China’s labor law legislations mainly consist of two laws on national level, the Labor Law and the Labor Contract Law, as well as various regulations and circulars issued by local governments. The Labor Law and the Labor Contract Law provide the general principles regulating the employment relationship while the local regulations and circulars specify the details based on regional economic conditions. This legislation structure leaves sufficient flexibility to accommodate different developing levels but also leads to the side effect that the labor practice and interpretation differs greatly by locality. Even in the same city, the practice and the judge’s interpretation of law might change according to the economic climate. Therefore, the investor is recommended to do a due diligence on the labor legislations and practice of the place where the manufacturing entity is located and shall not take for granted and simply adopt the practice in other cities of China.
A written employment contract is required for the establishment of employment relationship, the absence of which will result in severe penalty to the employer. The company could choose to conclude either fixed term contract or permanent contract with the employee but under some circumstances, the employment contract has been renewed twice for instance, the company must establish permanent relationship at the request of the employee. The employment contract could only be terminated on the basis of legitimate reasons enumerated by the Labor Contract Law, e.g., expiry of the contract, severe violation against company bylaws, incompetence after training and position adjust. The fact that the terminating party shall provide solid evidences to justify the termination and that the judge tends to protect the employee makes the termination, especially large scale retrenchment, always a bad headache for the employers in China.
The Labor Contract Law also provides the standard of severance compensation, which is basically one month salary for one year service capped by three times of the local average salary. If the employer fails to justify the termination with legitimate reason, it shall pay doubled compensation to the employee.
Technically the Trade Unions of China is a non-government organization but in fact it has a deep government background and works closely with the Ministry of Labor and Social Security. Therefore, in China the Union will not take aggressive action when conflict between the enterprise and the staff occurs, especially in state owned enterprises, as the government gives economic reform and political stability the highest priority. Furthermore, the right to strike was removed from the existing PRC Constitution and exercising the right to demonstration shall be subject to strict pre-approving procedures of the government, which causes the role of the trade union even weaker. In that case, it is understandable that the employees are not enthusiastic to establish trade union in the company even though the PRC Trade Union Law requires the company to assist the trade union setup and allocate proper funds (2% of the total monthly salary cost) to the union.
Most private companies and FIEs in China do not have trade unions. Even in those which have trade unions, the unions are either mild or inactive.