Major Improvement and Development to the Labor Contract System from the “Labor Contract Law”

“The Labor Contract Law of the People’s Republic of China” (hereinafter, the “Labor Contract Law”) was promulgated on June 29, 2007 and came into force on January 1, 2008. This is another milestone in the legal construction of labor and social security. Compared with the former “Labor Law”, the “Labor Contract Law” has made new provisions as well as further improvement and development to the labor contract system.

The “Labor Contract Law” enlarges the applicable range of the labor contract system

According to the “Labor Contract Law”, besides the original domestic enterprises and individual economic organizations, private non-enterprise entities and other organizations have also been taken into the applicable range of the labor contract system. Meanwhile, except civil servants and the staff who are administered by reference to the “Civil Servant Law”, and the employers of the public institutions under the system of employment, the state organs, public institutions, social organizations shall establish a labor relationship with their employees and execute according to the “Labor Contract Law”.


The “Labor Contract Law” strictly requires the execution of written labor contract

The “Labor Contract Law” makes improvement to the problem that the employing entities do not execute written labor contracts, and provides that an employer shall establish a labor relationship with an employee from the date of starting to use the employee; and a written labor contract shall be executed to establish a labor relationship. Meanwhile, it provides that if an employer fails to execute a written labor contract with an employee more than one month but less than one year after the date on which it starts using him, it shall pay to the employee his monthly salary at double amount; if an employer executes a written labor contract with an employee more than one year after the date on which it starts using him, it shall be deemed that the employer has executed a labor contract without a fixed term with the employee.


The “Labor Contract Law” strictly requires the execution of written labor contract

The “Labor Contract Law” makes improvement to the problem that the employing entities do not execute written labor contracts, and provides that an employer shall establish a labor relationship with an employee from the date of starting to use the employee; and a written labor contract shall be executed to establish a labor relationship. Meanwhile, it provides that if an employer fails to execute a written labor contract with an employee more than one month but less than one year after the date on which it starts using him, it shall pay to the employee his monthly salary at double amount; if an employer executes a written labor contract with an employee more than one year after the date on which it starts using him, it shall be deemed that the employer has executed a labor contract without a fixed term with the employee.

The “Labor Contract Law” strictly defines the probation period

The “Labor Contract Law” strictly defines the probation period that if the term of a labor contract is more than 3 months but less than 1 year, the probation period shall not exceed one month. If the term of a labor contract is more than one year but less than 3 years, the probation period shall not exceed 2 months, and If the term of a labor contract is more than three years or it is a contract without a fixed term, the probation period shall not exceed 6 months; for a labor contract based on the completion of a particular task or with a fixed term of less than 3 months, no probation period may be stipulated; an employer can only stipulate one probation period with a same employee. Meanwhile, the “Labor Contract Law” strictly defines that the salary of an employee during the probation period shall not be lower than the minimum salary for the same post of the same entity or not lower than 80% of the salary stipulated in the employment contract, nor shall it be lower than the minimum salary of the place where the employer is located. Besides, the “Labor Contract Law” defines that within the probation period, the employer shall not dissolve the labor contract unless for legal circumstances, while the employee may terminate the contract with a notice three days in advance.


The “Labor Contract Law” clearly provides that only under two circumstances can the penalty for breach of contract of the employee be stipulated

The “Labor Contract Law” restricts the employer to stipulate penalty for breach of contract at ease by exploiting its dominant position, and clearly provided that, except the two circumstances of the violation of the stipulation on the training service period or the stipulation on the non-competition, the employer shall not stipulate for the employee to bear the penalty. Meanwhile, the “Labor Contract Law” limits the amount of penalty for the stipulated training service period to be no more than the training fees, and makes detailed provisions on the applicable target, period (2 years) and scope etc. of the non-competition.


The “Labor Contract Law” provides in details the circumstances for dissolving a labor contract

Compared with the “Labor Law”, the “Labor Contract Law” has, on one hand, enlarged the conditions for the employee to dissolve the labor relationship at any time, such as that the employer fails to pay the social security premiums according to the laws, the contract is invalid and the employer’s rules infringe on the rights of the employees, etc.; and on the other hand, has added the circumstances for the employer to dissolve the labor relationship at any time, such as that the employee simultaneously establishes a labor relationship with other employers and may seriously affect his completion of the tasks of this entity, or he refuses to make a correction though the employer has pointed it out, the contract is invalid, etc. and added the circumstance that the employer can pay one month’s salary to substitute the 30 days’ notice period when dissolving the labor relationship. Besides, the “Labor Contract Law” gives more detailed provisions to the applicable circumstances for the dissolution because of downsizing.