Incoterms_® and Commercial Contracts

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1. Introduction

Until the 1980s, the “iron rice bowl” applied in State-owned enterprises that monopolized economic activity, and accordingly there arose no need for negotiating or concluding labour contracts. The use of labour contracts has developed gradually in conjunction with economic reform and the emergence of foreign invested enterprises (FIEs).

The Constitution adopted in 1982 after the launching of the reform movement stipulates that “citizens of the People’s Republic of China have the right as well as the duty to work”.¹ The State’s role in matters of employment is to create conditions propitious for its development, to improve occupational safety and health standards and working conditions, to facilitate vocational training and to promote increases of remuneration for work and of welfare benefits.²

Their rights to rest,³ to retirement pensions,⁴ to material assistance in the event of disability,⁵ to education⁶ and to engage in scientific research⁷ are guaranteed by the Constitution. Women in the People’s Republic of China (PRC) enjoy equal rights with men in all spheres of life, including the workplace.⁸

A fundamental characteristic of the Chinese labour market has traditionally been and remains its fragmentation resulting from the stringent rules limiting movement of people within the country, from rural to urban areas and from region to region.⁹ All Chinese are assigned a residence based on their mother’s place of residence. Apart from the difficulties of obtaining an authorization to move, the economic cost is in many cases prohibitive. For instance, as social security systems are funded and managed locally, there are few opportunities to transfer rights from one jurisdiction to another.

The labour regulatory framework in China is characterized by the high degree of autonomy granted to local authorities to legislate with respect to labour relations, a fact which makes it difficult for decision-makers to extrapolate from one local regime to another.

A further characteristic of labour relations in China is that employers frequently violate the laws and regulations.

The representative office of a foreign enterprise is subject to different regimes according to the nature of the activity in China.

The institution of minimum salary levels set by the local governments entailing differences of remuneration levels among the different regions is becoming a factor that Western enterprises, principally attracted by the low cost of labour, must take into consideration when they choose where to set up their business in China.

1.1 The labour market

According to official statistics, as of the end of 2004, the labour market in China consisted of some 752 million workers, which represented more than 50% of the Chinese population.

The labour force is continuously growing.

In terms of its allocation, 46.9% of the labour force are employed in the agricultural sector, 22.5% in industry and 30.6% in the service sector.¹⁰

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The level of education varies enormously according to the region. In large cities like Beijing, Shanghai, Guangzhou, Wuhan, Chongqing, Chengdu, Hangzhou and Nanjing, it is relatively easy to find graduates of higher education who speak a foreign language or are specialized in a technical field.

In 2006, the average salary of employees in China was RMB 21,001 per year.¹¹

In terms of entrance-level “basic” salaries, in Shanghai, for example, the monthly salary for electrical engineers varies from RMB 1,457 to RMB 4,157, for car mechanics from RMB 1,002 to RMB 2,205.¹²

It should be noted that in China the concept of “basic salary” does not include social charges and benefits such as insurance, pensions, provision of accommodation, reimbursement of transportation costs or meal expenses intended to compensate for rising prices due to inflation. These latter expenses often constitute a significant sum that the employer must pay for the benefit of the employee. The total of all these charges may reach 45% to 55% of the basic salary.¹³

Bonus systems are widely practised among Chinese enterprises, and for some categories, such as sales representatives, such payments may represent several months’ salary.

The officially announced rate of unemployment was 4.6% at the end of 2006. In reality, the rate may be far higher for urban workers.

Despite the large numbers of the Chinese labour force, it is sometimes difficult for FIEs to find skilled professionals, notably in the areas of finance, marketing, accounting, advertising, management and technical maintenance. FIEs are often obliged to train their local personnel. Moreover, FIEs may encounter difficulties in keeping the local personnel that they have trained, especially in a booming economy. In recent years, positive trends on the labour market include the ever-greater production of graduates in technical fields and the government’s support for vocational training.

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1.2. Evolution of labour legislation

During the first half of the 1980s, while the State-planning regime remained in effect, labour regulation was almost non-existent, as State-owned enterprises did not enjoy autonomy in the recruitment and management of their personnel. However, in response to social problems arising in the rapidly developing private- and mixed-ownership sectors, ad hoc provisions were intermittently issued. The Chinese government quickly became aware that the deficiency of the social legal framework constituted an obstacle to the sustained development of the socialist market economy.

The State Council promulgated on July 26, 1980, a general text concerning the management of personnel in sino-foreign equity joint ventures (EJVs). This text was criticized by foreign investors as being too constraining.

In order to create a more favourable investment climate to attract and reassure foreign investors, the Chinese government subsequently issued two important regulations:

• the provisions with respect to the right of autonomy in the administration of personnel, salaries, insurance and expenses for social benefits in FIEs, promulgated on November 10, 1986, by the Ministry of Labour (renamed first Ministry of Labour and Social Security, and most recently, Ministry of Human Resources and Social Security, MHRSS); the provisions were replaced by the Regulation on Administration of Labour in FIEs, issued jointly by the Ministry of Labour and the Ministry of Foreign Trade and Economic Co-operation (now Ministry of Commerce, MOFCOM); and
• the notice with respect to the implementation of the right of autonomy in hiring personnel in FIEs, approved by the State Council on April 25, 1988.

These two texts, which were usually referred to collectively as the FIE Autonomy Right Regulations, were intended to offer FIEs realms of autonomy in the management of their personnel and in determining their policies on salaries and social benefits as a means of attracting foreign investors.

The reform of the socialist market economy announced at the beginning of 1992 naturally extended to the labour market. The boom of foreign investment after 1992 entailed the constitution of a large number of FIEs that employed their personnel pursuant to labour contracts. Thus, the regulation of the labour market became a priority of market reform.

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Since 1993, the reform of labour law has taken on great significance. The objective has been to establish a social law of general application and to adapt the labour market to the needs of the construction of the socialist market economy. A whole series of texts governing labour relations was promulgated, including most importantly six laws and regulations:

• the regulation with respect to the settlement of labour disputes, issued by the State Council on July 6, 1993 (the Labour Disputes Regulation);
• the regulation with respect to the administration of labour in foreign invested enterprises, issued jointly by the MHRSS and the Ministry of Foreign Trade and Economic Co-operation (MOFTEC, now MOFCOM) on August 11, 1994 (the FIE Labour Regulation) (which is no longer in effect);
• the Notice with respect to the reinforcement of the protection of the legal rights of personnel employed by foreign invested enterprises and private enterprises, issued jointly by the MHRSS, the Ministry of Public Security and the National Association of Worker’s Unions on March 4, 1994 (which is no longer in effect);
• the Labour Law, which was adopted by the eighth Meeting of the Standing Committee of the eighth National People’s Congress (NPC) on July 5, 1994 and promulgated on the same date, and which entered into force on January 1, 1995 (the Labour Law);
• the regulation with respect to the employment of foreigners in China, issued jointly by the Ministries of Labour, Public Security, Foreign Affairs and the MOFTEC on January 22, 1996 (the Foreigner Employment Regulation); and
• the Employment Contract Law, promulgated by the 28th Session of the Standing Committee of the Tenth NPC on June 29, 2007 with effect as of January 1, 2008 (the Employment Contract Law).

The two most important of these sources are the Labour Law and Employment Contract Law.

They are applicable to all forms of enterprises including FIEs and Chinese enterprises, whether State-owned or privately owned.

Since the promulgation of the Labour Law and of the Employment Contract Law, a comprehensive legal regime governing labour relations has been taking shape in China, primarily covering the following subjects: general principles and policies, employment and re-employment, vocational training and certification of skills, payment of salaries, annual paid leaves, employment relationships, retirement pensions, medical care insurance, unemployment insurance, workmen’s compensation insurance, childbirth support, social security in rural areas, and the supervision of social security funds.¹⁴

Within these fields, the most important regulations are:

• the Provisions on Unemployment Insurance issued by the State Council on January 22, 1999;
• the Provisions on Collective Agreements issued by the MHRSS on January 20, 2004;
• the Provisions on Minimum Wages issued by the MHRSS on January 20, 2004;
  and
• the Regulation on Labour Security Supervision issued by the State Council on November 1, 2004.

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The Labour Law and the Employment Contract Law treat Chinese employers and FIEs in the same way and the same legal regime applies to both.

According to the Employment Contract Law, some of the major changes are as follows:

• where an employment relationship has already been established, but no written employment contract has been concluded, a written employment contract must be concluded within one month from the date when the employee joined the employer;
• in the absence of an employment contract, the assumptions of employees concerning the terms of their employment prevail before the people’s courts;
• the term of non-competition clauses may not exceed two years;
• when a fixed-term contract is not renewed at its expiration, compensation is due;
• labour unions are involved in a broader spectrum of issues;
• employers must implement effective internal labour-related rules and regulations;
• probation periods for different labour terms are clearly stipulated;
• the availability of economic compensation for termination of labour contracts is expanded and the rules for its calculation are adjusted in favor of employees;
• in case of mass lay-offs (i.e. where a minimum of 20 persons, or whatever lesser number accounts for 10% of the total number of employees, are laid off), strict procedure must be followed;
• more specific rules have been introduced for labour secondment and related services agents; and
• jurisdiction over the validity of labour contracts is given to arbitration committees or the people’s courts.

1.3. Roles of the Chinese Communist Party and of labour unions

The Chinese Communist Party (CCP) may carry out political study activities in enterprises. In FIES, only the Chinese personnel is concerned. Political study involves the political directives of the CCP, the laws and regulations of the State, general culture, including a basic knowledge of science and history, as well as instruction on social morality and discipline.

However, taking account of the particularities of FIEs, the political activities of the CCP may only be organized outside working hours. Studies may be organized within working hours only with the prior authorization of the manager of the FIE. Political study activities are unpaid and in principle they are conducted by volunteers. In enterprises with a large number of employees, after having obtained the prior approval and support of the foreign party to the FIE, a full-time administrative and political office may be set up on the enterprise’s premises.

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Pursuant to the law with respect to labour unions of employees of April 3, 1992, (the Labour Union Law) and several implementing regulations of the EJV Law, employees have the right to create a union within the enterprise. The principal role of Chinese unions is to protect the employees’ rights and interests, and subsidiarily its role is to support the management organ of the FIE. In practice, unions may play a positive role, notably as intermediaries and mediators between employers and their employees. FIEs should cooperate in their activities, such as by providing them with offices and by cooperating in the organization of cultural and sporting activities for the employees.

Like Chinese enterprises, FIEs must allocate to the labour union, if any, an amount equal to 2% of their total payrolls.

1.4. Labour regulations specific to FIEs

The most important laws and regulations governing labour relations within FIEs are the Labour Law and the FIE Labour Regulation.

However according to the Decision on Abolishment of Certain Labour and Social Security Regulations promulgated by the Ministry of Labour and Social Security on November 9th, 2007, the FIE Labour Regulation was repealed on November 7th, 2007 and replaced by the rules in the Labour Law and other labour-related rules and regulations. Accordingly, labour relations within FIEs are now subject to the general labour law regime.

1.5. Employment by representative offices

Representative offices of foreign enterprises are not allowed to recruit local staff without resorting to the services of intermediaries approved by government. Until the early 1990s, the State-owned Foreign Enterprise Services Corporation (FESCO) had a monopoly on all recruitment. Since then, the number of intermediaries has grown steadily and it is now possible for foreign representative offices to recruit the personnel of their choice while still organizing the employment relationship through an agent. Representative offices often adopt rules of conduct in employee manuals but it is doubtful that such provisions would be binding on their personnel hired by intermediaries. The working conditions of personnel in representative offices may not violate the Labour Law.

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2. Regulation of the labour market

The Labour Law defines the rights and obligations that arise in connection with labour contracts: recruitment, dismissals, resignations and working conditions. Its objective is to impose a regulatory framework suited to the instauration of competitive conditions for both Chinese and Western enterprises established in China.

The labour department under the State Council is responsible for the regulation of labour relations throughout the whole country, whereas local people’s governments above the county level take charge of the management of labour in areas under their jurisdiction.¹⁵

The Labour Law certainly represents progress in social legislation in China. Firstly, it has contributed to the imposition of standards and to the instauration of a competitive labour market and it will improve the transparency and the reliability of the judicial framework and of the general investment climate. Secondly, the Law imposes minimum standards governing the determination of social charges and imposes greater responsibility on enterprises for their conduct of labour relations. Finally, the implementation of economic and social reforms will engender increasing numbers of disputes as Chinese employees’ grow conscious of their rights.

2.1. General principles of the Labour Law

The purpose of the Labour Law as stated in its first article is to protect the rights and interests of employees, to regulate labour relations, to establish and safeguard a labour system adapted to the socialist market economy and to promote economic development and social progress.

The Labour Law applies to all enterprises and individual economic entities within the territory of the PRC.¹⁶ The Law recognizes a right of equal access to the profession of one’s choice, the right to be paid for one’s work, the right to paid holidays and to benefits, the right to social insurance and welfare, the right to vocational training and the right to settlement in the event of a dispute with one’s employer.¹⁷

Employees have the right to participate in and organize trade unions in accordance with the law. Trade unions represent and safeguard the legitimate rights and interests of employees. They must carry on their activities independently in accordance with the law.¹⁸

According to article 18 of the Company Law, the employees of companies organize a labour union that carries on activities to safeguard their rights and interests. Companies must provide facilities for labour unions’ activities. The labour unions sign collective contracts with the employer-company with respect to the remuneration, working hours, welfare, insurance, work safety and sanitation, and other matters.¹⁹

Labour relations within Chinese enterprises are based on the principle of “democratic management”. Employees may organize themselves into congresses, representative assemblies, or any other forms in accordance with the law. They consult with employers on an equal footing about employees’ rights and interests.²⁰

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The Labour Law provides that women and men enjoy equal rights of access to employment.²¹ When recruiting employees, women may not be refused because of their sex, and the recruitment criteria for women may not be more selective than those applicable to men, although State regulations may stipulate some activities to be unsuitable for women.

Employers may not discriminate on the basis of national origin, race or religious belief.²²

Article 15 of the Labour Law prohibits recruitment of persons under the age of 16 years.

In consideration of these rights, employees also have obligations, such as fulfilling their assignments, improving their vocational skills and participating in apprenticeships, respecting safety and hygiene standards, as well as disciplinary rules and professional ethics.

According to article 10 of the Labour Law, the State must expand employment opportunities through promotion of economic and social development. The State encourages the establishment of industries and the economic expansion of all enterprises, social and commercial institutions and collectives. Local governments must organize employment promotion services. Further, according to article 4 of the Employment Contract Law, where an employer formulates, amends or adopts rules or where important events occur concerning employees’ remuneration, working time, rest, vacation, work safety and sanitation, insurance and welfare, training, or work discipline or management of labour quotas directly affecting their interests, such situations must be discussed at a general meeting of employees or with all employees, and they may put forward proposals and opinions. Employers negotiate on the basis of equality with trade unions and employees’ representatives.

If trade unions or employee representatives consider the implementation of a rule or a decision about an important event to be improper, they may require that the employer negotiate amendments.

2.2. Individual employment contracts and collective labour agreements

The institution of employment contracts was an integral part of the reform of State-owned enterprises. After 1984, the employment contract regime was progressively introduced within State-owned companies limited by shares. According to statistics issued by the MHRSS in 2001 and 2002, employees of over 95% of all enterprises in China were then under employment contracts.²³ Generally, employees in FIEs are employed under individual contracts or collective agreements concluded with their enterprises.

According to article 16 of the Labour Law, an individual employment contract refers to an agreement made between an employee and a unit (danwei) establishing a working relationship and defining the rights and obligations of both parties.

Employment contracts and their amendments must comply with the principles of equality, free will and mutual consent and their provisions may not violate the laws and regulations.

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According to article 17 of the Employment Contract Law, an employment contract must be concluded in writing and must include provisions concerning the following matters:

• the employer’s name, domicile, legal representative or major person-in-charge;
• the employee’s name, domicile, identity card number or that of any other valid identity certificate;
• the contract’s term;
• the duties to be performed and the work site;
• the working hours, the periods of rest and vacation;
• the terms of remuneration;
• the working conditions and the measures for the prevention of occupational hazards; and
• the rules with respect to social security.²⁴

An employment contract is invalid, in whole or in part, under the following circumstances:

• a party uses deception or coercion, or takes advantage of the other party’s difficulties, to obtain an employment contract, or an amendment thereto, that is contrary to that party’s true will;
• the employer denies its legal liability or the employee’s rights; or
• mandatory provisions of laws or administrative regulations are violated.

In addition to their individual employment contracts, all employees may negotiate collective agreements with their enterprises. Collective agreements are signed on behalf of all employees by trade unions or by representatives elected by the employees. Collective agreements enter into force only after registration with the local labour department. A collective agreement is deemed to take effect if the labour authority raises no objections within 15 days from receipt of the application.

According to articles 52 and 53 of the Employment Contract Law, employees and their employer may enter into specialized collective contracts regarding a limited number of issues, including work safety and hygiene, protection of female employees, wage adjustment mechanisms. Industrial or regional collective contracts may be concluded at the county level or below between trade unions and representatives of enterprises in industries such as construction, mining, catering services.

Nevertheless, collective agreements do not prevail over individual employment contracts’ more favourable treatment of individual employees. They generally set down minimum conditions with respect to salary, working hours, breaks and vacations, safety and hygiene, labour insurance, and welfare applicable to all the employees within the same enterprise.

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2.3. Term of employment contracts

The term of an employment contract may be fixed or indefinite or it may cover the time for completion of a specified task.

According to article 14 of the Employment Contract Law, in any of the following circumstances, if the employee agrees to a renewal of the employment contract, and unless the employee proposes to conclude a fixed-term employment contract, an indefinite-term contract is deemed to have been concluded:

• the employee has already worked for the employer for ten consecutive years;
• in the cases of employers initially under the employment contract system and of State-owned enterprises that re-negotiate their contracts in the context of their reorganizations, the employee has already been employed for ten consecutive years and is less than ten years from the statutory retirement age;
  and
• the employment contract is to be renewed after two consecutive fixed-term employment contracts.

If the employer fails to sign a written employment contract with an employee within one year from the date of commencement of the employment, an indefinite term employment contract is deemed to have arisen.

According to article 82 of the Employment Contract Law, if an employer fails to conclude with a qualified employee an indefinite-term employment contract, it is liable to pay the employee double wages, starting from the date on which an indefinite-term employment contract should have been concluded.

A probation period of a maximum of six months may be stipulated in an employment contract. The duration of the probation period should be adjusted in accordance with the term of the employment contract. According to articles 19 and 70 of the Employment Contract Law, an entity can only stipulate one probation period per employment contract. With respect to employment contracts for completion of specified tasks or with a fixed term of less than three months as well as part-time employment contracts, probation periods may not be stipulated.

2.4 Working hours

The Labour Law reduced the maximum number of working hours per week from 48 to 44, which has been further reduced to 40 hours pursuant to article 3 of the State Council Regulation of March 25, 1995 with respect to employee’s working hours, which entered into effect on May 1 of the same year.

Extensions of working hours are permitted after consultation between the enterprise and the trade union and employees concerned, provided that overtime work must be remunerated and the total amount of overtime worked may not exceed three hours per day and 36 hours per month.²⁵

Employees are entitled to at least one day off a week.²⁶

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2.5. Wages

Employers enjoy autonomy to determine wage levels. In so doing, they should apply the principle of equal pay for equal work.²⁷

The State exercises its influence through macroeconomic regulation and controls over total payrolls.²⁸

Wages must be paid in cash directly to employees at least once a month.²⁹

The State has decreed the implementation of a system of guaranteed minimum wages, while delegating to provincial, autonomous regional and municipal people’s governments the responsibility for determining their amounts within the territories subject to their jurisdiction.³⁰

The amount of the minimum wage is determined on the basis of the average levels of expenses and income, the unemployment rate, the social insurance contributions and the economic growth rate in the region.³¹

Moreover, according to article 85 of the Employment Contract Law, if the remuneration is lower than the local minimum wage, the employer is liable for the difference. If such payment is not made within the time limit, the employer may be liable to pay extra compensation to the employee at a rate of not less than 50 % and not more than 100 % of the amount due.

Overtime work must be remunerated at a premium of no less than 50% for extra hours, 100% for work on days of rest and 200% for work on statutory holidays.³²

2.6. Annual paid leaves and statutory holidays

According to article 45 of the Labour Law, employees who have worked for no less than 12 consecutive months have the right to annual paid leave.³³ However there had not been any detailed rules in this regard until the promulgation of the Provisions on Employees’ Annual Paid Leave on December 14, 2007, which came into force on January 1, 2008.

According to the Provisions, the minimum duration of the annual paid leave ranges from five to 15 days depending on the employee’s seniority.

The following are statutory holidays: New Year’s Day (one day), Spring Festival (three days), Labour Day (three days), National Day (three days). Other days of rest or festivals may be stipulated in laws or regulations.³⁴

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2.7. Protection of minors and women

It is forbidden to employ children of less than 16 years of age. Neither women nor adolescents under the age of 18 years may work in mines or carry out dangerous occupations. Employers must, at their expense, arrange for regular medical checks for adolescent employees.³⁵

The Labour Law confers special protection upon female employees. According to article 61, overtime hours and night work are forbidden for women who are more than seven months’ pregnant. Work at high altitudes or in low temperatures or contact with cold water may not be assigned to women during menstruation. Female employees have the right to at least 90 days of maternity leave.³⁶

More detailed provisions for the protection of the health of women are stipulated in the Regulations concerning the Protection of Female Staff and Workers issued by State Council on July 21, 1988 and the Regulations concerning the Protection of the Health of Female Employees issued on November 26, 1993 jointly by the Ministry of Health, the MHRSS and the National Association of Women.

2.8. Working conditions

In conformity with the criteria imposed by the State³⁷ in order to protect the safety and hygiene of employees, an enterprise must establish regulations on work safety and hygiene, as well as take measures to prevent accidents.³⁸

Employers must furnish protective materials in conformity with the requirements imposed by the State. A periodic medical exam is obligatory for those employed in dangerous professions. During working hours, the applicable safety standards and procedures must be respected.

The Law on the Prevention and Control of Occupational Diseases³⁹ stipulates standards for the monitoring of occupational injuries to impose the diagnosis of work-related diseases and illnesses. It is prohibited to trade in or use materials that could cause diseases. Under the Toxics in the Workplace Regulations, employers must adopt measures to prevent accidental poisonings.⁴⁰

The governments at different levels are responsible for compiling statistics with respect to deaths, injuries and illnesses due to accidents or working conditions.⁴¹

Though there is no legislation prohibiting sexual harassment in employment relations, there are reports of such cases having been brought before the people’s courts on grounds of violations of the General Principles of Civil Law.

2.9. Confidentiality clauses

The parties to employment contracts may stipulate confidentiality clauses. Confidentiality obligations may remain in force after the termination of the employment contract for limited or unlimited terms. Moreover, a penalty provision for breach of confidentiality may be stipulated.

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Consequently, employees who breach confidentiality clauses are liable to compensate the wronged employers for their actual damages arising from the breach.

Employers that intentionally recruit personnel to obtain confidential information belonging to their prior employers may be held liable.

2.10. Non-competition clauses

The parties may insert non-competition clauses in their employment contracts for employees subject to obligations of confidentiality as well as senior managers and senior technicians. The scope, geographical range and duration of non-competition clauses may be stipulated by the parties. Their term may not exceed two years.

During the non-competition period, the employer must compensate the employee according to the employment contract. Otherwise, the employee is not obligated by the non-competition obligation. A minimum amount for such compensation is usually fixed by local authorities and the compensation is payable monthly.

Employees who breach non-competition obligations are liable for the consequent damage.

If it is difficult to assess damages, the compensation must be equal to the profit earned by the infringer from the violation. An employer that knowingly recruits an employee under a non-competition obligation may be held jointly liable toward the former employer.

2.11. Vocational training

The Labour Law creates obligations with respect to vocational training. Governments must take steps to develop vocational training and to improve the quality, the work capacity and vocational skills of employees. Governments at all levels must integrate vocational training in their social development plans and must support vocational training initiated by public and private institutions.⁴²

According to article 22 of the Employment Contract Law, where an employer assumes special expenses for the technical training of an employee, it may require that the employee subscribe to a minimum period of employment. If the employee violates the commitment, a penalty for breach of contract may be claimed by the employer. If an amount of liquidated damages is stipulated in the contract, they may not exceed the training fees incurred by the employer prorated for the unperformed part of the service period.

2.12. Social insurance and welfare benefits

The Labour Law reaffirms the commitment to establish a national social security system.⁴³

The State undertakes to develop social security funds intended to provide benefits “in line with the level of social and economic development and social sustainability”.⁴⁴ Furthermore, the State encourages the recourse to complementary insurance subscribed by private enterprises or institutions.

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The social security system provides retirement pensions, medical care insurance, unemployment insurance, housing funds, workmen’s compensation and child birth support.⁴⁵

The actual rates of benefits vary from locality to locality.

The governing principle of the social security system is that the government, enterprises and individuals share their burden and their risks.

Rates may vary from time to time. Moreover different provinces, autonomous regions and municipalities directly under the central government may also implement different rates.

Enterprises are required to provide certain welfare benefits to their employees. These include payments to bonus and welfare funds, contributions to housing funds, and other statutory allowances, such as annual paid leave, marriage leave, parental leave and subsidies for transportation, which may vary in both subject matter and amount from locality to locality.

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2.13. Resignations

Employees may resign and terminate their employment contracts subject to 30 days’ prior written notice to their employer.⁴⁶ During probation periods, only three days’ prior written notice is required However, according to article 38 of the Employment Contract Law, employees may terminate their contracts without advance notice in the following circumstances:

• the employer fails to pay salaries or social security charges;
• the employer fails to provide the working conditions stipulated in the relevant labour contract;
• its rules are contrary to laws or regulations and impair the rights and interests of the employees;
• the contract is vitiated by duress, deception or unconscionability;
• employers use violence, threats or unlawful restrictions of personal freedom to compel employees to work;
• employees are instructed in violation of rules and regulations or peremptorily ordered by their employers to perform dangerous operations that threaten their personal safety; or
• any other circumstances prescribed by laws or administrative regulations arise, under which employment contracts may be dissolved.⁴⁷

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2.14. Dismissals

Pursuant to article 25 of the Labour Law and article 37 of the Employment Contract Law, an employer may terminate an employment contract and discharge an employee without notice in the following cases:

• at any time during a probation period if the employee is not qualified;
• if the employee commits a serious violation of disciplinary or internal rules;
• if the employer suffers serious losses due to the employee’s grave dereliction of his/her duties, or is guilty of graft;
• if the employee has accepted work with another employer, thus materially affecting the completion of his/her tasks, and refuses the employer’s request for remedial measures;
• if the employment contract is vitiated by duress, deception or unconscionability;
  and
• where the employee has committed a crime.

In the following cases, and subject to 30 days’ prior written notice (or payment of an extra month’s salary) as well as to payment of compensation, an employer may rescind an employment contract:

• where, after undergoing a period of medical treatment, an employee with an illness or non-work-related injury is unable to perform his/her original duties and is also unable to perform other jobs proposed by the employer;
• if the employee is incompetent to carry out his/her duties and remains unqualified after training or changes of assignments; or
• where significant changes in the objective conditions that were relied on as the basis of the contract prevent its implementation and the parties are unable to agree on its adaptation.⁴⁸

According to article 41 of the Employment Contract law, under any of the following circumstances, if it is necessary to dismiss 20 or more employees, or a lesser number that accounts for 10% of the total number of employees, the employer must notify the trade union or all employees 30 days in advance and provide explanations:

• the employer carries out restructuring pursuant to the Enterprise Bankruptcy Law;
• the employer has serious difficulties in its production and/or business operations;
• the employer switches production, introduces a major technological innovation or revises its business method and, after amendment of employment contracts, still needs to reduce its workforce; or
• other major changes in the objective economic circumstances relied upon at the time of conclusion of the employment contract that render its performance impossible.

Once it has solicited the opinions of the trade union or of the employees, an employer may implement the dismissals subject to reporting the plan to the local labour administrative department.

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When deciding to retain employees during a workforce reduction, the employer must give priority to employees with whom it has concluded fixed-term employment contracts with a relatively long-term or indefinite-term contracts or who are the only ones in their families to be employed and whose families have a dependent elderly person or minor.

If such an employer recruits again within six months, it is obligated to notify those dismissed at the time of workforce reduction and, all other things being equal, to give them priority.⁴⁹

Appropriate compensation usually corresponds to one month’s salary for one year of seniority (or for less than six months, half a month’s salary) up to a maximum of 12 months.⁵⁰ One month’s salary refers to the employee’s average monthly wage for the 12 months prior to the termination of the employment contract. In the event that such one month’s salary were higher than three times the average employees’ monthly salary in the region where the employer is located published by the local authorities, the compensation would be limited to three times such average employees’ monthly salary. Where employees are dismissed because of health problems, a medical treatment allowance at an amount equivalent to at least six months’ salary may be required.

2.15. Administrative supervision and sanctions

The labour authority within the local government is in charge of labour inspection.⁵¹

For the exercise of its functions, the labour authority may enter the premises of enterprises, carry out inquiries in workplaces and require communication of necessary information.⁵²

Labour unions monitor the conduct of employers to safeguard the rights and interests of employees and they assist enterprises in implementing labour laws and regulations.⁵³

The Labour Law dedicates a chapter of 17 articles to sanctions of violations. The Employment Contract Law provides for more detailed and stricter sanctions in certain areas. Generally speaking, sanctions include:

• administrative sanctions: warnings, fines, measures intended to repair damage caused, suspensions of operations or suspensions or cancellations of business licences;
• civil sanctions: compensation for damages and cessations of activities; and
• criminal sanctions in serious cases.

Where an employer has extended working hours in violation of the law, the labour authority may issue a warning of rectification or impose a fine.

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If an employer commits any of the following acts so as to infringe the rights and interests of its employees, the labour authority may order it to pay them wages and/ or compensation, and in the event of failure to do so, the labour authority may order the employer to pay the employee damages in an amount varying between 50% and 100% of the wages and compensation:

• failure or delays in the full payment of employee’s wages;
• payment of wages at rates lower than the minimum wage;
• failure to pay compensation for overtime work; or
• failure to pay compensation to employees in accordance with the provisions of the law after termination of a labour contract

Where an employer has illegally recruited persons under 16 years of age or violated the provisions on the protection of female and underage workers amounting to infringements of their rights and interests, the labour authority may order remedial measures and impose fines. In serious cases, the authorities may revoke the business licences of the incriminated employer.

The public security bureau may detain for up to 15 days personnel of the employer suspected of crimes, and may fine or issue warnings to employers that have compelled their employees to work by the use of force or threats of force or that have restricted their personal freedom or insulted, physically abused, beaten, illegally searched them or taken them into custody.⁵⁴

In serious cases, the following conduct may give rise to criminal pursuits against employers:

• failure on their part to take preventive measures resulting in serious accidents and loss of life or property;⁵⁵
• if they force employees to work in violation of safety regulations resulting in major accidents causing deaths or serious injuries and consequences;⁵⁶
• if they compel employees to work by force or threats of force or by restrictions on their personal freedom, by insulting, physically abusing, beating, illegally searching or taking them into custody;⁵⁷ and
• if they unjustifiably prevent labour or other departments or their own employees from exercising their rights, or if they retaliate against informers.⁵⁸

Personnel within labour or other departments may be pursued criminally if they abuse their powers, neglect their duties, or commit fraud for the benefit of their relatives or friends.⁵⁹

When public servants or personnel of social insurance organizations commit serious misuses of social insurance funds, they may be subject to criminal pursuits.⁶⁰

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2.16. Employment and corporate governance

Under Chinese law, a company should be managed according to the principles of “democratic management”, implemented for instance by forming assemblies of employee representatives.⁶¹

Prior to making a decision on restructuring or any important issue relating to business operations, or on the adoption of any important bylaw, companies should solicit the opinions of their labour unions as well as the opinions and proposals of employees through the assembly of their representatives or in any other way.⁶²

An organization of the Chinese Communist Party must be set up in companies to carry out Party activities and companies must provide the necessary facilities.⁶³

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3. Settlement of labour disputes

Chinese law provides for resolution of labour disputes through conciliation, through arbitration and through actions before the people’s courts.⁶⁴ In the context of arbitration and court procedures, recourse may be made to conciliation.⁶⁵

In practice, labour disputes that cannot be settled between the parties are first submitted to conciliation and, if that fails, then to arbitration. When parties file a case before the people’s courts, it is generally to attack an arbitration award.

3.1. Principles of the Labour Law concerning dispute settlement

In resolving labour disputes, the rights and interests of the parties should be safeguarded by application of the principles of lawfulness, fairness and timeliness. The current procedures for settling labour disputes are provided in the rules with respect to the handling of enterprise labour disputes (the Labour Disputes Rules).⁶⁶ On April 16, 2001, the Supreme People’s Court (SPC) promulgated the Interpretation Rules on the Settlement of Labour Disputes.⁶⁷

The PRC Labour Disputes Mediation and Arbitration Law (the Labour Disputes Law) was adopted by the 31st Session of the Standing Committee of the Tenth NPC on December 29, 2007, and it will come into force on May 1, 2008. Some of the provisions in the Labour Disputes Rules will then be replaced by those in the Labour Disputes Law.

The Labour Disputes Rules apply to the following three major types of labour disputes between enterprises and their employees within mainland China:

• disputes arising in connection with the performance of labour contracts;
• disputes arising from the discharge, removal or dismissal of an employee, or from an employee’s resignation or voluntary departure; and
• disputes arising as a result of the implementation of regulations concerning wages and salaries, insurance, welfare, training or labour protection.

The Labour Disputes Law’s scope of application extends to disputes arising in connection with:

• the determination of existence of labour relationship;
• the conclusion, modification and termination of labour contracts; and
• medical compensation for industrial injuries, economic compensations and/ or damages.

Labour disputes between governmental organs, institutions or social organizations and their staff and workers, and those between individual industrial or commercial operators and their assistants and apprentices are handled in accordance with the Rules.⁶⁸

When a labour dispute arises, parties may choose conciliation. If any party is not willing to settle the dispute through conciliation, or if performance of an agreement reached through conciliation fails, disputes must be submitted to arbitration. The party that has objections to an arbitral award may bring suit before a people’s court within 15 days after receiving the arbitral award.⁶⁹

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3.2. Conciliation

Conciliation is not a mandatory procedure for labour dispute settlement. Labour dispute conciliation committees may be established in any enterprise.

According to the Labour Disputes Law, an enterprise’s labour dispute conciliation committee includes members representing the enterprise and the employees. The members representing the employees are either representatives of the labour union or are elected by all the employees. The chairman of the conciliation committee must be a representative of the labour union or have been elected by the personnel and is agreed upon by the members of the labour dispute conciliation committee.

The conciliation committee must complete its proceedings within 30 days from the date of the parties’ application.

If, after the conciliating efforts, an amicable resolution is reached, a conciliation agreement must be concluded.

If the conciliation is not completed within the stipulated time limit, the parties may submit their dispute to arbitration or to the people’s courts. According to the Labour Disputes Law, if an agreement cannot be reached within 15 days from the date on which the labour dispute conciliation committee receives the application for conciliation, any party may apply for arbitration.

If any party fails to perform the agreement reached through conciliation within the time limit, the other party may apply for arbitration. If such agreement is in connection with the payment of salary, compensation for industrial injuries, material harm and damages, employees may directly apply to the competent court.

3.3. Arbitration

3.3.1. Labour arbitration committees

Labour dispute arbitration committees must be established at the county or district level.

The Labour Disputes Law stipulates that the labour arbitration committee, where the labour contract is performed, or that where the employer is located, may accept jurisdiction. If parties to a labour dispute each apply to one of those two arbitration committees, the one located where the labour contract is performed is deemed to prevail.

A labour arbitration committee consists of the following members:

• representatives of the competent labour authority;
• representatives of the labour union; and
• representatives of the economic affairs administration department designated by the government.

The labour arbitration committee establishes a list of arbitrators and implements an arbitration tribunal system.

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For the handling of each labour dispute, the labour arbitration committee forms an arbitration panel, consisting of three arbitrators. In simple cases, a single arbitrator may be designated.

The number of arbitrators must be odd, and the panel’s chairman ex officio is the person in charge of the competent labour administration department. Decisions of the arbitration panels are made by majority votes.

3.3.2. The parties to a labour dispute

Parties may be represented in arbitration proceedings by one or more lawyers or other agents.

If employees without civil capacity or with limited civil capacity, or the interests of deceased employees are involved in a labour dispute, their legal representatives may act on their behalf in arbitration proceedings. Where there is no such legal representative, the labour arbitration committee may appoint an agent for the purpose of the proceedings.

Third parties that have an interest in the settlement of a labour dispute in arbitration may apply to participate in the proceedings or may request to be kept informed of their evolution.

3.3.3. Arbitration procedures

Applications for arbitration must be filed in writing with the arbitration committee.

Originally, the limitation period for filing claims was only 60 days from the date on which the applicant knew, or should have known, that there had been a violation of its rights and interests. The Labour Disputes Law to one year extended this time limit.

The Labour Disputes Law reduced from seven to five days after receipt of a claim the time within which an arbitration committee must decide whether to accept it as well as that within which it must notify the parties after its acceptance.

The Labour Disputes Law reduced from 15 to 10 days after receipt of notice of a claim the time within which a defendant must submit its reply. Despite the defendant’s failure to submit its defence within the prescribed time, the hearing of the case is not postponed or otherwise affected.⁷⁰

At least five days prior to any hearing, the arbitration panel notifies the parties in writing of its time and place. If a party that received written notice is absent from a hearing without reason or withdraws from a hearing without the arbitration panel’s permission, then (1) if the plaintiff is absent, the case is considered as withdrawn and (2) if the defendant is absent, an award may be made.

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Under the Labour Disputes Law, an arbitration proceeding must be completed within 45 days from the date on which the petition is accepted. In complicated cases, the arbitration committee may grant an extension that may not exceed 15 days.⁷¹

3.3.4. Disqualification of arbitrators

In any of the following circumstances, arbitrators must withdraw from the proceedings and the parties have the right to demand such withdrawal verbally or in writing:

• they are parties to the dispute or are close relatives of a party;
• they have a personal interest in the case;
• they have some other relationship with a party, which may affect the fairness of the arbitration.

The Labour Disputes Law expands the above scope to cover arbitrators who:

• are a close relative of the legal representative or agent of a party;
• have some other relationship with the legal representative or agent of a party, which may affect the fairness of the arbitration; or
• privately meet with, or accept gifts from, a party or its legal representative or agent.

Arbitration committees and their personnel must respect the confidentiality of individual or private matters divulged during the course of investigation of a dispute.

If personnel involved in arbitration proceedings are found to have practised favouritism, received bribes, abused their powers, disclosed confidential information or committed other irregularities, administrative sanctions may be imposed. Arbitrators so incriminated must be revoked from the arbitration committee. In serious cases, criminal sanctions may be imposed.

3.3.5. Conciliation during arbitration

During the arbitration proceedings, the parties may settle their dispute through compromise.

The arbitration panel should first undertake conciliation, and on the basis of the facts as determined, encourage the parties voluntarily to reach a settlement agreement, the content of which may not violate the mandatory provisions of laws and regulations.

If a settlement agreement is reached through conciliation, the arbitration panel should draft a statement of conciliation, which enters into effect from the date of its service upon the parties.

If a conciliation agreement is not concluded by the parties, or if prior to their receipt of the conciliation statement either party withdraws, the arbitration panel should promptly make an award.

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3.3.6. Enforcement of effective conciliation agreements and statements and of arbitration awards

If a party disagrees with an arbitration award, it may file a lawsuit in the people’s courts within 15 days after receiving the award. Afterwards, within 15 days after receiving the decision of the people’s court, the disagreeing party is also entitled to appeal to the higher court, whose decision is final. The Labour Disputes Law provides that arbitral awards in connection with certain disputes (e.g. those arising for payment of salary, economic compensations or damages, etc.) are final at the time when they are made. Where no party starts legal proceedings within the 15-day time limit, the award enters into effect.

The parties concerned must implement effective statements of conciliation and arbitration awards within the time limits indicated in such documents. In the event of failure to implement an award, parties may apply to the people’s court for compulsory enforcement.

3.4 Litigation

Under both the Labour Disputes Rules and the Labour Disputes Law, direct recourse to litigation is not allowed. Generally speaking, a labour dispute must be submitted for arbitration before an action can be brought before the courts.

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4. Immigration and employment of foreigners in China

Prior to 1996, there was no specific national regulation governing foreign employees in China. The provisions concerning this subject were extremely succinct and dispersed throughout different texts. According to the FIE Labour Regulation, EJVs and wholly foreign-owned enterprises (WFOEs) in principle recruit their personnel within the territory of mainland China. Should an enterprise need to recruit non-Chinese personnel, it must obtain the authorization of the competent local labour authority and complete certain formalities.

4.1. Immigration

It was not until 1985 that the regulation of immigration was treated by legislation in the form of the Law on Control of the Entry and Exit of Aliens.⁷²

The State Council adopted on July 15, 1995, the Regulations on Exit and Entry Frontier Inspection that became effective as of September 1, 1995.⁷³

On August 15, 2004, the Ministry of Public Security and the Ministry of Foreign Affairs jointly issued the Regulations on Examination and Approval of Permanent Residence of Aliens in China.

China aims at instituting an immigration regulatory framework to conform with “common international practice” and the “practical needs” of China. According to Chinese policy, permanent residence is given:

• to high-level foreign personnel in businesses that promote China’s economic, scientific and technological development or social progress;
• to foreigners who make relatively large direct investment in China;
• to individuals who have made outstanding contributions or are of special importance to China; and
• to people who come to China to be with their family, such as husband and wife, minors dependent on their parents, and senior citizens dependent on their relatives.

Currently, China officially implements a “Green Card” system intended to adapt the national economy to globalization, to push forward reform and the opening-up and modernization of socialism, and to impose standards for the examination and approval of permanent residence of aliens in China.

4.1.1. Aliens

Aliens are all those who do not have Chinese nationality.

Aliens may only enter the territory through designated ports. In doing so, they must possess valid passports and, where required by laws and regulations, visas of the category appropriate to the nature of their intended presence on the territory.

They may only travel to places officially open to them and otherwise they must apply to local public security organs for travel permits.⁷⁴

Foreigners illegally present on Chinese territory may be detained, fined and deported and, in serious cases, they may be pursued the under criminal law.⁷⁵

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4.1.2. Permanent residency

To obtain permanent residence within China, an application is filed with the public security organ of the people’s government at the city level, or the branch office or county office of the public security bureau of a municipality directly under the central government, which is in charge of the community of the applicant’s major investment or long-term residence. The public security organ investigates and verifies the application and, subject to its compliance with the specified prerequisites, it is forwarded to the Ministry of Public Security for approval. A decision must be rendered within six months from receipt of the application. Upon approval, the applicant is granted an Alien Permanent Residence Permit.

Applicants outside China must apply for D Visas from a Chinese embassy or consulate abroad and obtain an Alien Permanent Resident Status Confirmation Letter from the Ministry of Public Security. Within 30 days of entering China, they must apply to the competent public security organ for an Alien Permanent Residence Permit.

The Alien Permanent Residence Permit is an alien’s legal identity document in China.

Alien Permanent Residence Permits are valid for five or ten years. Certificates with five-year validity are granted to minors, while certificates with ten-year validity are granted to adults. In case of expiration, loss, damage or content change of the certificates, the holders may apply for recertification. The public security organ may reissue certificates to them after confirmation that they have not lost permanent resident status, without reiterating the approval procedures.

According to relevant provisions, there is no limitation on the period of stay of aliens with permanent resident status in China.

Permanent resident status may be lost in any of the following circumstances:

• when the holder’s presence endangers national security or interests,
• when the holder is sentenced to expulsion by a people’s court,
• when the holder has gained permanent resident status by fraud,
  and
• when the holder’s whose periods of residence in China do not meet minimum standards (though no such standards appear to have been made public).

According to official statistics, since the implementation of the Law on Control of the Entry and Exit of Aliens in 1985, the Chinese government has approved permanent residence for only about 3,000 foreigners.

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4.2. Employment of foreigners in China

The Foreigner Employment Regulations of January 22, 1996, which entered into force on May 1, 1996, abrogated the provisions of October 5, 1987, with respect to the employment of foreign students and foreigners without residence cards. According to the new Regulations, all foreigners wishing to take up employment in China must first obtain authorizations through their employers in China and then the corresponding work visa from a Chinese consulate abroad. After entry into China, they must carry out the formalities required in order to obtain an employment permit and a residence permit.

On January 22, 1996, the MHRSS, Ministry of Foreign Affairs and the MOFCOM jointly adopted the Rules for the Administration of Employment of Foreigners in China (the Foreigner Employment Rules).

The labour administrative authorities of the people’s government of the provinces, autonomous regions and municipalities directly under the central government and those at the prefecture and city level within their jurisdiction are responsible for the administration of employment of foreigners in China.⁷⁶

The Foreigner Employment Rules apply to foreigners without permanent residence status wishing to engage in remunerative work on Chinese territory.⁷⁷

Such foreigners intending to accept employment in China must, in principle, first obtain a visa from a Chinese consulate abroad.⁷⁸ However, in “special cases”, foreigners may change their status at the public security organs upon presentation of the Employment Licence secured by their employers, and so obtain their employment permits and residence certificates.⁷⁹

Foreigners wishing to work in China must fulfil the following conditions:

• they must be at least 18 years old and in good health;
• they must be able to prove their professional skills and vocational competence (technical or specialized training, professional experience, etc.) necessary for the carrying out of the intended work;
• they must not have a criminal record;
• they must have a definite employer; and
• they must have a valid passport or other equivalent international travel document.⁸⁰

4.2.1. Employers’ employment permits

A Chinese enterprise or unit intending to recruit a foreigner must first apply for an Employment Permit.⁸¹ A foreigner may only be recruited after the employer’s application has been approved and the employer has obtained the permit. The position to be occupied by a foreigner must be one for which there are special requirements and for which there are no suitable Chinese applicants. The performance of the work must not violate Chinese laws and regulations.⁸²

Employment on the mainland of residents of Taiwan and of the Hong Kong and Macao region of China are subject to specific rules.⁸³

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Individual economic organizations and private citizens are prohibited from employing foreigners.⁸⁴

To obtain an employment licence, FIEs must submit their contracts of constitution, articles of association and business licences to the certificateissuing office of the local labour authority. In applications for employment of foreigners other than by FIEs, the decision takes account of the opinions of the competent trade authorities and demand and supply on the labour market.⁸⁵

The Foreigner Employment Regulations limit the duration of labour contracts with foreigners to a maximum of five years. However, renewals are possible.⁸⁶

Foreign students or trainees and other categories of foreigners may not work in China without first obtaining work permits.

Foreigners authorised to work in China must remain in the city or region designated on their employment permits. All changes of employer or place of work must be recorded with the public security bureau and the relevant labour authority.⁸⁷

Employment contracts must be concluded with foreigners and their provisions with respect to minimum wages, working hours, rest and vacation, work safety and hygiene as well as social security are governed by Chinese laws and regulations.⁸⁸

4.2.2. Employee employment permits

Foreigners living abroad and intending to take up employment in China must first obtain a work visa from the Chinese consulate in the country of their citizenship or legal residence.⁸⁹ At the time of the visa request, a medical examination is required.

Upon receipt of their visas and within 15 days of their entry into China, foreigners must register with the labour and social security bureau and with the public security bureau. They must present the employment licence obtained by their employers and the signed labour contracts and valid passports in order to obtain an employment permit. An employment permit is only valid within the area specified by the labour authority.

The following categories of foreigners are exempted from employment permits:

• those who hold a Foreign Expert Certificate issued by the State Bureau of Foreign Expert Affairs;
• those with special skills working in offshore petroleum operations who do not go ashore in China;
• those who conduct cultural performances of a commercial nature approved by the Ministry of Culture and who hold a permit to do temporary commercial performances; and
• foreign technical and managerial personnel engaged and funded directly by the Chinese government, government authorities and public institutions.⁹⁰

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Foreigners in the following categories who have legally entered Chinese territory may apply directly for an employment permit and residence card:

• foreigners appointed to work in China under sino-foreign cooperative exchange projects pursuant to agreements entered into by the Chinese government and foreign governments or international organizations;
• chief representatives and representatives of permanent representative offices in China of foreign enterprises;
• deputy general manager or higher level management staff, technicians or other personnel of enterprises or institutions; and
• scholars at or above the level of associate professor invited by leading domestic academic institutions.⁹¹

4.2.3. Annual inspections

Within 30 days of the end of each year, employers must submit the employment permits of their foreign personnel to the labour authority for annual inspection.⁹² The permits become invalid if the procedures are not completed in a timely manner.⁹³

4.2.4. Sanctions

Violations of the conditions of work permits may incur deportation. In serious cases, where foreigners and employers forge, alter, falsely use, transfer, buy and sell employment permits, the labour administrative authorities may cancel the permits, confiscate any illegal gains, impose fines and even refer the matter to the procuratorate for pursuit before the courts under the criminal law.⁹⁴

Abuses of power, illegal collection of fees, and fraudulent practices by government officials are subject to disciplinary sanctions and, in serious cases, to criminal pursuits.⁹⁵

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