Understanding the Complexities of China’s Labor Laws

February 1, 2024
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Conducting a thorough examination before entering the Chinese market has become more crucial than ever, especially regarding labor laws. Whichever business model you choose for your China business – company registration in China or outsourcing operational functions to a service provider – you need local employees.

Therefore, it is imperative to understand how to manage them effectively, what their expectations are, and what legal requirements you must abide by as an employer. Conducting this research before setting foot in China provides a significant advantage. It facilitates strategic decision-making and effective budget management, which will pay off in the long run as you solidify your foothold in China and hire more employees.

Reading this article is the first step in your China market research. In this article, we’ll discuss:

  • Modern Chinese labor laws
  • The Chinese labor market landscape
  • The importance of compliance with Chinese labor laws
  • The role of HR management in business success
  • The need for support in the Chinese market
  • Looking ahead: The future of the Chinese labor market

Navigating Modern Chinese Labor Laws

The Chinese labor law framework is complex, not only because it is intricate, but also due to legal variations between regions in China. That said, all labor laws adhere to national guidelines that aim to protect employee rights. Consequently, some of these regulations are similar to what we are familiar with in the Western context, such as social benefits, minimum wage, overtime payments, annual leave, special leaves, and termination severance. Overall, employment laws in China receive heightened attention in the aftermath of COVID-19, as employees feel empowered to assert their rights amid the growing trends that prioritize employee well-being.

Specifically, we would like to delve deeper into two laws we are frequently asked about:

The Chinese Labor Contract law:

This law is relevant to all companies that recruit and hire in China, as it establishes the labor relationship between an employer and an employee. In fact, it is illegal for a company to hire a full/part-time employee without an updated and valid labor contract. The Chinese labor contract specifies details such as the employment term, the job description, the definition of the working hours and vacation days, the benefits package, etc. While this all sounds straightforward, international companies must understand the concept of contract localization. Practically speaking, in order for a labor contract to be legally effective, it has to be written in Chinese, and its clauses should be customized based on the company’s location.

The Trade Union Law:

As its name implies, the Trade Union Law outlines the conditions and requirements for establishing trade unions in China. As such, the law defines what is considered a trade union, the eligibility criteria for employees to join a trade union, and its scope of activity. One crucial distinction between trade unions in China and those in Western countries is that Chinese trade unions are not independent entities. Instead, they operate under the leadership of the Chinese Communist Party, and must align with its principles. From an employer’s perspective, once a trade union is established, the employer is obligated to support its functioning and allocate 2% of the employees’ salaries toward its activities. Furthermore, employers are held accountable for any violations of the provisions stipulated in the Trade Union Law.

Common difficulties with proper compliance

International companies doing business in China often find themselves overwhelmed by China’s extensive legal requirements. As a result, they often make mistakes unknowingly.

Language barriers and cultural differences play a significant role in the misinterpretation of local labor laws. As Chinese labor laws and legal documents, including labor contracts, are primarily written in Chinese, foreign companies struggle to fully grasp the nuances of their obligations. China’s unique business culture and norms present additional challenges, hindering smooth employment relationships.

Moreover, international companies frequently struggle to stay current with evolving national and local labor laws. These laws undergo regular updates and revisions, and, more often than not, they are not applied or enforced equally across the board. As a result, companies operating in multiple locations face inconsistencies in enforcement and a myriad of operational complexities.

Lastly, the distance from the Chinese market poses another obstacle. Even with a comprehensive understanding of the legal requirements, ensuring compliance with labor laws demands diligent monitoring and timely reporting. Maintaining accurate records and submitting reports on time becomes more challenging when the company is managed remotely, without transparency or trust between the Chinese branch and the overseas headquarters.

The implications of non-compliance

Needless to say, non-compliance with China’s labor laws comes with severe implications, ranging from hefty fines to business license revocation. But the most dangerous consequence is reputational damage. With public databases in place, such as the National Corporate Credit System, information regarding non-compliant companies becomes accessible to the public and third-party professional entities such as suppliers, distributors, and investors. Thus, these violations become embedded in the company’s reputation in China and potentially inflict long-term damage to its image.

The Chinese Labor Market Landscape

Current trends in the Chinese labor market

The Chinese labor market is experiencing significant transformations, driven by various emerging trends. These trends are shaping the dynamics of employment, workforce availability, and employee management across different industries in China.

Hybrid is the new normal The COVID-19 pandemic has legitimized remote and hybrid employment models, which were made possible by the increasing adoption of digital work processes. Remarkably, data indicates that offering a remote working option is seven times more likely to attract job applicants than other working arrangements, primarily due to the enhanced flexibility. According to industry professionals, this trend is not a passing phase but is here to stay.

Demand for a new skill set As China transitions towards a knowledge-based economy, there is a growing emphasis on skills that align with the country’s innovation, digitalization, and sustainable development goals. Key areas of demand include expertise in emerging technologies such as AI, big data analytics, blockchain, cloud computing, cybersecurity, automation, and smart manufacturing.

However, the supply of skilled employees in these domains doesn’t satisfy the demand. Hence, the Chinese government is taking active steps to upskill and reskill its local labor force, with the example of vocational training programs and financial incentives for businesses that invest in employee training.

The aging population Demographic trends in China, and specifically the declining birth rates, directly impact China’s labor force. This is mainly demonstrated in the increase in employees’ average age. The average age of China’s labor force has risen from 37.1 years in 2017 to 38.4 years in 2022.

One immediate consequence of the population decline is the reduction of the local workforce. But it doesn’t end there. A smaller workforce size increases the competition for skilled workers, further widening the skill gap between those with specialized knowledge and those without. Additionally, an increased dependency ratio pressures the working population to support more dependents, adversely affecting productivity and economic growth. Consequently, the government and employers are expected to allocate resources to meet the healthcare needs and retirement benefits of the growing elderly population, creating a significant financial burden.

Labor rights & work-life balance Workers’ expectations of employment in China has been transformed by the impact of COVID-19, resulting in a growing emphasis on mental health, professional growth, and overall work conditions.

A survey conducted by the All-China Federation of Trade Unions (ACFTU) in March 2023 revealed that Chinese workers prioritize long-term development, with a remarkable 93.5% expressing an interest in acquiring new vocational skills and knowledge. This inclination is particularly prevalent among employees aged 18-40 and those with a bachelor’s degree or higher.

Notably, the government has introduced new legislation to safeguard the rights of gig economy workers, and expanded laws protecting women’s rights by prohibiting gender discrimination and defining sexual harassment in workplaces. Furthermore, a significant ruling by the Chinese court declared the “996” work schedule illegal, following a tragic incident at the tech corporation, Pinduoduo.

Read more on women’s employment in China – Lessons for global managers

Challenges & opportunities for foreign businesses in China

This evolving labor market poses new challenges for foreign companies that hire employees in China, but also several new opportunities.

The challenges:

Limited supervision over remote employees

Employees’ preference for remote work limits the management’s ability to oversee their employees. This can be particularly troublesome for foreign companies, as the distance from the market already presents obstacles in closely monitoring day-to-day operations in China.

Competitive domestic market

The scarcity of highly skilled workers, coupled with the surging demand for their expertise, toughens the competition for local talent in technology-driven sectors.

Employees’ expectations for more

In the current landscape, employees have higher expectations than ever regarding their working conditions – from generous benefits packages to increased flexibility. Furthermore, the improved quality of life in the world’s largest consumer market only fuels employees’ expectations for better work conditions and higher compensation.

Increased hiring costs

Ultimately, these factors translate into an increase in hiring costs for companies. Employees increasingly assert their demands and leverage their specialized skills as bargaining power, particularly in competitive industries. As a result, companies must provide generous financial incentives to attract and retain talented employees in order to gain a substantial competitive advantage in the market.

The opportunities:

Larger talent pool

Thanks to remote hiring, companies now have access to a broader talent pool, which can be especially valuable for businesses operating in specialized industries that face a shortage of qualified professionals.

Increased employee satisfaction and efficiency

Remote hiring also proves valuable in terms of meeting employees’ expectations for flexibility. Specifically, companies benefit from improved employee productivity as a result of satisfied employees and the elimination of commute times.

Governmental support

Companies that demonstrate their commitment to employee development and promote initiatives such as training programs and gender equality can enjoy financial support from the government. This not only reduces the financial burden on the company but also enables it to retain skilled employees, leading to improved performance.

Importance of Compliance in the Chinese Labor Market

Why is compliance crucial? The benefits of compliance

From all of the above, it is clear that hiring and managing employees in China, although vital for business growth, can be complicated. Taking shortcuts is not an option, and compliance with Chinese labor laws is absolutely essential.

  • From a legal perspective, compliance ensures stable and sustainable business operations.
    Ethically, compliance builds trust and fosters goodwill among employees, customers, and the broader community, demonstrating the company’s dedication to respecting workers’ rights and fair treatment.
  • From a business standpoint, compliance is synonymous with sustainable success. Adhering to labor laws enhances the company’s standing in the labor market, attracting top talent, promoting employee retention, and increasing productivity.
  • Equally significant, companies that comply with labor laws enjoy improved relationships with regulatory authorities, minimizing the risk of scrutiny or intervention and maximizing the potential for future benefits and preferential treatment.

The potential consequences of non-compliance

Non-compliance with labor laws can have significant short-term and long-term consequences. These encompass financial penalties, legal action, frequent government inspections, and reputational harm. Ultimately, these outcomes impact the company’s bottom line. Such a stain on the company’s reputation sends a negative message, making it challenging to attract skilled employees and conduct business in China.

Tips for ensuring compliance

How then can international companies doing business in China ensure compliance?

It all starts with adopting a proactive approach, including:

  • Staying up-to-date with the latest labor laws and regulations.
  • Establishing internal policies and procedures that align with Chinese labor laws and employees’ expectations (e.g., maintaining accurate employee records, paying social benefits on time, offering training, etc.).
  • Creating an internal Employee Handbook to set supplemental regulations relating to the company’s operation and preventing ‘gray areas’ cases.
  • Maintaining open communication channels with employees.
  • Conducting regular internal audits.

In many cases, international companies doing business in China find it advantageous to seek support from trusted service providers that offer HR services in China. By leveraging these local employment services, companies can have peace of mind, knowing that their Chinese employees are being effectively managed and that the company is fully compliant with local requirements.

Read more about Recruitment & HR Management in China

The Role of Human Resources Management in Business Success

Clearly, recruiting and effectively managing employees in China is not as straightforward as you might have anticipated based on your home country’s experience. Companies in China must keep abreast of the dynamic happenings in the local labor market, both in terms of legal requirements and employee behavior. They must balance between the company’s resources and the demands of the labor market, which can often be a delicate task. If that’s not enough, overcoming language and cultural barriers adds another layer of complexity, knowing that even the slightest deviation can result in significant costs.

Local human resources management is the key to successfully navigating this intricate landscape. The human resources team is the sole function in the company that is fully acquainted with local labor laws, constantly stays up-to-date with the developments in the market, and maintains open lines of communication with employees to confirm their needs are fulfilled. Therefore, the human resources team is the only function that can create a compliant and supportive work environment that leads to higher retention rates, increased productivity, and a larger potential for sustainable growth.

For this ideal to become a reality, professional help from a local service provider comes in handy. China-based support from local and reliable experts eliminates the usual foreign manager blind spots. These local service providers act as an extension of the parent company, offering the necessary expertise, time, and resources that the overseas management team may be lacking.

Understanding the Need for Support in the Chinese Market

HR & employment support in China plays a pivotal role in shaping the company’s trajectory, and is present throughout the entire employee lifecycle. In fact, HR and employment support in China is the foundation of the company’s success.

If you haven’t yet embarked on your China journey – don’t take our word for it. Instead, why not learn from other companies’ experiences?

Real-life examples: Local HR support in China watches your back

In one instance, a company initiated a company registration in China (WFOE). However, despite our HR team’s concerns regarding illegal employment, the international management hired a local employee before completing the WFOE setup. When the probation period concluded, the company decided to terminate the employee’s contract, who, in response, threatened to file a lawsuit for – guess what – illegal employment.

To resolve this case peacefully, our HR team conducted a background investigation, revealing that the employee had provided false information in their CV. With the assistance of a lawyer and offering compensation, the company reached a resolution, and the employee dropped the lawsuit.

In another instance, a highly ambitious company hired numerous new employees for its China branch, but terminated most of these new hires upon completing the probation period. Our team warned the management that the so-called reason for the termination – not meeting sales targets – might not be considered valid by local authorities. However, the management did not follow the advice or seek arbitration. Only when one employee, who had been employed for just one month, threatened legal action, did management finally reconsider.

These situations highlight the complexity of employee management and labor laws in China. It is a valuable lesson that a thorough understanding of these laws and consulting with local experts is crucial to ensuring a smooth transition into the Chinese market. Read more on how to legally approach employee termination in China.

Success stories of foreign businesses in China: Get it right from the start

Foreign companies can thrive in China if they only get it right from the start. Here’s a success story of an Israeli company operating in the smart manufacturing industry. With the assistance of our HR team in hiring their first employee, this company experienced a remarkable tenfold increase in sales revenue within the first year of its presence in China.

Several other companies have also achieved notable success in China after we assisted in employee recruiting in China. Among them is a company specializing in software development for the autonomous vehicles industry, as well as another company operating in the agricultural sector. The latter is one of our long-standing clients – we have been working together for over 15 years.

A key factor shared by all these successful companies, besides their thriving in China, is their collaboration with a dependable and trusted third party. The strategy involves leveraging external services, including but not limited to employment services, to handle operational management in China. This approach relieves the foreign management from the burden of dealing with these aspects directly, allowing them to concentrate on excellent business development while we manage the behind-the-scenes operations.

Our services assist international companies in the Chinese market. Contact us

Looking Ahead: The Future of the Chinese Labor Market

What can be anticipated for China’s labor market in the future? Our analysis is divided into four different areas.

Labor laws & the wider legal framework

The Chinese legal landscape is constantly changing, with regular updates and expansions at both national and provincial levels. The earlier examples of laws relating to women’s rights, gig economy workers, work hours, and trade unions highlight the fast-paced nature of labor law development, suggesting that further changes can be expected. However, it is important to recognize that laws outside the realm of labor law also impact human resources management, and they, too, undergo continuous evolution.

For instance, a trend in recent years has been the swift enactment of data protection legislation, exemplified by the Data Security Law and the Personal Information Protection Law. This serves as a reminder for international companies doing business in China to stay vigilant and be aware of broader legal developments that may affect employee management. Consequently, businesses should anticipate increased government scrutiny. Be mindful that all legal amendments align with the government’s agenda, making it essential to stay informed about government announcements, as they can provide valuable insights into potential future changes in the legal system.

Work procedures & arrangements

In recent years, China has actively pursued digital transformation initiatives to enhance the efficiency and user-friendliness of its business environment. This focus on digitization has extended to the human resources field, for instance, with the government’s endorsement of electronic labor contracts in July 2021.

The increased automation and digitization efforts have practical implications for the facilitation of remote and hybrid work models. As mentioned earlier, these flexible work arrangements have gained popularity among employees, and given the ability to perform numerous tasks remotely, it is anticipated that more companies will adopt and offer such work arrangements.

Labor force composition & skilled employees’ availability

China’s changing demographics resulted in a shrinking workforce and an increase in the average age of employees. This indicates that in the future, a significant portion of the workforce will be older and potentially less adept with technology. Another noteworthy trend influencing the composition of the labor force is the migration of rural workers to urban areas, driven by the desire for a better quality of life. Between 2012-2022, the number of migrant workers in China grew by approximately 15%, reaching approx. 300 million individuals. While this trend partially offsets the reduction in the size of the urban labor force, migrant workers often have lower levels of education and may lack the knowledge and expertise sought by international companies.

Considering these factors, international companies should invest in reskilling and retaining their existing employees. Amid the fierce competition for highly skilled workers, it is often more feasible and advantageous to nurture your current workforce rather than initiate frequent recruitment processes.

Minimum wage & hiring costs

In light of the inflation in the Chinese market, the growing emphasis on labor rights, and the imbalance between the supply and demand of skilled employees, hiring costs in China are consistently rising. This trend is expected to continue in the foreseeable future.

One element that significantly affects hiring costs is minimum wage. The minimum wage in China varies greatly across different locations, and local governments are responsible for updating it every two years. Historically, minimum wage in China is usually on the rise, keeping up with the constant rise in the cost of living.

However, it is important to note that the minimum wage rarely represents the actual amount paid to local employees. To compete for highly skilled workers, international companies in China have had to substantially increase wages and provide attractive incentives to attract top talent and remain competitive in the Chinese market. For instance, in 2020, workers in Shanghai earned an average monthly salary of RMB 10,338, which was nearly four times the local minimum wage. Read more insights into salaries in China.

How to prepare for these changes?

Being aware of future trends and adequately preparing for them is a crucial starting point for dealing with the uncertainties inherent in doing business in China. This approach can not only position you as a market leader but also increase your chances of maintaining a strong local presence. However, awareness alone is not enough; the next challenge lies in effectively responding to these trends, which is where many international companies struggle.

To navigate the waves of the Chinese market and develop a truly effective strategy, a superficial understanding or familiarity with local occurrences is insufficient. What you need is a trusted service provider who can analyze the landscape, provide advanced insights into upcoming developments, and offer guidance to minimize mistakes or inexperienced missteps. By leveraging comprehensive on-the-ground support, you can bridge knowledge gaps and harness the service provider’s experience and expertise to craft a strategy that positions you ahead of the curve.

Conclusion

Doing business in China means engaging with the country’s local labor market, which presents great challenges. The intricate labor law system, diverse enforcement and regulation, intense competition for skilled professionals, and language and cultural barriers create a complex landscape that can be difficult to navigate.

However, the Chinese market is still a lucrative market for business, and as such, international companies should not be deterred from tapping into its potential. On the contrary – they should embrace the opportunity with a well-planned strategy. One effective approach is partnering with a reliable local service provider who can offer a range of benefits, including:

  • Ensuring 100% legal compliance
  • Leveraging local knowledge
  • Adapting to emerging trends
  • Elimination of cultural and language barriers
  • An advantage in attracting and retaining top talent
  • Maximizing government support
  • Preventing or mitigating cases of local fraud by partners, employees, and clients
  • All of the above leads to a smooth transition into the Chinese market, paving the way for sustainable long-term growth

In conclusion, the answer to the question at the top of the article – is yes. According to a survey conducted by the American Chamber of Commerce in China, the majority of companies remain committed to the Chinese market, despite the challenges it presents. But in order to fully realize this potential, make sure to research and prepare thoroughly. No matter how you choose to conduct your business in China, knowledge is always power.

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