David was an expatriate manager sent by his American employer to open an office in Guangzhou. His company had already identified several key technical people for the operation. David readily found clerical assistance, and located an office. He was able to move into the office while the branch registration was pending with the government. Several of the employees expressed their preference that their personnel files not be moved from their old employers so that they would not lose pension benefits. He didn’t understand about these personnel files, and he had many more urgent matters to worry about.
However, one day two labor bureau officers suddenly appeared at his office. They were conducting a random inspection of foreign businesses in the office tower. Their military style costumes gave them a menacing air despite their polite demeanor. They informed him that his operation was illegal and that he would have to register all the employees immediately. They said they would return to check that procedures had been completed. They did not say that his business would be shut down, only that he might face fines if he did not rectify the situation. They gave David the names of several employment service agencies in town and told him to contact them to register the employees.
David needed to know the most cost effective way to redress the situation, and specifically, did he have to appoint a labor agency to hire his staff? Was it possible his operations could be terminated if he did nothing? Did he face any personal liabilities as the responsible person in the operation?
David’s situation is very common among foreign companies establishing Chinese offices. China’s labor market is unusual by contemplating that foreign companies not hire local labor directly, but must appoint local labor agencies to hire and manage local workers. The requirement is stated in the law, and the government promotes and encourages such an arrangement as providing an easier means to collect pension and insurance payments. The policy also provides a buffer between foreign capitalist employers and the socialist economy and its workers.
I. Regulatory Scheme
China has several laws and regulations concerning treatment of employees, including a Labor Law, a Regulation on Labor Management of Sino-foreign Joint Ventures, Regulations on Labor Management of Foreign Funded Enterprises, and Regulations on the Control of Resident Offices of Foreign Enterprises, as well as separate standards for details such as minimum wages, holidays, working conditions, etc. There are also separate regulations which apply only to foreigners working in China. The primary Labor Law governs employment relations in the absence of overriding provisions in supplemental laws and regulations.
In general, Chinese citizens may not be hired directly by foreign companies. Workers from abroad can be employed only with special permission from the local labor authorities and after obtaining an employment certificate for the employee. In addition, employees are generally required to have proof of residence in the city in which they apply for employment. This restriction is mainly to prevent floods of rural workers from competing for jobs in Beijing, Shanghai and Guangzhou. It has been only loosely enforced, and is more likely to be enforced for high paying, professional, jobs.
II. Local Labor Intermediaries
Under China’s Regulations Concerning the Control of Resident Offices of Foreign Enterprises, Article 11, the resident office of a foreign enterprise must entrust a “local service unit” to hire personnel. Under the Regulations on Labor Management of Foreign Funded Enterprises, other foreign funded enterprises, such as a branch office or subsidiary, must also engage a local service unit unless they first obtain approval from the local labor office. Upon obtaining such approval, they can hire personnel directly, and must comply with all regulatory requirements and pay all social welfare funds directly to the government. Representative offices will not be approved to pay such funds directly.
When China invited foreign employers to invest in China in the early 1980’s, it established agencies to act as intermediaries between foreign employers and the local labor market. One purpose of this arrangement was to ensure that foreign employers did not have an unfair advantage in attracting labor and talent away from domestic, in other words, government enterprises. Among the first established agencies, the Foreign Enterprises Service Company Limited (“FESCO”) is owned by the National Ministry of Public Security. Many foreign employers were not enthusiastic about having these indirect employees of China’s FBI working inside their operations.
The services performed by the agencies include advertising employment positions and locating employees, hiring the employees, collecting and holding social welfare funds, such as medical insurance, unemployment insurance, and arranging for passports and visas if an employee needs to go abroad. Although one of the major services is the location and hiring of employees, most foreign employers prefer to identify employees on their own, figuring that direct hiring will result in employees with greater loyalty to the foreign employer. Even when negotiation of employment is conducted directly by the foreign employer, an employment contract generally must be executed between the employee and the local service agency.
Standard terms in labor contracts provided by service agencies include the agency’s duty to locate and hire employees to work for the foreign employer, the agency’s duty to obtain work permits for its employees, and the agency’s right to withdraw its employees from the foreign employer’s workplace. The foreign employer generally must agree to provide working conditions which reflect or exceed standards set by the Labor Law, pay the service agency’s fees, and keep the agency apprised of any changes in location or conditions of its workplace, in addition to many other details. The foreign employer should not assume that the agency’s standard contract provides only legally required benefits to employees. For example, the amount of severance pay required by the agency may well exceed the amount required by law, the agency’s minimum wage will probably be higher than the legal minimum wage, and the agency may require many benefits beyond the legal minimum.
Another difference between the Chinese system and the American one is that the each worker has an official personnel file which must reside with a recognized employer. Foreign enterprises are not recognized to hold these files unless special permission has been granted. Furthermore, workers with special licenses, such as accountants and lawyers, cannot be employed by any employer other than an officially recognized domestic professional firm. Many professionals do in fact work in-house for companies and foreign companies, but they must do so after making special arrangements with their officially recognized employers, and their relation with the paying employer is considered a private, not an official, relationship.
While the regulations must be complied with, there is no drastic punishment provided for in the regulations, and violations will not result in forced closure of a business. The rules are enforced by frequent inspections from the labor bureau, and continued failure to pay amounts owed can delay or prevent a business’ annual renewal of its operations license.
III. Recent Trends and Issues
The major issue concerning the Labor Bureau in the 1990’s has been how to adjust the labor market to the closure of thousands of state-owned enterprises. Hundreds of thousands of employees have been laid off, creating a possibly unstable political situation. The government has encouraged foreign employers to absorb some of the work force to ameliorate any economic instalibility.
In the 1980’s, and early ‘90’s, FESCO, the only service agency, charged foreign employers amounts comparable to foreign labor prices, but paid employees only prevailing local wages. Since there was only one agency for many years, FESCO dictated employment terms, provided extensive benefits and severance pay to employees, and charged a substantial fee, and profit for themselves. FESCO used the funds to build a sizable empire and has since branched into many other businesses, including auto repair, freight forwarding, and real estate. In the 1990’s, foreign employers were allowed to advertise and identify their own employees, so that use of the employment agencies has become little more than a formal requirement.
Because of the perceived unfairness of the labor system, in which the intermediaries retained most of the money, many foreign employers adopted creative solutions. These include a common practice of under-declaring an employee’s wages and paying additional wages directly to the employee, or setting the employee’s responsibilities well above the official job title, or declaring a full-time employee to be part-time. In all such cases, the employer pays less to the service agency, and the employee receives substantially more, but both employee and employer take a risk. Employers who do this take a risk that disgruntled employees will report them, and employees take a risk of diminishing their employment history. The practice has been fairly common, although there are no statistics.
In the mid-90’s competition was introduced to the labor service agency market. Instead of removing the requirement for labor intermediaries, the government allowed new agencies to be formed to compete with existing agencies. The new agencies were usually also backed by government organizations, such as the State Council and various ministries. This change might appear to some as recognition that foreign employers do not need the agencies’ assistance to manage their workers for them. However, it is likely that the requirement will be maintained, as the government has a substantial interest in maintaining control over the labor market and providing a buffer between foreign capitalist employers and its socialist economy.
This new competition brought employer payments and employee wages closer together, and encouraged the agencies to offer more services to employers, and require fewer benefits be paid to workers. Fees charged to employers have been reduced from RMB500 per month (about US$60) per employee, to about 250 per month per employee. Benefits are reduced, but still amount to about 60% of an employee’s base wage. Thus it is likely that the practice of underreporting continues.
IV. Basic Requirements of China’s Labor Laws
The basic principles stated in the labor laws are fair and equal treatment of employees regardless of race or sex, no employment for children under the age of 16, and the right for workers to organize. The laws and regulations also set standards for working hours and conditions, family leave, holidays, minimum wages, and most items that foreign employers would expect. Labor relations can be disputed at a legal court, or a special labor dispute arbitration body.
A. Nature of Employment; Minimum Wages
The Labor law provides that employees may be hired on a permanent or temporary basis. A temporary contract can be for a fixed period of time or until the occurrence of a certain event. An employee may terminate employment with 30 days written notice. An employer may terminate employment with 30 days written notice under certain conditions. Wages are usually paid monthly, at the end of each calendar month. Minimum wages are set by local government agencies. The Law also states that employers must observe safety standards, and train and supervise employees, provide social insurance and welfare, and observe certain holidays and rest periods for employees.
Regulations on the Minimum Required Wage are set by each provincial government. In Shanghai, the 1999 minimum wage for employees of state owned enterprises is RMB 432 per month, or the equivalent of US 33 cents per hour. That wage standard applies to general employers, who are mostly government enterprises. The minimum wage in other cities is considerably less, for example, Chendu’s monthly minimum is RMB 220 per month. Other cities vary, depending upon economic conditions. In addition, the Labor Bureaus set minimum wages for types of jobs.
However, foreign employers are expected to pay much more than the minimum, roughly double or more times minimum. For example, according to one of the Beijing labor service agencies, the Chief Representative of a Foreign Enterprise Representative Office located in Beijing must be paid a minimum of RMB RMB8,000, (US$ 1,000) per month and the Deputy Chief Representative must be paid RMB7500. A secretary’s minimum wage in Beijing is about RMB 1200 (US$150) per month.
B. Working Hours
China’s Labor Law sets basic requirements for working conditions. These include an eight hour work day, with an average working week no more than 44 hours long. The Law requires at least one day off per week, but has been updated by Regulations on Employees’ Work Time to two days off per week. China has been more Western on its weekend schedule than several other Asian nations for several years. If an enterprise needs a different schedule, it may apply for special permission.
The Law states that overtime work may be required of employees after consultation with the trade union and laborers, unless emergency repairs are needed due to natural disaster or a threat to public interest. After consultation, overtime work is limited to one hour per day, or three hours per week. The maximum per month is no more than 36 hours. Overtime pay is set at 150% of normal wages. Overtime work performed on rest days (weekends) must be paid at 200% of normal wages, and extra work performed on holidays must be paid at 300% of normal wages.
C. Holidays, Leave and Vacations
In general, Chinese workers receive about 10 paid holidays per year, comparable with other Asian nations. The holidays include the first three days of the traditional Chinese lunar calendar, known as “Spring Festival” or Chinese New Year, varying on the solar calendar from late January to late February. They also receive a paid holiday for January First on the Western calendar, three days for International Labor Day on May 1-3, and three days for National Day from October 1 �??3.
In addition, China’s government occasionally establishes special holidays on short notice, such as the ten days off granted nationally for the fiftieth anniversary of the PRC government. The exact length of the holiday was uncertain until one week before the holiday. Thus employees in China received about 21 days of holidays in 1999.
Maternity Leave is granted for 90 days starting from the date of birth of the child. The employer must ensure that the mother’s job is held open for her return. Leave is paid by the employer, and the employer is reimbursed from monies collected monthly for the maternity leave fund. Paternity Leave is granted for three days. Since families are only allowed to have one child, maternity leave is granted only once in a worker’s lifetime. Funeral leave is granted for one to three days, depending on the closeness of the family relations between decedent and employee.
The Law establishes that laborers are entitled to paid vacations. Generally, a worker with one year’s seniority, is entitled to a week or more of consecutive days of vacation. Generally one day is added for each year of employment. Sick leave is required to be paid for all employees. Sick leave is paid at 60-100% of daily wages, depending on the seniority of the employee. The Rules on Labor Insurance and local regulations must be consulted to determine the length of sick leave, but by American standards, the length of paid sick leave is extremely long. The minimum sick leave is three months long, for employees with less than a 10 year cumulative work history, and less than five year’s seniority with their current employer. The maximum sick leave, for workers with 20 years of work history and 15 years with their current employer, is an unlimited paid leave. Employees are paid salary at a reduced rate during sick leave. The reduced rate begins at 60% of salary, and increases gradually up to 100% for employees with seniority of 8 or more years of service to the current employer.
D. Termination
Each employee must be documented with a written employment contract, which will be examined by the local labor authorities within 30 days of its execution. Employment can be terminated for cause by either party, or upon agreement of both parties. However, workers who have received an occupational injury and can no longer work, or a female employee on maternity leave, cannot be fired. If such a worker chooses to leave the employer, the employer must pay a disability and resettlement fee to the government social security agency.
In the event of any termination, except where the employee was fired for cause, such as when an employee leaves either upon mutual agreement, because of abuse by the employer, or from a work related injury, the employer must pay a subsistence or medical settlement to the employee based on the years of service of the employee. In general, one month’s pay for every year of service is due upon termination, unless the employee was fired for cause. In the event of a medical condition preventing employment, six month’s pay for every year of service is due for employees with five or more years of service. In both cases, one month’s pay is based on the average monthly wage of the six months prior to termination.
Employers must pay workers in cash for all wages earned, less withheld income tax, at lest monthly, if not more frequently. The official employer, usually the labor service agency, must submit statistics on wages and employees to the local labor administration, and must participate in various social insurance programs. Payments for social welfare funds must be listed separately on the employer’s accounting records.
The regulations governing foreign employers provide that either employee or employer may demand compensation for damages for violation of a labor contract. The Ministry of Labor retains the authority to interpret the regulations. The regulations also set penalties on the employer for failing to pay the prevailing minimum wage, failing to implement social insurance procedures, or recruiting workers in violation of regulations. There are only monetary penalties to be paid to the employees or the government agency, even in the event of safety or hygiene violations. Clearly, the regulations are not attempting to shut down any business, even abusive employers.
E. Basic Social Welfare Benefits
The agency agreement executed by the foreign employer and the labor agency will list the social welfare benefits required by that agency. Each agency must provide the five benefits legally required, at the rates set by the local or provincial government, and may also provide other benefits. Thus, many of the benefits are in fact negotiable, so it is worth shopping around. In addition, the agencies’ fees per employee will vary from agency to agency. The fees usually range from RMB 200 to RMB 400 per month per employee. There may also be document storage fees, transaction fees for each new or terminated employee, and other fees, depending on the creativity of the agency.
The legally required benefits are 1) retirement pension, 2) medical fund, 3) unemployment insurance, 4) disability insurance, 5) maternity fund. The most significant of these is the Retirement pension, set at 31.5% of monthly salary in Shanghai, 28% in Guangzhou, and 25% in Sichuan. Currently, retirement benefits are granted to men over 60 and women over 55, at monthly rates depending on the earnings and employment history of the individual.
The Medical Treatment Fund is set at 6.5% in Shanghai, 11% in Sichuan, and none in Guangzhou. Unemployment Insurance is set at 2% of salary in Shanghai, and 3% in Guangzhou and Sichuan. Disability Insurance is set at about half a percent of monthly salary. The Maternity Leave Fund is set at about 7% of monthly salary, and the fund is used to reimburse employers for part or all of the wages paid during an employee’s maternity leave.
Beyond these, most agencies also charge for additional, but not legally required benefits. Among these are a single-child medical treatment fund at a fixed amount per month; an employee entertainment fund of a fraction of a percent of monthly salary; a housing allowance, to compensate for loss of housing when employees leave government jobs; a credit card fund; family property insurance; and various possible other funds and insurance, depending on the agency’s ingenuity.
V. Conclusion
Foreign employers must adjust to the fact that Chinese workers receive substantially more benefits and job security than do American workers. In addition, the requirement to use employment intermediaries will seem very unnatural to a western employer. However, the system is not meant to be punitive to foreign employers, and there are now market forces at work to attract more foreign employers to the labor pool
As long as David examines a couple of employment service agencies, and negotiates a reasonable arrangement with one of them within a few months, his legal troubles with the Labor Bureau can be simply resolved. He may find that certain employees do not want to move their personnel file to his office. This usually has to do with benefits they are receiving from a former employer, which is still very common. David will need to examine the loyalty issue arising when an employee is receiving a pension or benefits from another employer, and decide whether he wants to retain those employees. However, armed with his legal choices, even in an environment very different from his hometown, David can make economically efficient decisions and get back to his business in China.
