may be about to breach a confidential relationship.
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Personnel records
The right to fire is becoming more and more restricted because of the inherent nature in China laws that favor employees. These days, more and more workers who feel they have been unjustly discharged or forced to quit have filed employment-related suits and courts are increasingly taking the employee’s side.
The best way to “win” a lawsuit for employers is to avoid it in the first place. By keeping in mind some basic management and interpersonal rules, many of these rules are also useful in establishing your defense — that you had a good reason to fire your employee — if it turns out that the worker does sue you, after all.
Under china law, the employer can revoke labor contracts should any one of the following cases occur with its laborers: (1) When they are proved during probation periods to be unqualified for employment; (2) When they seriously violate labor disciplines or the rules or regulations of the employer; (3) When they cause great losses to the employer due to serious dereliction of duties or engagement in malpractice for selfish ends; (4) When they are brought to hold criminal responsibilities in accordance with law.
As the China labor law does not define clearly what is to be unqualified, serious violation, dereliction or malpractice for the revocation, therefore, the safest way to fire someone, from a legal standpoint, is to be sure that you have a valid, nondiscriminatory business reason for the action, and that you have enough documentation to prove it. Your documentation must be created in the normal course of business, before you fire the person which includes fair work rules and policies just like a company handbook but it must be the reasonable rules your business requires, a performance feedback system
It’s important to remember that workers (and courts) are more likely to perceive a firing as “fair” if your employees have had plenty of notice about what conduct and performance you expect from them which are very clear and specific. It’s also important that workers receive regular feedback about their job performance, and that they are warned whenever you find that they are not living up to expectations, investigate the “last straw” incident thoroughly. It should be also noted that the using of progressive disciplinary measures in your rules must be enforced fairly otherwise it would be useless. For legal purposes, you must apply your rules equally to all your employees, if you hope to rely on them.
The last but not least, before the fire, you are required to solicit the opinion of the trade union of your company which had been the concern of the hearing judge.
Secondment arrangement
“Secondment Contract” means the contract to be entered into between the Company and Party B (or any of its Affiliate(s)) for the secondment of certain employees by Party B (or such Affiliate(s)) to the Company.
Due to the internal policies of foreign investment enterprises (FIEs) and their foreign parent companies, the difficulties in understanding PRC employment law and how it operates, as well as to avoid the business tax and withhold tax, a number of FIEs structure their employment of foreign nationals in China by way of secondment.
From the perspective of PRC law or the law of the country from where the person seconded, the dual legal conflicts and inconsistencies could cause more problems as the employment contract and the labor disputes arise thereof shall be governed and interpreted by Chinese relevant law and regulations which means that a foreign employment agreement cannot prevent the PRC law from applying if the expatriate will be working in the PRC for more than three months.
To avoid that risk, a PRC company may employ the foreign national directly and to state PRC law as the governing law in the employment agreement. In the meantime, detailed arrangements and entitlements could be structured in line with the foreign parent’s HR policy or the PRC company’s HR policy.
Of course, there are a number of other points should be paid attention such as Residence, Personal income tax, Taxable presence risk, and Compliance obligations which could avoid or mitigate potential risks in the commonly adopted secondment arrangements identified above. It is important that employers work together with their lawyers to benefit from the employment of expatriates in China and avoid the risks of being stuck in the law of two or more jurisdictions.
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Individual income tax
For people working in China, the taxable income is the balance of their monthly income after deducting RMB 1600 for personal expenses.
If you are employed from outside China, the taxable income is the balance of their MONTHLY income after deducting RMB 4,000. The income from the wage and salary will be taxed at the progressive rates ranging from 5% to 45%.
Monthly Salary Tax Rate Quick Calculation Deduction
RMB5,000 – 20,000 20% RMB375
20,001 – 40,000 25% RMB1,375
40,001 – 60,000 30% RMB3,375
60,001-80,000 35% RMB6,375
80,001-100,000 40% RMB10,375
RMB100,000 + 45% RMB15,375
If you derive income and work in the mainland for over 183 days, you are liable to individual income tax in China.
Certain income of foreign workers is eligible for individual income tax concessions. They are housing allowance, meal allowance, removal expenses, travel allowance, language training fees and children’s education expenses, etc. If all these eligible expenses are included in the salary payment without separate receipts income tax concessions will not be granted.
Any foreign individual who resides in China consecutively or accumulatively for not more than 90 days (or 183 days for those from countries that have signed tax treaties with China) in a tax year is exempt from individual income tax if his wage or salary is not paid or borne by his employer in China and is not borne by resident establishment or permanent venue of his employer in China.
We believe the important threshold for foreign residents liable to individual income tax (IIT) is the number of days staying in the mainland which is 183 for tax treaty nations with China. Using multiple or splitting the employment contract for an expatriate cannot help minimize the income tax liability. We would advise that in order for the company to comply with China IIT laws they should consult the tax professionals.
When you said tax year (or calender year), it means from January 1st to December 31th.
If you are employed by a Chinese company with a permanent base of operation in the mainland your income are liable to individual income tax irrespective of the length of period of working in China and how the income are paid.
Some people have made up really high housing costs to bring down taxes owed. Word is that the authorities may audit housing contracts, and cross-check them with market rates. The claim for housing allowance should broadly comensurate with the staff’s status in the company and its size and prestige. Also the amount of claim should not deviate much from the market value of the property in one particular area or district. Clearly all the valid evidence and documents should be produced to support the claim.
If you foreign company has a fixed office base of operation in China you are liable to individual income tax irrespective the number of days of stay in the mainland. Otherwise the 183 days rule will apply. The period of stay in China will be counted on the actual number of days basis.
Trade Union
trade union membership
Under the revisions of the Trade Union Law passed on October 27, 2001, all employees have the right to join the All China Federation of Trade Unions (ACFTU), the country’s sole trade union run by the ruling Chinese Communist Party. No organizations or individuals may prevent their employees in China from organizing or joining a trade union, regardless of nationality, profession, religion, race, sex or education level. And all enterprise trade unions with more than twenty-five members are now obliged to have a trade union committee. Where there are workers, there should be trade unions for them. This is the principle that drives the ACFTU, who believes trade unions are not only for employees of state-owned enterprises, but also for migrant workers and employees from foreign-funded and private enterprises.
China’s Trade Union Law stipulates two ways for the establishment of trade unions: One is a request from employees on a voluntary basis, and the other is a suggestion from the trade unions at a higher level. Trade unions in the upper level of the national union hierarchy are authorized to send union officials to enterprises and help them establish trade unions. Enterprises have no right to interfere in the process.
As to the restrictions on trade unions, Trade Union Law actively prevents the formation of independent trade unions, while establishing the legal basis of the trade union monopoly held by the ACFTU subordinating local trade unions to the Constitution of Trade Unions of the PRC, securing the legal-political subordination of trade unions to the ruling Party and ideology.
Rights of a trade union member
According to article 3 of ‘General Principles’ of the Constitution of Trade Unions, Trade union members enjoy the following rights:
1. To elect, to be elected and to vote.
2. To criticize any trade union organization and personnel, to demand the removal or replacement of any union personnel, and to supervise the trade union work.
3. To make criticisms and suggestions concerning problems in the state and social life and to demand that trade union organizations accurately convey them to the departments concerned.
4. To demand that trade unions give them protection when their legitimate rights and interests are infringed upon.
5. To enjoy the preferential treatment provided by trade union-run undertakings in the fields of culture, education, sports, tourism, convalescence and recuperation; to enjoy various awards given by trade unions.
6. To participate in the discussions on trade union work and issues of concern to workers and staff members at union meetings and through trade union-run newspapers and journals.
Trade unions do have a right to be consulted on significant issues of operation and management, including the design of new facilities and processes and in the implementation of safety systems. The Trade Union Law also contains many provisions requiring unions to safeguard workers rights to ‘democratic management’ (e.g. Articles 5, 6, 19, 23, 35-3.
Furthermore, Both the Trade Union Law and the Work Safety Law give extensive powers to unions to ensure that standards are met (Trade Union Law Articles 21-26, Labour Safety Law Article 52). These provisions typically give unions the power to complain of a violation, and require the employer to investigate the compliant and make amends if a violation has occurred, If an employer refuses to do so, the union can refer the matter to local authorities. Unions have legal capacity and can sue in their own right.
On the foreigner membership, if a foreigner employed in China in accordance with the legal procedures (RULES FOR THE ADMINISTRATION OF EMPLOYMENT OF FOREIGNERS IN CHINA), then, the Trade Union law will apply which meant that he is entitled to join the trade union of the entity in which he works with if he is legally allowed by the China competent authority.
Relevant China laws and regulations do not expressly prohibit the double trade union membership if the foreigner and his employer abide by the China trade union law and other relevant laws and regulations.
Other issues
Except the abovementioned, the followings would be worthwhile attended for foreign investor’s success in China:
Under China’s Trade Union Law, enterprises pay the outlay for labor unions, which is equivalent to 2 percent of the total wages of employees, not the number of workers who join the trade union, with 60 percent repaid to employees in a form of welfare, and 40 percent submitted to trade unions at higher levels and the enterprises are also required to provide facilities and working place for the trade unions carrying out works.
Some local governments put too much emphasis on the growth of GDP and don’t pay enough attention to the protection of workers’ rights and interests so when they negotiate with the foreign investors about the investment, they may make some commitments which violate the trade union law or other relevant laws and regulations, therefore, a lawyer should be consulted for avoiding any future troubles.
Currently, it appears that the ACFTU pushes for better access to multinational corporations in the face of its declining influence;
It wouldn’t be surprising in the Chinese environment, where strikes are forbidden and the official labour grouping actively supports the government’s efforts to block the rise of independent unions. So the trade union could be good partner in your business operation if you deal with this issue properly.
Unions in enterprises and organizations with more than 200 members should elect one full-time chairperson, according to Trade Union law.
Any organization or individual that, in violation of the provisions of Articles 3 and 11 of the Union Law, obstructs the workers’ and staff members’ from joining or organizing of trade unions in accordance with law or the effort made by trade unions at higher levels to assist and guide the workers and staff members in establishing trade unions shall be ordered to by the administrative department for labor to make rectification; if it refuses to do so, the said department may apply to the people’s government at or above the county level for solution; where grave consequences are caused as a result of the use of such means as violence and threat in obstruction and thus a crime is constituted, criminal responsibility shall be investigated according to law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
David Cui
Lawyer
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Sponsor Link: DaCare Executive Search (China)
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