Sign In


[Talk to my Lawyer]: Labor Contracts! Things You Probably Didn't Know!

What a lawyer says about the most common labor contract disputes
2021-10-22 12:00:00
"Talk to My Lawyer" is an ongoing SmartShanghai column discussing legal matters in Shanghai. SmSh invites qualified lawyers from our directory to give us legal advice on a range of issues, including commercial law, property law, contract law, and keeping-us-out-of-jail law.

Let's talk about labor disputes. In assisting our non-Chinese clientele, labor disputes — specifically contract disputes — can be big issues that people might experience when relocating to China. Chinese labor contract law, of course, works differently in some areas than contract law in other countries.

And they don't give you a handbook when you get off the plane...

In my experience, here are the most frequently asked questions — and the answers to them — we get about labor contracts and severance issues.

Who should sign a labor contract?

In a word? Everyone. Everyone should sign a labor contract. If there is labor and money being transacted, it is the official law that a written document must be in place to outline the terms of this transaction.

For foreign employees, you need to make sure you have a clause that states that your contract is in observance of "Labor Law and Labor Contract Law", so that as an employee, you're protected under law in terms of severance and other possible dispute issues.

Do I need to sign one with my ayi?

You can't sign an employment contract with your Ayi unless you are a registered business. You may wish to sign a "Civil Contract" with your ayi, which differs from a labor contract in that it doesn't cover taxes or social insurances.

Do labor contracts have to follow a certain structure?

For foreigners, the laws do not specifically outline a specific structure for the labor contract.

However, these elements should be clearly stated: Job position description, remuneration, benefits, working hours, annual leave, and insurance.

The labor contract does not need to be in Chinese.

A labor contract between a foreign employee and employer can agree to any terms except the following five things which are centrally regulated and mandated:

• Minimum salary
• Working hours
• Annual leave
• Work safety
• Social insurance

For these five things, terms can be negotiated, but they must not fall below China's labor law minimums (like minimum wage).

I've been offered a contract. I want to enquire as to the legality of some of the terms. How can I do this?

For general enquiries you can contact the Shanghai Labor Hotline at 12345.

If you want to go over an offered contract with a trusted third party expert, and discuss in detail certain elements and issues that could arise, go see a lawyer who specializes in contract law, particularly how it relates to non-Chinese workers.

Like me!

My contract has expired but I've kept working all the same. Is this considered working without a contract? Or do contracts automatically renew?

This is most definitely working without contract and the employer will bear the liability of paying double salaries. Yes. Double.

If it is the employer is unwilling to sign the labor contract, the employer shall pay the employee twice the labor remuneration starting from the second month of the labor relationship.

Also, it shall be deemed that both parties have entered into an open-ended labor contract that is with no termination date / fixed term from the day when the labor relationship hits one full year without a proper labor contract signed.

I've been asked to do a probation period. What does the law say about this?

Probation periods are common when undertaking a new job in China. Here's what the law says:

  • Probation periods shall not exceed six months.
  • If the term of the labor contract is more than three months but less than one year, the probation period shall not exceed one month;
  • If the term of the labor contract is more than one year but less than three years, the probation period shall not exceed two months
  • If the term of the labor contract is more than three years or is open-ended / no fixed period, the probation period shall not exceed six months.
  • The probation period shall be included in the terms of the labor contract.
  • The probation period cannot be counted out of the labor contract, that is, an employer cannot withhold the signing of the labor contract until after the probation period expires. If the labor contract only stipulates the probation period, the probation period shall not be established, and such period shall be deemed as the period of the labor contract.
  • The same employer and the same worker can only agree on one probation period for one type of work.

My employer wants to pay for a training period for me. What obligations do I have in this case?

The law stipulates that employers can agree on service periods with employees, specifically when employers provide employees with some kind of training (usually those expensive professional training) and bear the costs and expenses of the training.

That is to say: if they pay to train you, they are also allowed to lock you into a contract wherein you must work for them for an agreed upon period.

If the employee leaves early before that promised period, the employer can demand liquidated damages (i.e. whatever they invested in towards your professional training).

Liquidated damages can not exceed all training costs and expenses borne by the employers.

My contract has a "non-competition" clause. What is this and what does the law say?

The law stipulates that employers can agree with employees on restricting employees to work in certain industries or conduct business in certain industries on their own for a maximum of two years after leaving their jobs.

However, in this case, after resignation, employees shall be paid a monthly compensation of not less than 30% of the original salary for the duration of restriction.

If the employer decides that it is not necessary for the employee to continue to perform the non-competition obligation (i.e. they don't wanna pay!), it can stop paying the compensation and release the employee from this non-compete restriction.

If the employee violates the agreed agreement, he will need to pay the employer liquidated damages accordingly.

Under what circumstances should my employer pay compensation for terminating the labor contract?

This is the big one.

Let's look at three different scenarios, starting with the most common one.

A voluntary resignation (you quit your job):

If they employee quits, the employer has no need to pay the employee severance.

Wrongful termination (you get fired without cause):

If an employer wishes to terminate the employment of an employee before the expiration of their labor contract, and through no fault of the employee, then severance will need to be paid.

Unfavorable Contract Renewal (your contract expires, and you don't get a better offer):

Now this is something probably very few foreigners know. If your contract expires, and your employer does not offer you a contract renewal withbetter terms than the last contract, then you can refuse the renewal contract. The company can either offer you better terms, or they must pay you severance (provided again, the contract states it follows PRC labor laws).

Now an employer may ask "Well, if an employee can get severance at contract renewal, then why is there even a time limit on contracts? Why don't I just do a 10-year or 500-year contract?"

This is where understanding Chinese labor justice comes in handy. Workers are heavily protected in China. The time limits on contracts are also meant to benefit laborers, in that this guarantees that you will either receive regular promotions or better terms with each successive employment contract with the same company if you decide to stay.

Justified termination (you messed up and get fired):

If the employee (1) seriously violates the company regulations, or (2) is grossly negligent causing a great loss to the employer, or (3) has been prosecuted for a criminal offense outside the employment, the employer can terminate the employment and does not have to pay severance.

In practice, all those violations should be listed in your Employee handbook. The handbook is usually issued as a part of the labor contract and then treated as a part of the agreement between the two parties.

So, whenever you aren't sure if a termination was legal or not, take a look at your employee handbook. Your violation should be listed in there, otherwise chances are high the termination was illegal.

Pro-Tip: The above guidance is enacted only as long as the contract stipulates that it will follow PRC labor laws. If your contract doesn't say this, you can request a clause like this: "Unless agreed upon otherwise, the Labor Law and Labor Contract Law of China shall govern any matters raised or generated from this contract."

My labor contract has been illegally terminated. What rights can I claim?

Under normal circumstances, you can request the restoration of labor relations, provided that (1) the employer still exists (they haven't gone bankrupt), and (2) your previous position or similar position with the employer still exists.

Or, instead of requesting the restoration of labor relations, you may require your employer to pay you damages for the illegal termination of the labor contract, that is, twice the labor compensation. In addition, you can also claim wages, benefits, and allowances that have not been paid in full, and ask your employer to compensate you for untaken annual leave.

Same as the above part, if you want the protections of China's Labor Law, and Labor Contract Law, it needs to be stipulated that those laws govern your contract.

What is the calculation method of compensation and damages?

The employer and employee can engage in negotiations as to the terms of termination as well as the severance amount. However, employees are entitled to the standard severance compensation in addition to any other compensation the employer promised on a pro-rated scale.

Again, only if the Labor Law and Labor Contract Law are agreed by the employee and employer to be applied in the employment and such agreement has been clearly stated in the labor contract, then the following guidance can be considered.

The law stipulates that the calculation method of labor compensation is the number of years the employee actually worked for the employer before the termination of the labor contract multiplied by the employee's average monthly remuneration in the twelve months before the termination of the labor contract. For example, if "Charles" has worked for his employer for three years and seven months and his average monthly remuneration is 20,000rmb per month, his labor compensation is:


Note that if the fraction of the actual working years is less than half a year, it is calculated as 0.5 years, and if it exceeds half a year, it is calculated as 1 year. Therefore, three years and seven months should be calculated as 4 years. The average monthly remuneration for twelve months should be obtained by dividing the total remuneration (including not only wages, but also benefits, allowances, etc.) the employee received from the employer in the twelve months before the employee leaves the job by twelve.

The amount of damages is twice the labor compensation. In lay-man's terms... that 80,000 RMB calculation we did above... DOUBLE that... it's a 160,000rmb severance pay-out.

My company went out of business. Do I still have a chance to receive severance?

Your severance will be treated as debt of the company and they have to pay off all its debts before it can go solvency. Even if a company closes down their operations, in legal terms only very few companies are able to declare bankruptcy, so that means legally the company still exists until it's officially de-registered. Until then, employees are eligible to receive severance.

After the labor relationship is terminated, how do I get compensated for the untaken annual leave?

The law stipulates that the untaken annual leave will be calculated by multiplying the number of untaken days by the average daily remuneration of the employee.

Specifically: The law stipulates that the number of working days in a year is 250 days. Therefore, the average daily remuneration should be the total annual remuneration of employees (not only wages, but also benefits, allowances, etc.) divided by 250 days, and then multiplied by untaken annual leave days.

Can my employer put a clause in the employment contract to exclude severance ?


The trend nowadays allows foreign employees to agree different articles to the labor laws with the employer, and it is possible to exclude severance, if the contract does not mention that the Labor Law and Labor Contract Law applies to the contract.

(See the first question.)

If the contract does not specifically discuss severance, there is a risk that the arbitration and court may not support a severance to be claimed because it is not agreed in the contract.

Can my employer force me to take my own annual leave for public holidays?


Some foreign companies have been known to close on "make-up" work days, but then force employees to use their own annual leave.

This is not enforceable and the employee, if he decides to work and refuses to use their leave, they need to submit a written response to the employer for such decision.

If the company insists to close on a work day (for example, a Sunday "holiday make-up work day"), then it should not be claimed from the employee's personal annual leave.