| If you are considering setting up a company in | | | | order to protect their intellectual property rights in |
| the People's Republic of China (the "PRC") you | | | | China's "wild west" business atmosphere. Although |
| should be aware that Chinese law is more | | | | the Labor Contract Law allows post-employment |
| protective of employees than the laws of many | | | | non-competition restrictions, it will limit their |
| western nations, particularly the United States. | | | | enforceability to two years and restrict the |
| The current PRC Labor Law was enacted in 1994; | | | | geographical area of applicability to areas where |
| however, a new PRC Labor Contract Law, | | | | actual competition is likely to occur. In this respect |
| intended to supplement the Labor Law, is | | | | the reform will render Chinese law more similar to |
| expected to come into force at the end of 2006. | | | | US law, since the current Labor Law does not |
| This new law contains both bad news and good | | | | impose any geographic restrictions at all (but does |
| news from the point of view of the foreign | | | | permits a maximum duration of up to three |
| investor; however, in general it further | | | | years). The Labor Contract Law goes even |
| strengthens the protection of employees. | | | | further, however, by requiring the employer "buy" |
| The Bad News: | | | | a non-competition clause by paying a minimum |
| Severance Pay | | | | compensation equal to the employee's annual |
| Because it is difficult under the PRC Labor Law to | | | | salary upon termination of the labor contract. It is |
| terminate open-term labor contracts, employers | | | | still unclear what, if any compensation will be due |
| usually prefer fixed terms. The Labor Contract | | | | the employee if the period of restriction is less |
| Law will address this issue by requiring employers | | | | than a year. |
| to pay severance compensation to employees on | | | | Contract Interpretation |
| fixed term labor contracts if these contracts are | | | | Any ambiguous term in a labor contract will be |
| not renewed at the end of the contract term. | | | | construed in favor of the employee. This rule |
| The proposed compensation is at least one | | | | does little more that codify what has long been |
| month's salary for each year of service. | | | | the prevailing practice in PRC courts. |
| Company Rules/Employee Handbooks | | | | Representative Offices |
| No provision in the employee handbook or other | | | | The current Labor Law requires Representative |
| rules affecting the employee's "personal interest" | | | | Offices to go through designated agencies such |
| may be put into force absent consultation with | | | | as FESCO (similar to Manpower in the United |
| the labor union or other employee representative | | | | States) in order to hire employees. The new |
| body (under Chinese law, virtually all employees | | | | Labor Contract Law offers Representative |
| are required to be unionized). | | | | Offices greater flexibility by allowing them to |
| A Shorter Probationary Period | | | | directly contract with employees for their first |
| Currently, the probationary period may be agreed | | | | year of employment. |
| between the employer and employee in the labor | | | | In summary, the new Labor Law will restrict |
| contract, but the maximum probation may not | | | | foreign investor's flexibility and make it more |
| exceed 6 months. The Labor Contract Law | | | | expensive for them to operate. The only good |
| shortens this period to one month for | | | | news is that Representative Offices will find it |
| non-technical work and two months for most | | | | somewhat easier to operate. Typically, the new |
| technical work (the six-month maximum is still | | | | Labor Contract Law does not bother to define |
| retained for "senior technical work", probably | | | | terms like "technical", "senior technical"; and |
| because these highly skilled employees are seen | | | | "personal interest" However, foreign investors |
| as less vulnerable in the employment market. This | | | | have long been used to waiting months and even |
| is significant because it easier to fire an employee | | | | years for ambiguous terms in Chinese law to be |
| during the probationary period than afterwards. | | | | defined through the further issuance of |
| Non-Competition Clauses | | | | "implementing regulations" to supplement the main |
| Foreign invested companies in particular have | | | | law; meanwhile the government's actual |
| tended to insert post-employment | | | | implementation of the law in particular cases will |
| non-competition clauses into labor contracts in | | | | be closely watched. |