Author: Erex Chen
For expat employees, due to lack of local labor law knowledge, it is always difficult to conclude a fair employment contract in China. It is particularly true when they are offered with the prepared employment contract by the employer and no much room is left for them to raise opinions for change. Thus, a lot of potential disputes may exist during the performance of the contract, which, in most cases, cannot be foreseen by the employee.
In our day-to-day practices in relation to the employment law, we have paid attention to several issues in concluding the employment contract which may cause dispute. In this article, we would like to share our experience, as well as our suggestion.
I. Application of Work Permit
Under China law, for expat employee, a work permit shall be applied to ensure legitimate employment in China. Without a work permit, expat employee will be deemed to work illegally and will face penalty from the police once he is caught. In addition, without a work permit, expat employee is not protected under the labor law, which means they cannot file to labor arbitration and claim for their rights under the labor law.
However, the application of work permit, under current practice, shall be sponsored and applied by the employer. In the application process, certain expenses will be incurred including freight for application of Z visa outside of China, Z visa fee, cost for health examination etc.
Common disputes arise in the process of work permit application include:
-Who shall be responsible for the expenses arising in relation to the work permit application;
-As no 100% guarantee that each employee is allowed to obtain the work permit, in case of failure in obtaining the work permit, how the expat employee shall be compensated, provided that the employee has started the work for the employer prior to the application and is forced to stop due to the lack of work permit;
-Usually it may take around 2-3 months to obtain the work permit. In our experience, we saw the process of work permit application may be seriously delayed due to the lack of experience in handling work permit by the employer, which is usually caused due to the incorrect paper preparation by the employer. The employee is running the risk of working without work permit and cannot be protected by the labor law.
-After the employee quits from the employer, the employer shall cancel the work permit for employee timely and issue a release letter so that the employee is able to apply for a new work permit in his new job. In some cases, the cancellation and the issuance of release letter may be delayed due to the reason of the employer, which causes that the employee is not able to obtain a new work permit in due time.
Therefore, the potential issues in relation to the work permit shall be clarified by the employer, either in the employment contract, or a separate document signed by both parties.
Under China law, leave includes annual leave, sick leave, maternity leave, baby-nursing leave, Bereavement leave etc. In most cases, the employer intends to follow China law in respect to the days of leave as well as the compensation during the leave for expat employee.
However, potential dispute may still exist. Maternity leave and salary during the maternity leave for female expat employee is an example.
For local Chinese employee, the rights for maternity leave for female employee are combined with China’s family planning policy. For instance, for local female employee, their rights for maternity leave include:
-98 days of regular maternity leave. In case of dystocia, additional 15 days leave is allowed. In case of multiple births, for one more baby, additional 15 days leave is allowed.
-In Shanghai, for female employee who gives her first birth after 24 years old, she will be granted with additional 30 days leave.
-During the maternity leave, the local employee will receive maternity allowance from the social insurance fund.
However, for expat employees, since she is not subject to China’s family planning policy, and is not covered by the local social insurance in terms of maternity insurance, their right for maternity leave and payment during the maternity leave will be an issue.
As the rights of female expat employee for maternity are usually ignored by most employers, to avoid dispute, we may suggest female expat employee shall make a special agreement with the employer by reference to the local standard.
Under China labor law, termination of an employment contract is strictly limited to the situations allowed by the law. Therefore, without a legitimate reason, an employer is not allowed to terminate employment contract at will.
The situations where the employer is allowed to terminate employment contract include:
Immediate Termination by the employer
-the employee is proven during the probationary period not to meet the relevant requirements for the position;
-the employee commits a serious violation of the employer’s company regulations;
-the employee commits a serious dereliction of his duty or practices graft of favoritism, causing serious losses to the employer;
-the employee has simultaneously established an employment relationship with another employer, severely hampering his ability to complete work duty of the employer, or has refused to rectify following a request by the employer;
-the employee defrauds, coerces, or exploits the unfavorable position of the employer, resulting in the employment contract having been concluded or modified against the true intention of the employer, as a result of which the employment contract is deemed null and void;
-the employee is subject to criminal liability.
Termination with prior notice by the employer
The employer may terminate the employment contract with one month prior notice (or pay one month salary in lieu) under the following circumstances;
-After taking a medical leave and recuperating from an illness or a non-work-related injury, the employee remains unable to return to his original position, and is also unfit for reassignment to other duties;
-The employee is unable to fulfill the duty of his position, despite undergoing training or a transfer to another position;
-There is a substantial change in the objective circumstances under which the employment contract was concluded, thereby rendering the performance of the contract impossible and, after consultation, the parties fails to reach on amendments that would accommodate such a change.
If it is necessary to lay off twenty or more employees, or a number of employees fewer than twenty but comprising more than ten percent of the workforce of the employer, the employer may lay off employees after it has issued a statement to the trade union or to all employees within 30 days prior notice and has considered the opinion of the trade union or employees, and after filing a workforce-reduction plan with the labor administration authority.
However, for expat employee, besides the above regulations which both parties can use as a basis for termination, the law allows both parties to agree on other situations where a termination can happen.
A typical situation is that the employer wants the right of early termination without any reason. For example, the employer is happy to see that it can terminate early with 3 month prior notice.
The expat employee shall particularly pay attention to the clause of termination. This is because if the employer is able to terminate just with prior notice and without any reason, most of situations as allowed by the law for termination by the employer may become meaningless. The employer may tend to terminate just with notice, thus avoiding any risk of illegal termination.
Our suggestion is the situations stipulated by the law for termination by the employee is made in favor of the employee, and therefore, can be referred when making the contract.
IV. Severance Payment
Severance payment is available for employees in the event the employment contract is terminated according to Article 46 of the Employment Contract Law.
The severance payment is paid according to the number of years the employee works in the employer and one month salary as severance payment shall be paid for each working year. If the working time is less than 6 months, then half month salary as severance payment shall be paid. Where the employee has worked for no less than 6 months but less than one year, then full monthly salary as severance payment shall be paid.
However, if the employee’s monthly salary exceeds three times the average local employee’s monthly salary for the municipality, the one month salary as severance payment shall be limited to three times the amount of average local employee’s monthly salary.
For expat employee who is in a management position, or whose salary is a high one, with the local standard of severance payment, he may find the total severance payment he may receive upon termination is a really small one.
For example, let’s say the monthly salary of an expat employee is RMB 50,000 and he has worked in the company located in Shanghai for 2 years, then the severance payment he may receive is 2*3*5380=32280, which is less than his one full month salary.
Due to the financial difficulty, big companies usually tend to cut positions to save money. Without good reason for early termination, the employer will still try to run the risk of unilateral termination and terminate the contract illegally. However, under the law, the compensation for illegal termination for employee is double of severance payment. So, in above cases, the employer is only liable to pay 2*32280=64560 even the termination is an illegal one.
For senior expat employee receiving a high salary, the above result is obviously not fair to them. This gives the employer option to cut position at will while the cost is a low one.
Our suggestion for the senior expat employee is that in the contract, the employee insists that the calculation of the severance payment is one normal monthly salary for each working year, and the restriction of three time of the average local employee’s monthly salary shall not apply. In that case, the severance payment can be RMB 100,000 and in case of illegal termination by the employer, the compensation shall be RMB 200,000.
This article is published solely for the interest of friends and clients and should not be relied upon as the legal advice of any kind from us. Should you have any questions about this article, please contact the partner of Mylink Law Office.
Erex Chen, Managing Partner