Negotiating Employee Contracts in China
Regardless of what business you are in or where you operate, it is great employees that make a great company. While hiring great employees can be a challenge anywhere, the process of recruiting, retaining and terminating employees is especially tricky in China.
First, let’s dispel the common misconception that labor is cheaper in China. That’s arguably still true for factory workers, but skilled staffers draw significant salaries. At first glance, the numbers may seem deceptively low. A skilled office manager, for example, is paid a monthly salary of $1,000 to $2,500 in China, compared to $3,750 to $5,000 for a comparable position in Arizona, where my American business is headquartered. But in China, employers pay additional taxes on these wages in the form of “social insurance.” The rates vary by province, but in Shanghai, where I do business, the cost is 44 percent above the base salary.
So for a worker earning $2,000 per month, the cost to the employer will actually be $2,880. Additionally, it is customary at the Chinese New Year to give employees a 13th month of pay — including social insurance — for 12 months of work. Amortize that over the year and it raises the monthly cost to $3,120, which is creeping up toward the American pay scale.
Some may argue that there’s a qualitative difference in employee abilities between the two countries, but my experience is that the best people in China are equal in skill to their American counterparts.
Another critical thing to note is that job descriptions in China need to be much more detailed than those in the United States. Being as specific as possible in the labor contract about your expectations is imperative to establishing good working relationships with your Chinese employees. Simply including a sentence at the end of a job description that says “other duties as directed by your supervisor” will not suffice.
For example, in the United States, we think nothing of requiring an American office manager to wash his or her own coffee cup at the end of the day, but in China, the expectation is that an “ayi” — literally, it means “auntie,” but we would call her a maid — cleans up after everyone. In addition, a male employee may view typing a report as woman’s work — and thus beneath his position. That’s why it’s critical to be completely clear about a job’s specific tasks during the job interview and contract negotiations.
Arizona is a right-to-work state, so adjusting to China’s employment-contract system has been challenging for me. I have found that the best bet is to keep a close eye on details. Here are two basics that should be checked carefully, because they change often, sometimes several times a year:
• Term length: All employees get contracts, and they are issued in one-, two- or three-year terms.
• Probation: The one-year contract allows a probation of 30 days for an employee, the two-year contract allows 90 days of probation and six months’ of probation on a three-year contract.
In the probationary period you can terminate an employee without penalty; however, changes to this system are coming soon, so it’s smart for you to have a system to check contracts when necessary.
The best resources to keep you on the good side of Chinese labor law are your labor lawyers, who will update you when rules change. You definitely need a lawyer to represent your company. Labor contracts tend to be one-sided, and they really only govern how you will treat your employees with little impact on how your employees will treat you.
For example, if an employee has a three-year contract, he or she is not penalized for leaving before the contract ends. But if you decide to terminate an employee, you will need to pay one month for every year remaining on the contract, plus a prorated annual bonus. If you fire a staff member in the ninth month of a three-year contract, you will pay four months of salary. Failure to do so will land you in labor court. I’ll cover that in my next entry.
It sounds temping to go with a short contract, but I’ve found that it doesn’t really allow enough time to judge whether a new hire has the necessary skills and will fit into the corporate culture. For management positions, we use a three-year contract – with six months of probation – and for other positions we use a two-year term.
Think of the time you and your staff spend writing up detailed job descriptions and combing through the contractual fine print as an investment in peace of mind. Proper planning will spare you sleepless nights.