Preventing Labour Disputes in China: The Importance of the Employee Handbook

Labour disputes in China have increased dramatically in recent years.  According to the 2016 China Labour Statistical Yearbook, labour dispute cases accepted for labour arbitration in China rose from 135,206 in 2000 to 813,859 in 2015, an increase of 502 per cent over 15 years.  The reasons for this increase include changes to Chinese labour laws that better protect employees, an improved and more efficient labour arbitration process, an increasingly informed workforce, and the recent economic slowdown in China.  It is therefore critical for employers in China to have in place effective mechanisms to prevent or at least minimise the potential for labour disputes.  One way is by having a well-crafted employee handbook (also referred to as a staff handbook, staff manual, or company code of conduct). 

What the Employee Handbook is and Why it is Important

The employee handbook is a document provided by the company to employees before they start their employment, and contains information on company culture, rules, regulations, and procedures, as well as the rights and duties of employees.  It is essentially the governing law of the company.  While an employee handbook is not mandatory for employers under Chinese law (unlike labour contracts), it is essential for protecting employers against labor disputes with employees.  This is particularly the case, for example, if an employer wants to terminate an uncooperative or rebellious employee for violating company rules and regulations (contained within the handbook) without being legally obliged to pay them severance pay or reinstatement them to their position.  If an employer does not have an employee handbook, however, then it is very difficult to legally terminate, let alone discipline, an employee for inappropriate behaviour, or even for doing something terrible that harms the company (e.g., intentionally damaging company property, stealing from the company, or selling confidential company information to a competitor).

Best Practices for Formulating the Employee Handbook

The employee handbook must firstly be clearly understood by all employees.  This means that it not only needs to be a reasonable length and not overly convoluted; it also means that it needs to be bilingual (i.e., in Chinese and mostly in English), and this is particularly the case for foreign companies with Chinese employees.  Without a Chinese version of the handbook, it is highly likely that a labour arbitration commission or court will rule that it is invalid and therefore unenforceable because the employees were unable to understand it.  While an English version isn’t as important in a legal sense, it is important for foreign employers to refer to for the purpose of making key employee-related decisions, particularly when it concerns termination.

It is also important that the employee handbook used in the foreign company’s home country headquarters not be directly translated into Chinese for use in its China subsidiary.  It needs to be tailored for the Chinese market and to ensure compliance with China’s constantly changing labour laws.  If a provision in the handbook violates Chinese law and it was used as a basis to terminate an employee, a labour arbitration commission or court will most likely deem it as unlawful termination and rule in the employee’s favour.  It is therefore critical that employers regularly review their handbook to ensure that it remains compliant with the law.

The employee handbook should avoid subjective and ambiguous rules.  An example of such a rule is one which simply states that being late or absent from work without good reason is a terminable offense.  Here, it is important to clarify the number of late arrivals which constitute a serious violation justifying termination.  Terminating an employee for being late once would most likely be considered unreasonable by a labour arbitration commission or court, and thus be considered unlawful termination.

The employee handbook should also make references to employees’ labour contracts.  This will greatly strengthen an employer’s position if an employee violates a rule or regulation contained in the handbook.  For example, employers should include a clause in the labour contract stating that the employee must comply with the rules and regulations of the employer, otherwise the employee may be disciplined or terminated.

Perhaps the most critical thing about the employee handbook, though, is that when formulating the rules and regulations contained within it, employers have a legal obligation, specifically under Article 4 of China’s Labour Contract Law (In Chinese: 中华人民共和国劳动合同法) (“LCL”), to have “consultations” with all employees or the employee representative council about those rules before making a final decision.  This is particularly crucial when such rules “have a direct bearing on the immediate interests of employees, such as labour remuneration, working hours, rest and vacation, occupational safety and hygiene, insurance and welfare, training, labour discipline and labour quota management”.  The consultation procedure is usually achieved through a meeting or several meetings.

Article 4 of the LCL also requires that the employer make public or inform employees of the rules and regulations as well as decisions on important matters.  Common practice here is for the company to publicly post on its bulletin board or share on its internal IT network an Implementation Notice and the final version of handbook.  These documents should also be sent to all employees in both hard copy form and via email.  During this process everything should be signed, witnessed and properly recorded.  If this consultation procedure is not followed properly or at all, then a labour arbitration commission or court will most likely rule that the handbook rules are invalid and unenforceable.

While ideal, it is not mandatory for the employer to obtain every employee’s explicit consent for them to be bound by the handbook rules and regulations.  The employer is also not required to agree to or accept employees’ comments, although it should document and record how it considered and responded to such comments.  Additionally, the consultation procedure is not required for new employees joining the company after the procedure has occurred.  However, all new employees must review and sign a copy of the handbook along with their labour contract before they start their employment.  If an employer ever gets into a dispute with one of its employees, and there is no written proof that the employee received the handbook and agreed to be bound by its contents, there is every chance that the employee will claim that they never received it.  In this situation, a labour arbitration commission or court would likely rule that the handbook rules and regulations are not binding on the employee.  In most cases, the burden of proof lies with the employer in China-related labour disputes.

Recommended Content for the Employee Handbook

Chinese law does not state specifically what needs to be included in the employee handbook (unlike labour contracts).  This is left up to the company to determine. However, every employee handbook should include information on the following:

  • Behavioural Standards and Disciplinary Procedures
  • Recruitment Standards for Probationary Employees
  • Employee Performance Assessment
  • Workplace Security
  • Working Hours & Overtime
  • Holidays and Leave
  • Remuneration Standards
  • Confidentiality & Non-Compete
  • Social Welfare

It is also beneficial for some companies to include in their handbook specific rules applicable to their industry.  For example, manufacturing companies might include information related to being on time, break lengths, and workplace safety, while restaurants and bars might include provisions on hygiene.  Below we discuss the first three abovementioned points, given that they relate to a crucial reason for having the employee handbook in the first place: employee termination.

Behavioural Standards and Disciplinary Procedures

Article 39(2) of the LCL states that an employer may terminate an employee’s labour contract without prior notice or severance pay if “the employee seriously violates the rules and regulations of the employer”.  Behavioural standards and disciplinary procedures for breaching an employer’s rules and regulations are usually not included in the labour contract; they are normally included in the employee handbook.  Disciplinary action for violations generally involve verbal and written warnings, demotion, and termination (in order of seriousness).  Here, it is critical to include in the handbook a precise explanation of the form of punishment that will be used for each type of misconduct.

To achieve this, the company should differentiate between major and minor violations.  A major violation, such as bribing a government official or selling confidential information to a competitor, can result in immediate dismissal.  A minor violation, such as turning up late to work, would lead to a verbal warning, followed by a written warning if the employee is late a second time.  The employer should also specify how many minor violations constitute a major violation, thereby justifying termination.  It is important to point out here, though, that the employer’s rules and regulations can be challenged during labour arbitration or court proceedings if they are considered unreasonable, particularly the question of whether or not a specific violation is serious enough to warrant termination.  The degree of seriousness will ultimately be decided on a case by case basis during the labour arbitration or court process.

When disciplining employees, it is also critical that the employer ensure that employees know that they have been disciplined.  It is not uncommon for a Chinese employee to claim that they never received a discipline notice.  It is therefore important to carefully collect evidence of handbook violations and maintain discipline records to prove the legitimacy of the termination.

Recruitment Standards for Probationary Employees

Many employers incorrectly assume that they can legally terminate employees during their probation period without giving a reason.  This is incorrect.  According to Article 39(1) of the LCL, an employer may only terminate an employee’s labour contract without prior notice or severance pay if “it is proved that the employee does not meet the conditions of employment during the probation period”.  The employer must provide evidence justifying the termination, including what the conditions of employment are, the employee’s acknowledgment of these conditions, and an assessment of the employee’s performance during the probation period showing that they did not meet the conditions.  If a labour arbitration commission or court considers the evidence to be inadequate, then the employer may be ordered to pay the employee severance pay or reinstate them to their position.

Not meeting the conditions for employment essentially means being “unqualified” for the position.  A definition of unqualified should therefore be included in the employee handbook.  This definition is likely to vary from position to position, and so may need to be amended for each position.

Employee Performance Assessment

When it comes to termination, different rules apply to regular employees who have already passed their probation, but who are, or who have become, incompetent in their positions.  Termination is significantly more difficult for non-probationary employees.  According to Article 40(2) of the LCL, an employer may terminate an employee’s labour contract with 30 days’ prior written notice or with one month’s wages instead of notice if “the employee is incompetent for the position and remains incompetent after receiving training or adjustment of his or her position”.  The employer must be able to prove not only that the employee is incompetent but also that they attempted to rectify the incompetency by offering the employee training or assigning him or her to another position, but that the employee remained incompetent regardless.

Unlike termination of probationary employees, severance pay is required for termination of non-probationary, incompetent employees, even when the employer provides satisfactory evidence of the incompetency.  According to Article 47 of the LCL, severance pay is calculated using two different formulas for two slightly different scenarios:

  1. Salary is less than three times the local average: (employee’s average monthly salary) x (years of service); or
  1. Salary is higher than three times the local average: (three) x (average local monthly salary) x (years of service).

If the employer cannot provide adequate proof that the employee is incompetent, however, then the termination will likely be deemed by the labour arbitration commission or court as unlawful, in which case the employer will be ordered to pay the employee double the above rates (LCL Article 87) or reinstate the employee to his or her position if he or she so demands (LCL Article 48).

Chinese labour laws and regulations are silent on what exactly is required in terms of evidence of incompetency.  Information on this should therefore be incorporated into the employee handbook, including specific performance assessment criteria to determine whether or not an employee is incompetent for the position.  These criteria should be disclosed to all employees, who should confirm their knowledge thereof in writing.

Concluding Remarks

The employee handbook is a critical document for employers, both foreign and Chinese, to have in order to protect against potential labour disputes with employees.  This is particularly the case if an employer wants to legally terminate a troublesome employee for violating handbook rules and regulations.  While one consequence for illegally terminating an employee is having to pay damages that amount to twice the rate of normal severance pay, a new regulation which came into force on 1 January 2017, namely the Measures for Publicising Acts in Material Violation of Labor Protection Laws (In Chinese: 重大劳动保障违法行为社会公布办法), stipulates that employers who materially violate labor protection laws will see their violations publicised on the local government’s official website, as well as in major newspapers, on TV, and through other media (Article 7).  Once publicised, the employer’s violations will become part of their compliance and credit records (Article 10).  It is therefore even more critical than in the past for employers to have a well-crafted employee handbook to make it easier to legally terminate troublesome employees.