14.4 Political and legal risk in international business  (Page 3/3)

Introduction

On June 29, 2007 at the 28th session of the standing committee of the 10th National People’s Congress, a new employment contract law was adopted which took take effect on 1 Jauary 2008. This law requires all employers to enter into contracts with their employees within 30 days of full-time employment and sets out guidelines for their implementation. By incorporating new legal provisions with existing laws from the current PRC labor law, the committee hopes to meet three main objectives: (1) to clarify the employment contract system by clearly identifying both the employer and the employee litigation rights and duties (2) provide protection of an employee's legitimate rights and interests and (3) construct and develop harmonious/stable work relations. All regulations that affect employees such as compensation, work hours, rest, leave, work safety and hygiene, insurance, benefits, employee training, work discipline or work quota management must be approved by the employee representative congress or by all the employees and determined with a trade union (to be established by all employers) or employee representatives. Rules, regulations and decisions having a direct bearing on employees shall be made public or be communicated to the employees by the employer. The labor administration authorities of People’s Governments at the county level and above, together with the trade union and enterprise representatives will establish a comprehensive tri-partite mechanism for the coordination of employment relationships. The trade union will also assist employees with employment contracts in accordance with the law.

Increased legal liability

Employers

Certain articles in the new law will establish increased legal liability and possible criminal charges for employers whose actions cause an employee to suffer harm, such as:

1. An employer’s internal rules or regulations violate the laws.
2. An employment contract is not delivered to an employee or lacks any of the mandatory clauses which the law requires.
3. An employee’s resident ID cards, files or contract papers are retained by an employer illegally or the employer collects an unrequired financial guarantee from an employee.
4. An employer uses violence or threats to compel an employee to work, orders them to perform dangerous operations or provides an unsafe or polluted environment resulting in harm.
5. An employer conducts business without the required legal qualifications.
6. An employer terminates a contract in violation of the law.

Employees

Employees that terminate a contract in violation of the Law or breach any confidentiality obligations or competition restrictions stipulated in the contract can be held liable for damages sustained by the other party.

Joint Liability for Employers/Employees and/or Third Parties

• If an employer hires an employee whose contract with another employer has not yet been terminated or ended, causing the other employer to suffer a loss, it shall be jointly and severally liable with the employee for damages.
• A staffing firm that violates the law may be subject to fines and have their business license revoked. If the employee(s) they placed suffers harm as a result, both the staffing firm and company that accepted the employee shall be jointly and severally liable for damages.
• A contractor hiring employees in violation of the law who suffer harm will result in joint liability for the organization that employed such contractor and the contractor.
• Negligence on the part of a labor administration authority to act in accordance with the law will also result in them bearing liability.

Penalties for an Employer’s Non-Compliance

Within the new law there are financial penalties for non-compliance with the terms of employer/employee contract guidelines, which include failure to conclude a written contract within the 30 day period, setting an illegal probationary period, illegally retaining an employee’s resident ID card or other papers, etc. An employer that fails to pay an employee his salary, pays below the local minimum wage rate, fails to pay overtime or terminates a contract without paying the employee severance or without cause will also pay varying damages as stipulated in the new law.

Summary

The new employment contract law will enhance employees’ rights in striving for better employment terms and working conditions. Therefore, all companies, including foreign companies who have invested in local subsidiary or representative offices in the PRC should re-examine their local and master directors' and officers' liability policies, as well as any employer’s liability exposures and relevant local or global policies. Although the level of compliance and the degree to which the new law will be enforced is not yet known, it is important to be fully prepared for a 1 January 2008, not only by reviewing all employment contracts, employee handbooks and internal guidelines, but also by taking stock of any subcontracting agreements or the use of staffing companies and their policies.

Questions

How can the establishment of China’s new employment contract benefit other countries that are looking to institute a new law like this one? How would this affect countries trading with China today? How will this new employment contract affect companies doing business in China?