Amending employment contracts in China is notoriously difficult. Attempting to unilaterally change an employment contract can be very risky for companies, often resulting in legal fees and lengthy disputes. Courts often order employers to pay damages for such decisions that are deemed imprudent and unfair to the employee.
It is important for companies to be aware as early as possible of the fact that the employer is often held to much stricter standards than in other jurisdictions. As such, contract amendment (in particular, salary reduction) is very difficult to accomplish. It should also be noted that, unlike the United States and other countries, China is not an at-will employment jurisdiction.
This means that an employer must establish just cause to terminate the employment contract and offer adequate compensation according to the requirements of China employment regulations.
Employment Contracts in China
In Chinese laws, the contract lays out the terms of employment and governs the relationship between the employer and employee. Generally speaking, it is safest to amend major provisions of the employment contract with the consent of the employee. Additionally, according to labor laws the employment contract must be signed by both parties.
Failure to meet this requirement will put the employer at a great disadvantage in the event of litigation. Employers should clearly state all of the following details in the employment contract:
- Duration of the contract
- Description of duties
- Work location
- Leave provisions
- Rest days
- Protection against occupational hazards
In addition to the employment contract, an employer should have an employee handbook that fully lays out the rules and regulations governing the employment relationship. A judge will usually be more likely to rule in the employer’s favor if the company’s course of action was specified in the employee handbook.
An employer must have a very strong justification for reducing the salary of an employee. Companies should be prepared to defend their actions before a judge. Generally speaking, in the eyes of the authorities, an employer is obligated to abide by the terms laid out in the contract and compensate the employee accordingly. Failure to do so is seen as a serious breach of the contract and a pay cut may be reasonable.
As such, lawful salary adjustment will, in all likelihood, require that the employment contract has a term that explicitly allows the employer to adjust the salary in particular circumstances.
After the probation period has ended, an employee’s incompetence is unlikely to be a sufficient justification for the reduction of an employee’s salary. A judge would prefer to see that employers attempt to find a more suitable position for employees in China. This should be done with the cooperation of the employee, and new positions should abide by the minimum wage with all relevant social insurance contributions.
Unilateral Salary Reduction
The labor contract law does not offer a specific provision for an employer to give an employee a pay reduction due to incompetence. To unilaterally reduce the remuneration of an employee, the employment contract itself must explicitly state that the employer is at liberty to do so. The contract must also be fully executed (that is, signed by both parties). The employee handbook should also specify the terms of salary reduction.
Breach of Rules
In the event that an employee breaches the company’s rules, the employer may be permitted to reduce the employee’s salary. The employer must ensure that these rules are very explicitly written in the employee handbook. Additionally, the consequences of rule violation should be listed in the employment contract. Failure to do so may result in a court requiring an employer to pay the employee damages.
Justification for Salary Reduction
Assuming the contract and handbook provide the employer with the right to reduce an employee’s salary, the employer must have documentation to justify the decision. Performance reports written in Chinese from routine evaluations would likely suffice.
Such documents created at the last minute will not suffice. Additionally, the employer is more likely to receive a favorable ruling from a judge if it is clear that the employee was given sufficient chances to improve his/her performance.
Equity in Employment Contracts in China
The change should be equitable or reasonable. For example, a judge may look to see that the remuneration is appropriate for the position and the efforts of the employee. Though ‘reasonableness’ is a vague concept, it is important to understand that Chinese courts operate very differently from other jurisdictions. It is important to bear this in mind when writing and negotiating an employment contract in China.
Changing the Employee’s Position
If the employee is incompetent, a safer option than reducing the salary would be to adjust the employee’s position. The labor contract law states that in the case of an employee’s incompetence, the employer may reassign the employee to a new position.
Through Mutual Consent
The best way to reduce the risk of a labor dispute and penalties is to make any adjustments to the position with the consent of the employee. Additionally, without a written agreement in Chinese that is signed by both the employee and employer, the company may find itself at unnecessary risk before a judge.
Reducing the Risk of Labor Disputes and Amending Employment Contracts in China
To maximize the chances of success in the event of a labor dispute, employers should ensure that changes to the employee’s position conform to the following:
- The change is demonstrably necessary for the operations of the company
- The employee’s salary is not greatly reduced (preferably not at all)
- The adjustment was not punitive nature or a demotion
- No other regulations were violated in the process
- The employer has written evidence in Chinese for all of the above.
A global PEO (Professional Employer Organization) service provider like INS Global can help you avoid many of the most common risks involved in amending employment contracts in China. With technical expertise, over 15 years of experience, and a dedicated multinational staff, we’re ready to help.