Investing In China: Hiring, Firing And Labor Law

One of China's major attractions for foreign investors is its low labor costs. In the central provinces entry-level laborers can be hired for as little at US$60 per month and college graduates work for as little as US$150 per month, although labor costs in the more affluent coastal provinces are about three times as high. Furthermore, because there is a shortage of skilled labor and white collar management in the coastal provinces, additional incentives might be required to attract highly qualified employees (this is not so much of a problem in the central and western provinces). Employers can be recruited and hired directly in most cases, although there are many public and private employment agencies that will assist the foreign investor in recruiting qualified staff. In joint ventures, the Chinese partner is usually responsible for recruitment, although this is something that can be negotiated between the parties.

Employment law in China is in some ways more protective of employees than US labor law. Labor matters in China are generally governed by the P.R.C. Employment Law (although certain other national legislation also provides guidance). Where national law is silent, provincial and local laws apply, but in the event of a conflict between provincial/local laws and the Employment Law, the Employment Law prevails, much in the way as federal law trumps state law in the US.

Employment contracts are generally required and normally stipulate probation periods of no more than six months. A thirty-day advance notice and good cause are normally required in order to fire an employee after the expiration of the probation period (although employee incompetence and company business reverses considered good cause subject to certain restrictions). An employee can be immediately fired for serious misconduct.

The eight-hour workday and the forty-hour workweek are standard for blue collar employees, overtime pay is mandated by law, and there are legal limitations on how much overtime can be required. Paid leave is also required, although the required length varies according to local regulations (usually not exceeding two weeks per year). There are special protections on the type of labor that can be assigned to women and teenagers, and the minimum working age is 16. None of this should be unfamiliar to those familiar with prevailing US labor practices.

Nevertheless, Chinese labor law does include certain unique features that foreign investors should be aware of:

(1) In the event of a labor dispute, arbitration is required before the case can be taken to court.

(2) There are three funds to which both employer and employee must contribute:

1. Endowment Insurance (a kind of social welfare fund) - the employee contributes 5% of his salary, employer pays an amount equal to about one-fourth of the employee's salary (amounts vary by locality).

2. Unemployment Insurance - the employee pays 1.0%, employer pays 2.0%.

3. Hospitalization Insurance - Employee pays 2.0%, employer pays 8.0 .

In each of the foregoing cases, the employer deducts the employee portion from the employee's paycheck, but must pay the employer's portion out of its own pocket in addition to the employee's regular wages. Also keep in mind that the foregoing amounts may vary somewhat according to locality. There are also certain funds that employers must contribute to, such as an employee labor union fund (generally about 2 of payroll).

A prospective foreign investor would do well to keep abreast of breaking developments in this area, because the law is rapidly evolving.