Employing Staff in China: A UK Lawyer's Guide to the Labour Contract Law

When a UK group's Chinese subsidiary wants to "performance manage someone out," the instruction usually arrives with assumptions imported from English law — notice in lieu, a settlement agreement, perhaps a short consultation. None of those assumptions survive contact with the PRC Labour Contract Law. The earlier UK counsel grasps how different the Chinese regime is, the cheaper the exit.

The statutory architecture

Employment in mainland China is governed principally by the Labour Law (1995), the Labour Contract Law (2008, amended 2012), the Social Insurance Law (2011) and a thick layer of local implementing rules issued at provincial and municipal level. The picture differs meaningfully between, say, Shanghai, Beijing, Shenzhen and a tier-three city, and local arbitration commission practice often matters more than the bare text of the statute.

Three points of orientation for UK counsel:

• China is a statutory, not contractual, employment system. The employer cannot contract out of mandatory protections, and most "boilerplate" English clauses (pay in lieu, garden leave, broad summary dismissal) are unenforceable or recharacterised.
• There is no employment at will. An employer may only terminate on grounds listed in the statute, and bears the burden of proving them.
• Remedies for the employee are heavily weighted: reinstatement, double severance, and continued social insurance contributions during disputes.

Written contracts and the double-salary penalty

A written labour contract in Chinese must be signed within one month of the employee's start date. If the employer fails to do so, from the second month onwards the employee is entitled to double monthly salary for up to eleven months, after which an open-term contract is deemed to exist. This is not a theoretical risk — it is one of the most common claims at labour arbitration, and HR oversights at a newly incorporated WFOE routinely produce six-figure RMB exposure.

Practical points for instructing solicitors to flag to the China HR team:

1. The contract must be signed, in Chinese, before or within 30 days of onboarding. A bilingual contract is permissible; the Chinese version controls.
2. Statutory minimum content includes term, job description, work location, working hours, remuneration, social insurance and labour protection.
3. Probation periods are capped by reference to contract length (e.g. a maximum of six months for a contract of three years or more, and probation salary cannot fall below 80% of the post-probation salary or the local minimum wage).
4. Non-compete covenants are enforceable only against senior management, senior technical staff and others with confidentiality obligations, are limited to two years, and require monthly compensation during the restricted period — typically 30%–50% of pre-termination salary, subject to local floors.

The open-term contract trap

The Labour Contract Law obliges employers to offer an open-term (无固定期限) contract in three scenarios most commonly: (i) ten years' continuous service; (ii) after two consecutive fixed-term contracts; or (iii) where the employee requests one in those circumstances. The two-fixed-term rule catches groups that habitually renew on rolling two-year contracts; the third renewal must be open-term unless the employee declines in writing.

An open-term contract is not a job for life — the statutory termination grounds still apply — but it removes the easy "non-renewal on expiry" exit, on which non-renewal severance is in any event payable. UK counsel advising on workforce planning should be alert to where employees sit on this curve before any restructuring is announced.

Why dismissal at will does not exist

PRC law recognises three modes of employer-initiated termination:

• Summary dismissal for cause under Article 39 — serious breach of internal rules, serious dereliction of duty, criminal liability, dual employment that materially affects performance, fraud during hiring, or invalidation of the contract through the employee's fault. No severance is payable, but the employer must prove the cause and show that the relevant internal rule was lawfully promulgated and democratically consulted.
• Termination on notice under Article 40 — incapacity after medical leave, incompetence after training or reassignment, or a material change in objective circumstances. Thirty days' written notice (or one month's pay in lieu) plus statutory severance.
• Economic redundancy under Article 41 — twenty or more employees, or 10% of the workforce, with prior consultation with the trade union or all staff and filing with the local labour bureau.

Mutual termination by agreement (协商解除) sits outside this framework and, in practice, is how the vast majority of unwanted exits are resolved — at a premium to statutory severance.

Statutory severance maths

Statutory severance (经济补偿) is one month's average wage per year of service, with periods of six months or more counted as a full year and periods of less than six months as half a year. "Monthly wage" is the average over the twelve months preceding termination, inclusive of bonuses and allowances, and is capped at three times the local average monthly wage, with a corresponding twelve-year cap on the years counted at that high-earner level.

Where termination is unlawful, the employee may elect reinstatement (with back pay) or double severance (赔偿金 — 2N) as compensation. The often-quoted shorthand "N, N+1, 2N" captures the three usual outcomes — N for lawful Article 40/41 termination with notice given, N+1 where notice is bought out, and 2N as the unlawful-dismissal penalty. Negotiated exits commonly settle between N+1 and N+6 depending on seniority, evidential strength and city.

A lawful termination playbook

A defensible termination file, built before any conversation with the employee, typically contains:

• An employee handbook and discipline rules that have been democratically consulted (with the employees' congress or all staff) and individually acknowledged in writing by the employee.
• Documented performance objectives, written warnings, a performance improvement plan, and evidence of training or reassignment where Article 40 incompetence is the basis.
• Where summary dismissal is contemplated, contemporaneous evidence of the misconduct, the relevant handbook clause and notice to the trade union (where one exists).
• Final pay calculations covering wages to the termination date, accrued untaken statutory annual leave at 300%, and any contractual bonus entitlements.
• A bilingual mutual termination agreement releasing all claims, with payment conditional on return of property and confidentiality undertakings.

Foreign-invested groups consistently lose at arbitration not because the underlying decision was wrong, but because the file was built after the decision was taken.

FAQ

Can we use our English-law employment contract template for our Shanghai subsidiary? No. The contract must be in Chinese and contain the statutory minimum terms, and many English-law clauses (pay in lieu, broad summary dismissal, post-termination restraints without compensation) are unenforceable. Use a PRC-compliant template, with a bilingual version if the employee is a foreign national or senior hire.

How much will it cost to remove an underperforming employee in China? For a mutually agreed exit, budget N+1 to N+3 months' salary for routine cases and higher for long-serving or senior staff, plus untaken annual leave at 300% and any deferred bonus. Imposing a unilateral termination without a proper Article 39 or 40 basis exposes the company to 2N and a real risk of reinstatement.

Does a probationary employee enjoy the same protection? Largely yes. Termination during probation requires proof that the employee fails to meet documented recruitment conditions, and the employer must show those conditions were communicated in writing at hiring. "Not a good fit" is not a lawful basis.

Can we enforce a 12-month non-compete signed in the UK against an employee in China? Only if it complies with PRC requirements: limited categories of employee, maximum two years, and monthly compensation during the restricted period. A UK-law non-compete without Chinese-law compensation will generally not be enforced by a PRC court or arbitral tribunal.

How Eugen Law Firm assists

Eugen Law Firm advises UK employment teams and their corporate clients on the full lifecycle of employing staff in China — from PRC-compliant contract templates and handbooks, through senior-hire packages and non-competes, to the design and execution of lawful terminations, redundancies and post-acquisition harmonisation. We act as embedded China counsel to UK firms, working to your client-care and reporting standards. For a confidential discussion, contact us at [email protected].