Beyond Borders - Episode 13: What you need to know about Chinese employment law

Our Beyond Borders podcast series is designed to help you manage your international workforce and navigate the quirks of international employment law.

In this episode, we explore performance management under PRC law, including the high threshold for dismissing employees for incompetence, the role of Performance Improvement Plans, and key issues around overtime pay and non-compete clauses. While the law sets clear principles, many practical details remain undefined, creating challenges for employers.

Transcript

 The Work Agenda podcast by Lewis Silkin: Beyond Borders

Episode 13: What you need to know about employment law in China

Tarun Tawakley

Hello and welcome to another episode of our Beyond Borders Coffee Break podcast with me, Tarun from the Lewis Silkin team here in the UK and my co-host Catherine from the Lewis Silkin team in Hong Kong. This series of podcasts is designed to build on our managing an international workforce event. In each episode, we speak with local market experts to explore topical employment issues and highlight key points that you need to know as in-house employment lawyers, HR professionals, or those with responsibility for employee relations issues across multiple markets. Catherine, over to you to introduce today's guest.

Catherine Leung

Sure. Today we are looking at Mainland China and some specific issues that sometimes take employers, especially foreign companies with China operations, by surprise. I'm very pleased to welcome our colleague, Matt Durham, who focuses on PRC employment law from our Hong Kong office.

Matt Durham

Hello, and thanks very much. I'm very happy to join you.

Catherine Leung 

So Matt, let's dive right in. Let's start with performance management. In many jurisdictions, including Hong Kong, if an employee is underperforming, you can run a performance improvement plan, or some may call a PIP. And if things don't improve, simply give notice. But that doesn't work in mainland China, does it?

Matt No, you're right, Catherine, that wouldn't fly in mainland China. PRC law is actually very restrictive of an employer's right to terminate unilaterally. There's no concept of at-will employment, and you can't simply terminate by giving notice. Employers can only terminate on specific legal grounds set out in the Labour Contract law, and these are really quite limited. When it comes to poor performance, the most relevant ground is incompetence, but that's quite a high bar.

Tarun Tawakley 

I mean, it certainly sounds like quite a high bar with that title. Matt, how on earth do you effectively dismiss someone for incompetence? And do you actually call it incompetence in the letter to the employee?

Matt Durham

Yeah, you're right, Tarun. The law says you can terminate if the employee is incompetent and remains so even after training or reassignment. But there's no clear definition of what incompetence actually means for this purpose. And while reported cases can be helpful, ultimately, there's no system of binding case law precedent to rely on. So as a result, companies really do need to look carefully at the exact circumstances and context of an employee's performance or lack thereof.

The basic rule of thumb, though, is that an employer should only consider termination for incompetence if the performance is objectively significantly bad, as opposed to merely being a little below par.

Catherine Leung 

Can you give us an example?

Matt Durham

I can. So for example, a failure to hit sales targets or meet other expectations should be considered against the reasonableness of the relevant standards or targets, the state of the market, for example, and also the level of performance of the relevant employee’s direct peer group.

Catherine Leung 

So, if an employer is dealing with someone who just isn't meeting expectations, what can an employer actually do?

Matt Durham

The best approach is normally to use a structured PIP, so performance improvement plan. There's no set legal format or minimum duration, but it should be clear, detailed, and documented in writing. Typically, you'd set out the issues, offer support and training, and give the employee a reasonable period, often six to twelve weeks, to improve. The aim of this is to build a solid paper trail in case the situation ends up in arbitration.

You need to show that an employee's performance fell substantially below the level required for the role and the needs of the business, and that, as such, it constitutes incompetence for the purposes of this legal ground due to an inability to perform the role at the required level.

Catherine Leung 

So what happens, Matt, if the employee just point-blank refuses to engage with the PIP process? What can an employer do then?

Matt Durham

That's a good question. If an employee flatly refuses to participate, that can in itself become a disciplinary issue. In some cases, it may provide grounds for termination for misconduct rather than incompetence. But generally, the PIP process is a signal to the employee that there's a serious issue and it often leads to a negotiated exit with an agreed exit payment in excess of the statutory severance payment that would apply to a unilateral termination for incompetence.

Catherine Leung 

Thanks, Matt. So, what happens if things go wrong? If the employee brings a claim for unlawful termination, what's the process there and what are the risks?

Matt Durham

Claims go first to the local arbitration commission and can then be appealed to the courts. The process can be very unpredictable, so that paper trail from the PIP is absolutely crucial. If the employee wins, the remedies are either double statutory severance or reinstatement. Reinstatement to position is rare, but it is possible. And obviously, this is extremely problematic for the employer. That's why so many employers prefer to negotiate a mutual exit.

Tarun Tawakley 

I mean, from my perspective as an employee, I think I'd probably want a mutual exit. I certainly wouldn't want to receive a letter accusing me of being incompetent. Let's move on to another quirk employers should be aware of in China around post-termination restrictions. These are largely enforceable across various markets, save where there are unique things, but China takes quite a unique approach. How do they operate in PRC, Matt?

Matt Durham

PRC law does allow post-termination non-compete restrictions, but usually only for employees in senior management or technical roles with access to confidential information and trade secrets. The maximum is 24 months, which is longer than in many other jurisdictions.

Tarun Tawakley 

I mean, you can say that again. 24 months is almost certainly double the position of what we'd expect for a mere employee in the UK.

 Matt Durham

Yeah, but it isn't completely flexible for employers. Restrictions must be reasonable in terms of business sector and geographical scope, although there's little further guidance in legislation and no system of binding case law precedent to help define or frame exact parameters. The other key point is that employers must pay economic compensation in order for such restrictions to be enforceable. At least 30% of the employees average monthly salary over the previous 12 months, and sometimes more depending on the exact city. This must be paid monthly during the restricted period and not as a lump sum. So compensation cannot be rolled up or delayed to the end of the restricted period. If the employer decides not to enforce the non-compete, they must notify the employee before the last day of employment, or else pay three months’ compensation anyway.

Catherine Leung 

So Matt, this is just an observation, but you say that with non-competes, there is little guidance in legislation and no system of binding case law precedent to help define or frame exact parameters. And similarly, with regard to terminations based on incompetence, you also said there is no clear definition of what incompetence actually means, nor is there a system of binding case law precedent to rely on.

Is this a common feature of the employment law landscape? And what challenges does this present for those trying to navigate the PRC legal system?

Matt Durham

Yes, indeed, that's a very fair observation. I guess you could say that PRC law is very good at setting out basic principles, but often details are left undefined. This can be attributed to several factors, I think, including the evolving nature of the legal system, the need for flexibility in application across a large country, and also the reliance on local regulations and practices to interpret and implement those principles.

And this is why paper trails, as I mentioned earlier, and things like handbooks and policies are absolutely critical in mainland China. Handbooks and policies can fill in those gaps, especially around conduct, disciplinary procedures, and grounds for termination. On that note, and this is a bit of an aside, I should also mention that employers in mainland China must follow a consultation process before introducing or changing handbooks or policy documents.

There's no fixed format for this consultation process, but typically you'd issue the draft to employees, allow a week or two for feedback, and keep records of the process. If you skip this step, the rules may not be enforceable in a dispute.

Tarun Tawakley 

It's quite an interesting landscape where you've got a bunch of basic principles, but it's all the more important to have that expert guidance from local counsel then to sort of guide you through actually what it means in practice where the parameters aren't really defined. Thinking then about other things that may be quirks for international employers operating in the market. China is famous, I mean, some would say infamous for its long working hours culture.

What does the law require in terms of employer attitudes and generally towards overtime pay?

Matt Durham

Yeah, it's very true what you say, Tarun. I mean, in principle, all employees are entitled to overtime pay if they work more than 8 hours a day or 40 hours a week. Overtime is actually capped at 3 hours per day and 36 hours per month, unless the employee is on an approved exemption scheme. The statutory rates for overtime payments are 150% of salary for overtime on a regular day, 200% for weekends, and 300% for public holidays.

Some employees in senior or technical roles can be exempted from overtime, but this needs to be registered with the local labour authorities. In practice, the limits described above are often exceeded without pushback from employees, either without compensation, such as for professionals who are well remunerated and working across international time zones, or in some cases with compensation for employees who are happy to have the extra income from working overtime.

The PRC National Bureau of Statistics reported that the average working week in China has increased from 47.9 hours in 2022 to 49 hours in 2024, despite government efforts to reduce working time. So against this backdrop, China's overtime pay laws are on paper among the most generous in the world, especially regarding premium rates for weekends and statutory holidays.

The strict monthly cap on overtime is also more protective than in many other countries. However, actual enforcement and compliance is another issue. Employees often tolerate working overtime until a dispute arises over dismissal, bonus or promotion, for example, at which point unpaid overtime claims surface. High profile social media coverage can also be very damaging for multinational companies and foreign brands so compliance is both a legal and a reputational issue.

Catherine Leung 

Thank you so much, Matt. That's been a fantastic overview and thank you for sharing your insights on the market where local knowledge is key in the absence of clear precedent.

Matt Durham

You're very welcome. It's been a pleasure to talk with you both.

Tarun Tawakley 

Well, that wraps up today's episode of Beyond Borders. If you want to learn more about PRC employment law, you can find details on the Ius Laboris Global HR Law Guide. Or of course, if you have specific questions, do feel free to reach out to Matt directly. Thank you very much for listening and please do get in touch with details of the markets you'd like us to cover next in the series. We'd also love to know what you thought of today's episode, so please do leave a review wherever you get your podcasts. Thanks very much.