Tuesday, January 1, 2008


Significant changes to the Current Labor Law Regime made by the New PRC Labor Contract Law and their influences on future HR management

by Ma Jian Jun
Jun He Law Offices

On June 29 2007, the Standing Committee of the National People’s Congress (NPC) of the PRC held the 28th meeting and adopted the Labor Contract Law of the People’s Republic of China (the “LC Law”) which will become effective on January 1 2008. The LC Law creates significant changes to the existing labor laws, regulations, judicial interpretations and administrative rules of the PRC and will result in significant changes to the current employment relationship of all kind of employers with their employees when it becomes effective. 

I. Company rules, policies and significant decisions
 The LC Law specifies that an employer is required to consult the employees prior to formulation of or amendment to certain company rules or policies concerning employment disciplines and employee benefits that are directly relevant to the interests of employees.  Over the course of consultation, a trade union may represent employees, or the employer may directly discuss relevant matters with all of the employees or representatives of the employees.  While implementing relevant rules or important decisions, employees or their trade union have the right to discuss with an employer as to how to amend or perfect relevant rules and policies.  

An employer has an obligation to notify employees of relevant rules, policies or important decisions. If an employer’s rules and policies violate a law or regulation thereby damaging the interests of employees, employees have the right to terminate the labor contract by notice to their employer at any time and to claim compensation.

Existing PRC labor laws and regulations are silent on how an employer should formulate and amend the rules and schemes that are relevant to the interests of employees.

In light of the draft of the LC Law made public before its formal promulgation, we are of the view that the terms “negotiations on a basis of equality” and “discussion” prescribed in the LC Law, are procedural provisions on the supervising right exerted by employees other than a codetermination system.  We are, however, unable to determine at this time whether the phrase “any company rules or policies are against the applicable laws or regulations” in the LC Law refers only to the substantive content thereof or whether it is inclusive of the procedures stipulated therein.  Additionally, no LC Law provision specifies what constitutes lawful and effective procedures for the consultation and discussion.  As the LC Law specifies that the competent labor administrative authorities of the local people’s governments at the county level or above shall monitor and inspect the formation of company rules and policies that have an immediate impact on the employees’ interest, and the performance thereof, it is, in our opinion, advisable for employers to proactively consult the competent local labor administrative authorities.  See Article 74 of the LC Law for details.

II. Mass redundancies
Under the LC Law, if an employer decides to terminate more than 20 employees or the total number of employees to be made redundant represent 1/10 of the total labor force, the employer is required to satisfy one of the following 4 conditions: (i) the employer needs reorganization under bankruptcy law; (ii) the employer has encountered severe difficulties in business operation; (iii) the employer still needs to terminate employees after transferring businesses, conducting significant technological reforms or changing its business methods and having amended labor contracts; or (iv) the labor contracts cannot be performed due to a significant change in circumstances.  The last two circumstances are newly added in the LC Law. 

We are of the opinion that employers undergoing a merger and acquisition transaction involving the transfer of employees will inevitably be affected by the above provisions.  Under the existing Labor Law, when an employer transfers employees on a large scale as a result of major changes in the objective circumstances such as asset transfer, the employer is not obliged to explain the situation to the trade union or to all of its employees a month in advance, nor does the employer need to listen to their comments or report the employee transfer plan to the competent labor authority.  Under the LC Law, however, employers must notify the trade union or all of the employees of the redundancy plan, solicit their opinions, and report to the competent labor authority. 

We present the information and analysis above for your reference only.  The English version of this memorandum shall not be construed as the official legal opinion of Jun He Law Offices