As a general rule, good companies invest in their employees and treat them as assets of the company. Just like any other kind of asset, they should be actively managed to maximize their value to the company. One major role of the HR Department - to train, encourage and organize staff - is effectively a kind of investment in the employees.

Unfortunately not all employees live up to expectations. Before making any investment a company should always put an exit strategy in place, and investments into employees are no exception. Since implementation of the Labor Contract Law in 2008, creating an effective exit strategy before hiring new staff has also become an important task for HR departments. There are a couple of reasons for this:

1.      Employees in their probation period cannot be legally dismissed unless the employer has collected satisfactory evidence that the employee has not met the initial requirements for the position.

2.      After the second renewal of the fixed-term labor contract (post 2008) employees are entitled to obtain an open-term labor contract. It is harder for employers to terminate the contracts of employees once they are "open-term."

These law changes have generated several consequences:

• Companies must carefully define the job description for every position within their organization, together with the necessary skills needed to carry out the role; if the description is too general the company will not be able to dismiss an employee by claiming that they failed to meet the initial requirements
• Managers need to evaluate staff during their probation period in a methodical and objective way, relating their performance directly to the requirements on the job description; this forms the evidence for terminating a labor contract during the probation period
• A thorough, yet reasonable, company rulebook needs to be drafted and signed by all employees; it should be mentioned within the labor contract template that infringements of regulations in the company rulebook will warrant official warnings or immediate dismissal from the company
• HR departments need to keep careful track of which employees are approaching the end of their second term under a fixed-term contract and initiate a process for dealing with such employees

Overall, we can say that the consequences to a company of hiring inappropriate employees have risen - it has become harder to terminate unsatisfactory staff, and as a direct result of this, the investment required to adequately protect the company has risen. Every company in China employing more than a handful of staff should ensure that it has effective processes in place and that the performance of its employees is being monitored properly.

The Chinese Labor Contract Law is quite clear about the issue above concerning treatment of employees during the probation period, nevertheless it remains just one of several widely-held misunderstandings relating to employment relationships in China.

We note some of these below:

1.      Employees reaching the end of their fixed-term contract do not need to be paid compensation when being unilaterally dismissed by the employer.

They do require compensation. An amount equal to one month of salary should be paid for each year of service they provided to the company. The calculation of years of service should commence from January 1, 2008 (when the Labor Contract Law was implemented), so currently the maximum amount of compensation payable to any employee reaching the end of a fixed-term contract will be two months. The calculation of one month of salary is based on the average monthly compensation received by the employee over the previous 12 months, including bonuses and allowances. It is capped at 300% of the average social salary for the city in which the employee works.

2.      In the event an employer unilaterally terminates an employee's contract with no valid reason, the liability of the employer is limited to twice the amount of compensation payable under the conditions that the termination was made in accordance with the law.

This common misunderstanding has arisen from Article 87 of the Labor Contract Law, which states that the employer can violate the law and still only be liable for double compensation based on the provisions in Article 47 (which stipulates mandatory compensation standards). However a further study of this law reveals Article 48. This article stipulates that if an employer terminates a labor contract in violation of the law, the employee can require continued performance of the contract. Only in the event that the employee does not demand continued performance, or if continued performance becomes "impossible" may the company pay double compensation to the employee.

We can therefore see that the potential cost to the employer could in fact be far higher. Components would include:

• Payment of salary for remainder of the contract term (not limited by 300 percent of average social salary provision)
• Legally stipulated compensation at the end of the contract term
• Any court costs incurred

 
3.      Not providing employees with written employment contracts can be advantageous to the employer.

In fact the opposite is true. Employers should be aware that the employment relationship is deemed to have started from the first day the employee works at the company, not from the date of signature of the contract.

According to the labor contract law, an employer must ensure that it has completed a written labor contract with every staff member within one month of the employee commencing work. This is important because if such a contract is not in place by the end of the first month the employee shall have the right to claim double salary for the period in which the company remains out of compliance with this regulation.

If the company neglects to complete such a contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous eleven months, they can also claim an open-term contract from the employer. This will mean that the employer loses the ability to release the contract of the employee at the end of the fixed-term contract.

4.      Companies may hire all of their employees through agents (a practice known as paiqian in China) instead of signing labor contracts directly with employees.

According to Article 66 of the labor contract law, in general only "temporary, substitute and auxiliary" positions should be filled by staff hired through an agency. However no implementation rules have so far been issued by the government to clarify the definition of these terms. We can say that companies which hire a large proportion of their staff through agencies are operating in a grey area of the law. The situation is unclear relating to issues of compliance and potential liabilities.

We can also add that employing all staff in this manner is an unnecessary risk, as there is no effective advantage to hiring senior employees in this manner, and in fact the vast majority of employees will prefer to have a direct contract with their employer.