The People’s Supreme Court issued a fourth Interpretation of the Chinese Labor Law, which came into force last year on February 1st 2013. Labor laws in China cover the rights and responsibilities of both the employer and employee. Although this law has been in effect for quite a long time, uncertainty still remains concerning how to correctly implement the regulations. In addition to this, the wording is sometimes confusing or vague, which increases the difficulty in correctly interpreting the law. Therefore, a “Judicial Interpretation on Applicable Laws in terms of Trial and on Labor Disputes Cases” came into force on February 1st, 2013. This was already the fourth interpretation, which signifies how complex the situation is. This brochure shall provide a summary of the most frequently asked questions concerning labor and labor contract law.

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The 21 most asked HR questions about the Chinese
labor law
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By the end, you will understand:
 The labor contract
 The probation period
 The working hours and annual leave
 Part-time employees
 Salaries and overtime
 The employee handbook
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The Chinese Labor law
The People’s Supreme Court issued a fourth
Interpretation of the Chinese Labor Law,
which came into force last year on February
1st
2013. The fourth interpretation contains
more specific regulations for payments during
the non-competition period, but at the same
time, it raises more questions about how to
correctly apply the existing laws.
The labor law and labor contract law, which
have been effective since 2008, are regulat-
ing employment relationships in China. Labor
laws in China cover the rights and responsi-
bilities of both the employer and employee.
Although this law has been in effect for quite
a long time, uncertainty still remains concern-
ing how to correctly implement the regula-
tions. In addition to this, the wording is some-
times confusing or vague, which increases
the difficulty in correctly interpreting the law.
Moreover, the labor law in China is rather
new. Consequently, practical examples of la-
bor disputes are also rare.
Therefore, a “Judicial Interpretation on Appli-
cable Laws in terms of Trial and on Labor
Disputes Cases” came into force on February
1st, 2013. This was already the fourth inter-
pretation, which signifies how complex the
situation is.
This brochure shall provide a summary of the
most frequently asked questions concerning
labor and labor contract law.
1. How shall the labor contract be
drafted?
Generally speaking, well-drafted labor con-
tracts are becoming more and more im-
portant. Labor contracts that do not respect
the applicable laws, exclude employee’s
rights or not incorporate the employer’s re-
sponsibilities are simply invalid. So that no
mistakes are made in drafting employment
contracts, it is recommended to take legal ad-
vice before starting any action.
The employment contract absolutely has to
contain:
• Name, address & legal representa-
tive of the company
• Name, address, ID number of the
employee
• Time limitation (if applicable) & pro-
bation period
• Remuneration
• Description and location of the em-
ployment

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• Regulations concerning working
hour, rest & leaves
• Working conditions, including safety
& protection measures
• Social insurance
2. Why is a written labor contract nec-
essary?
A written labor contract is absolutely neces-
sary in China in order to protect the employee
as well as the employer. The law has special
regulations on what happens if a written con-
tract is not provided within one month after
starting work. If this is the case, the employer
has to pay double the salary for every month
the employee worked without a contract. Ad-
ditionally, if the employee works for 12
months or more without any written contract,
the contract then becomes an open-ended
one. This is of course beneficial for the em-
ployees and they will surely make use of their
rights. In order to avoid these undesirable
burdens, the company should provide the
employees with a written contract on the first
day.
3. When is it an open-ended or a fixed
term contract?
Usually the company and the employee agree
within the written labor contract on the time
frame of the employment. However, accord-
ing to the law in China, a contract is simply
supposed to be open-ended if one of the fol-
lowing circumstances applies:
• The employee has been working for
the same company for at least ten
years.
• After the expiration of the second fixed-
term contract, which has been signed
after 2008, the following contract for
this employee has to be an open-
ended one.
• The employer did not provide a written
contract for 12 months or more.
An open-ended contract makes it more diffi-
cult to terminate an employee. The issues of
termination will be elaborated later.
4. Why should you have a probation
period?
As the term “probation period” already impli-
cates, this period is to test the employee. If
during the probation period an employee
shows that he/she is incompetent for the posi-
tion, the employer has the right to terminate
him/her without prior written notice and even
without severance payment. During this peri-
od the employee shall receive at least 80% of
his salary. If the probation period is longer
than the allowed time stated in the law, then
the employer has to pay compensation for
each month the employee did not receive
his/her full salary.

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5. How long is the probation period?
The duration of the probation period is regu-
lated by law. The given statutory periods are
the maximum periods allowed:
• Contract for less than 3 months: no
probation period.
• Contract for more than 3 months but
maximum one year: 1 month probation
period.
• Contract for more than 1 year but less
than 3 years: 2 month probation peri-
od.Contract for more than 3 years &
open-ended contracts: 6 month proba-
tion period.
• For all project-based contracts there is
no probation period.
6. How about part-time employees?
If the company wishes to employ a part-time
employee, then this is generally possible
even without any written employment con-
tract. However, for the employer’s safety it is
still recommended to have a contract. Part-
time employees are only allowed to work 4
hours a day and not more than 24 hours a
week. Part-time employees can be terminated
immediately without any severance payment.
7. How much annual leave do you
have to give an employee?
Chinese Law provides minimum requirements
for annual leave. However, Foreign Invested
Enterprises usually give more days annual
leave than this.
The minimum requirements are:
• 5 days if working less than 10 years in
aggregation
• 10 days if working 10–20 years in ag-
gregation
• 15 days if working over 20 years in ag-
gregation
In addition to this, Chinese employees enjoy
11 days of Public Holidays, which are decided
by the government and gathered around feast
days.
Check annually on these holidays because
overtime work on public holidays is very ex-
pensive.
8. How many hours can you let an em-
ployee work?
The Chinese system has three different sys-
tems to calculate the allowed hours per day.
The standard working hour system is suitable
for office workers. Under this system the
normal working day shall not exceed 8 hours
per day and no more than 44 hours per week.
Under the comprehensive working hour sys-
tem, the hours are calculated on a specific
period such as week, month or quarter.

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The average day shall also not have more
than 8 hours and the average week shall not
have more than 44 hours.
The third system, the non-fixed work hour
system does not calculate any hours and is
therefore mainly used for senior management
positions.
9. How much does overtime cost?
Under the standard working hour system
overtime shall be paid based on a certain
percentage of the basic hourly wage for each
overtime hour:
Under the comprehensive work hour system,
overtime is calculated as follows:
• Beyond ordinary shift: 150%
• On weekends: 200%
• On public holidays: 300%
10. How much does an employee cost
in addition to his/her salary?
Additionally to the salary, the company has to
contribute to social security and to the hous-
ing fund. The employer’s contribution is calcu-
lated based on the salary of the employee.
Table 1: Overview of the tax percentage on wage
Type Tax percentage on wage
Pension Insurance
20% (minimum base for calculation RMB 2,089/month, maxi-
mum cap for calculation RMB 15,669/month)
Medical Insurance: 10% (minimum base for calculation RMB 3,134/month, maxi-
mum cap for calculation RMB 15,669/month)
Housing Fund: 12 % (minimum base for calculation RMB 2,089/month, maxi-
mum cap for calculation RMB 15,669/month).
Unemployment Insurance:
1% (minimum base for calculation RMB 2,089/month, maximum
cap for calculation RMB 15,669/month)
Employment Injury Insur-
ance:
0.5 – 1.5% (minimum base for calculation RMB 3,134/month,
maximum cap for calculation RMB 15,669/month)
Maternity Insurance:
0.8% (minimum base for calculation RMB 3,134/month, maxi-
mum cap for calculation RMB 15,669/month)

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Since June 2013 (likely to be changed in
June 2014), the minimum base for the calcu-
lation in Beijing is RMB 2,089 (60% of the av-
erage monthly wage), meaning that even if
the monthly salary is below RMB 2,089 the
contribution is calculated with the base of
RMB 2,089. On the other hand, the maximum
contribution is determined by a cap of RMB
15,669 (300% of the average monthly wage
in Beijing). Every year in June, the Beijing
Municipal Human Resource and Social Secu-
rity Bureau and the Beijing Municipal Statis-
tics Bureau publish the official average
monthly wage for the previous year and the
base for the calculation changes. The exact
figures depend on the region. Moreover, the
employer’s contribution to the employment in-
jury insurance depends on the industry.
Companies not paying any contribution to the
social security will have to pay interests on
late payments. Moreover, employees have
the right to terminate and receive severance
payment if the employer does not pay the so-
cial security contribution.
11. How can you maintain the confi-
dentiality of the employees?
The written labor contract should have a con-
fidentiality clause. By signing the contract, the
employee agrees to handle all information,
e.g. trade secrets, confidentially. If the em-
ployee does not respect the confidentiality
clause and as a result the company suffers
losses, the company can make the employee
liable for compensation payments. To make
sure that this right will be enforced, the confi-
dentiality clause in the contract has to be
well-drafted and accurate. Thus, it is better to
leave this part to an expert.
12. When is it useful to have a non-
competition agreement?
Non-competition agreements usually apply for
senior management or senior engineers be-
cause they have the greatest knowledge
about the company’s strategy and secrets. It
is important for foreign companies to use
such non-competition agreement since they
often have technical and/or management
know-how, which they do not want to easily
lose to their competitors. Such non-
competition agreement states that the em-
ployee shall not compete with the employer
even after termination. This includes starting
a new job or their own business. That is why
this period is usually a tough time for the em-
ployees.

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13. How much does the non-
competition period cost?
During the non-competition period the em-
ployee shall receive 30% of his/her previous
salary per month. Previous salary means the
average salary obtained during the last 12
months and this also includes bonuses or any
other extra payments.
The maximum time frame for the non-
competition period is 2 years. If the employer
wishes to terminate the non-competition peri-
od before the official end, an additional three
months compensation payment has to be
paid. To prevent additional payments, the
company should well estimate for how many
months they can afford a non-competition pe-
riod.
14. How well does the non-competition
period protect me?
Of course it is difficult to monitor the terminat-
ed employee. However, if the employee
breaches the agreed non-competition period,
the employer has the right to demand com-
pensation payments for all damages oc-
curred.
15. How can you terminate an employ-
ee?
Termination is only possible if one of the stat-
utory reasons applies or if the fixed-term con-
tract expires. Any termination, which cannot
be explained by the statutory reasons, is ille-
gal and such a process for illegal termination
can be very expensive for the company. Situ-
ations when an employee can be terminated
can be classified into immediate termination,
meaning three days’ notice and in termination
with a notice 30 days in advance.
16. When can you immediately termi-
nate an employee?
• If the employee is to be found incom-
petent during the probation period;
• If the employee is investigated for crim-
inal actions;
• If the employee seriously violates the
internal rules;
• If the employee commits corruption or
dereliction causing loss for the em-
ployer
• If the employee has a second job,
which makes it impossible for him to
perform well, and the employee refus-
es to change this situation; then the
company has the right to terminate
him/her immediately without any sev-
erance payment.
17. When do you have to give a 30
days written notice for termination?
• If the employee is still incompetent af-
ter training and position adjustment;
• If the employee is unable to perform
his job after he has been sick;

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• If the objective circumstances, under
which the person has been employed,
seriously changed; then the employee
can be terminated with one month’s
written notice and with severance
payment.
18. How expensive will the termination
be?
Under certain circumstances the company
needs to pay severance payments. The total
severance payment is then calculated: aver-
age monthly salary x years of service. The
average monthly salary refers to the average
salary of the last 12 months before termina-
tion. This also includes bonuses and further
extra payments. However, for the employer’s
convenience, average monthly salary used
for severance payment calculation cannot be
more than three times the municipality’s
monthly average salary.
Thus, for Beijing since June 2013 (likely to be
changed in June 2014) this would be RMB
15,669 only.
For the years of service, any time period un-
der 6 months, is handled as half a year. A
time period above 6 months, is handled as a
full year.
19. When do you have to pay sever-
ance for your terminated employee?
The severance payment, which is calculated
as mentioned above, has to be paid:
• If a fixed-term contract expires and is
not renewed;
• If the employer and employee agree to
terminate the contract and this has
been proposed by the employer first;
• If the employee is terminated with a 30
days written notice;
• If the company needs to release 20
employees or at least 10% of all em-
ployees because it undergoes changes
as implied by the Enterprise Bankrupt-
cy Law;
• If the company closes down;
• If the employee proposes termination
because his/her employer was en-
gaged in illegal action.
20. What is the employee handbook
and why do we need it?
In addition to a labor contract, a company
should have an employee handbook, as well.
The employee handbook can be regarded as
the “Code of Conduct” for the employees. In
this handbook, internal procedures for leaves,
sick leaves, and behavioral standards should
be incorporated.

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The employee handbook gives the company
the possibility to define expressions, which
are formulated vague by the law. For exam-
ple: the law says, that an employee’s position
can be adjusted if he/she is incompetent. ‘In-
competent’ should be defined in the employ-
ee handbook. Another example: the law says
that an employee can be terminated immedi-
ately if he/she severely violates the internal
rules. ‘Severely’ should also be defined in the
employee handbook. As such, the employee
handbook shall cover:
• Recruitment Procedures
• Staff Performance and possible con-
sequences
• Confidentiality and noncompetition
• Termination
• Discipline Punishments
• Approval Procedures for leaves and
overtime
21. What role do Labor Unions play?
Generally speaking, a company needs to
have a labor union. The labor union has to be
informed about simply everything going on in
the company and has the right to ask the
company to change their actions. However, it
is not mandatory to get their agreement be-
fore any company action. It is important to
keep the labor union informed, especially in
the case of unilateral termination, in order to
avoid disputes with the Labor Arbitration. The
company also has the obligation to pay the
labor union fees on a monthly basis

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