Applicable rules for employing foreign nationals in China

With an increasing number of persons with foreign nationalities seeking employment in China, determining the existence of an employment relationship between a domestic enterprise and a foreign employee and whether relevant provisions of the Employment Contract Law apply have become focal points of employment dispute cases. This column briefly analyzes the foregoing in light of judicial practice in Beijing and Shanghai.

When an overseas enterprise assigns an employee with foreign nationality to serve in a Chinese enterprise, is an employment relationship constituted between the foreign national and the Chinese enterprise?

The current common practice is that the overseas enterprise has established an employment relationship with the foreign national, and then assigns the foreign national to serve in its affiliate or subsidiary in China. To complete the procedures to receive an employee work permit and for tax planning, the domestic enterprise will execute a pro forma Employment Contract with the employee, and submit it to the local labour authority for the record.

However, if a dispute arises between the foreign national and the affiliate or subsidiary in China, the court will not characterize the dispute between the parties as an employment contract dispute simply on the basis that the foreign national has an Employment Contract or a work permit.

In practice, if the overseas enterprise is ultimately responsible for the foreign national’s compensation, benefits and social insurance and has personnel management rights over the employee, such as evaluation, promotion, transfer, etc., the court will lean towards a finding that no employment relationship was established between the Chinese enterprise and the foreign national. This is the case even if the Chinese enterprise directly pays part or all of the employee’s remuneration or allowances, pays into social insurance and/or pays income tax on the behalf of the overseas enterprise. Courts in both Beijing and Shanghai have rendered similar judgments.

Can an enterprise and an employee with foreign nationality agree to special terms in an employment contract?

Firstly, where a domestic enterprise directly engages a foreign national and executes an employment contract with him or her, the wage that the employer pays the employee may not, pursuant to the Administrative Provisions for the Employment of Foreign Nationals in China and certain local regulations, be less than the local minimum wage. Furthermore, the employer may not, through provisions, preclude or impair the foreign employee’s rights in terms of working hours, rest, leave, work safety and hygiene, and social insurance.

Additionally, can the parties set forth in the employment contract termination conditions that differ from those specified in the Employment Contract Law (e.g., “either party may terminate the employment contract by giving the other party three months’ prior notice”)? Based on current precedents of the courts in Beijing and Shanghai, no clear consensus has been reached on the issue of the validity of provisions on the right of at-will termination in foreign-related employment contracts.

Courts in Beijing have denied the lawfulness of provisions on the right of at-will termination, holding that relevant provisions of the Employment Contract Law should apply. Courts in Shanghai have been inconsistent when determining the lawfulness of similar provisions, with some courts holding that the use by enterprises of their advantageous position to specify a right of at-will termination precludes major labour rights of foreign employees, and consequently cannot be found to be lawful, while other courts have rendered judgments upholding the lawfulness of provisions on at-will termination.

If a foreign employee reaches the retirement age specified in Chinese law, can the enterprise terminate his or her employment contract?

Pursuant to the Employment Contract Law, once a worker reaches the statutory retirement age (currently set at 60 for male and 50 for female employees) or begins to receive retirement pension, his or her employment contract expires automatically.

However, if a foreign employee reaches the retirement age specified in Chinese law, can the enterprise terminate his or her employment contract? Courts in Shanghai have held the opinion that local regulations do not prohibit foreign nationals who have reached the statutory retirement age from continuing to be employed. In contrast, courts in Beijing have held the opinion that enterprises can terminate a foreign employee’s employment contract on the grounds that he or she has reached the statutory retirement age in China, without paying severance.

Can an enterprise execute an open-ended employment contract with a foreign employee?

The Employment Contract Law specifies that once an employee has successively entered into two fixed-term employment contracts with the same employer, an open-ended employment contract should be executed when the contract is renewed again. However, where a foreign employee has consecutively entered into two fixed-term employment contracts with the same enterprise, there has as yet been no verdict on the question of whether he or she can request execution of an open-ended employment contract.

Firstly, pursuant to the Administrative Provisions for the Employment of Foreign Nationals in China, the term of a foreign-related employment contract may not exceed five years, and it should terminate upon expiration. Once the parties have completed the procedures for the approval for the employment of a foreign national, they can renew the employment contract. In practice, courts in Shanghai have not prohibited the execution of open-ended employment contracts by foreign employees, but carrying out the procedures for a foreign national employment permit is a necessary requirement. In contrast, courts in Beijing have ruled that the special term requirement in the Administrative Provisions for the Employment of Foreign Nationals in China is applicable to foreign employees, and an employment contract terminates upon the expiration of its term.

In short, where a domestic enterprise directly engages a foreign employee, judicial practice in Beijing and Shanghai is not uniform in gray areas such as specific termination provisions, contract termination and the execution of open-ended contracts. However, on the whole, courts in Shanghai seem to accord the parties greater autonomy of the will in the execution and performance of foreign-related employment contracts.