When you hire people in China it is mandatory to give them an employment contract. China’s current Labor Contract Law, which became effective in 2008, specifies the rights and obligations of the contract parties. It signifies that employers have to keep their employees until their retirement age but an employee can terminate the open-term labor contract at any time, without any restriction or penalty.
According to the PRC Labor Contract Law, an employee can opt for open-term contract after the execution of two consecutive fixed-term labor contracts. But this law has various interpretation in different places in China. For instance, in Beijing, an employer can terminate the employee when the first contract term gets expired, but if he/she doesn’t terminate the contract with the employee during that point of time, the contract automatically turns as an open-term contract. That’s why we advise our employer clients to go for an initial employment term of three years with six months probation period for their new employees. In Beijing, employers can only have one shot at fixed-term employment.
Shanghai’s interpretation of PRC Labor Contract Law is entirely different from Beijing. Here an employer can decide on their own to retain or not to retain the employee when the second term is over. When an employee has completed two fixed-term contracts in Shanghai for an employer, the employee is entitled to an open-ended contract. There are no legal restrictions or penalties, but it is not without monetary obligations. The employer needs to pay economic compensation to the employee. The employer must pay one month’s salary for every full year the employee has worked for the employer and half of a month’s salary for less than six months’ service. If the employee has worked for more than six months but less than one year, it is treated as if he or she had worked for a full year.
When an employee has met the following criteria, he/she is entitled to an open-ended contract-
- If the employee has completed two consecutive fixed-term contracts
- Employer and employee have agreed to renew the contract for a third time
- The employer has no statutory grounds for terminating its employee
Open-ended term can’t get materialized until both parties, employer and the employee agree to renew the contract third time after the completion of two terms. In Shanghai, an employee can’t force the employer to hire him or her on an open-ended basis if the employer wants to rehire him/her without open term basis. When the employee has completed two fixed-term contracts in Shanghai, employers could go for three options:
- Pay the applicable compensation
- Go for an open-term contract that assures lifetime employment to the employee
- Entice the employee to voluntarily accept a third fixed-term contract
Without getting the monetary incentives, employees rarely go for a fixed-term contract instead of lifetime employment.