Notable Points on Open-term Labor Contracts

Full-time employment contracts under the labor law of the PRC can be either fixed-term, fixed-term or project-related contracts. In certain circumstances an employee has the right to apply for a fixed-term employment contract, e.g. B. If an employee has worked for the same employer for 10 years in a row, he is entitled to apply for a fixed-term employment contract. After two consecutive fixed-term contracts with the same employer have expired, an employee is entitled to a fixed-term contract if he so wishes. Although the circumstances that give rise to fixed-term contracts appear clear under the established legal provisions, in practice there is still some controversy regarding the application of rules relating to fixed-term contracts. In this edition we want to provide clarity and also discuss various local practices regarding such controversial issues.

Q1: When would the “consecutive work for 10 years” start? Do employers have to enter into a fixed-term contract if “10 consecutive years” are reached during the legal extension of an employment contract? What if “10 consecutive years” are achieved during the performance of a fixed-term contract?

Article 14.2 of the Employment Contracts Act of the PRC (“LCL”) provides that if an employee has worked for the same employer for 10 consecutive years, he or she can request the employer to enter into a fixed-term employment contract. In other words, the employer cannot enter into the fixed-term contract or terminate the employment contract on the grounds that it has expired.

The implementing rules of the LCL also clarified that the “10 consecutive years” set out in Article 14.2 of the LCL start on the day the employee was hired, including the length of employment prior to the entry into force of the LCL in 2008.

In principle, an employment contract ends automatically when it expires. However, the LCL provides for certain situations in which the term of the employment contract is extended until the factors that facilitate such situations no longer exist. These situations include, without limitation, when the employee is within the legal duration of medical treatment or is pregnant, puerperal or breastfeeding. Then a problem arises: what happens if the employee’s length of service reaches “10 consecutive years” during the above-mentioned legal extension of the employment contract? Is the employer definitely obliged to conclude a fixed-term contract with the employee concerned at the end of the extension?

In this regard, the judicial authorities confirm in most areas. Indeed, judicial authorities in Shandong, Guangdong and Zhejiang provinces have issued official local interpretations to consolidate their consensus on the issue. However, Shanghai is unique in its interpretation. The judicial authorities of Shanghai believe that the legal extension of the contract period only applies in cases where an employee is subject to a special situation, as mentioned above, and does not require the conclusion of a fixed-term employment contract. Related lawsuits in Shanghai have confirmed that reaching “10 consecutive years” during the statutory extension period does not constitute grounds for entering into a fixed-term contract. Therefore, the employer in Shanghai can still choose to terminate an employment contract that has been extended for legal reasons after it expires, even if “10 consecutive years” are reached during the extension period.

Another question is: Does the employee have the right to request an immediate change in the contract period from fixed to open if “10 consecutive years” are reached in the course of the performance of a fixed-term contract? The answer should be negative. This is because the fixed-term contract is still being executed and any change or modification to an ongoing employment contract is subject to the agreement of both parties. If the employer does not agree to change the contract period halfway through the service, the employee can only apply for an open contract after the current fixed-term contract has expired.

Q2: Can an employer choose to terminate the second fixed term contract instead of entering a fixed term contract?

Another fact that obliges the employer to conclude a fixed-term employment contract is that an employment contract should be extended after two consecutive fixed-term employment contracts have been concluded.

Regarding whether the employer is not allowed to renew the contract after the second contract expires, the setting / practice of the judiciary differs in the respective places. In Shanghai, the employer has a choice in this regard. The relevant judicial guidelines of the Shanghai Supreme People’s Court from 2009 show that the agreement between the two parties depends on whether or not a third employment contract is concluded. According to these guidelines, there are two conditions for entering into a permanent contract: (1) the employer’s willingness to hire the employee for successive terms and (2) the employee’s request for a fixed-term contract. In relevant court proceedings in Shanghai, the courts ruled that the employer’s intention to renew the employment contract should also be taken into account. If the employer does not intend to renew, he can terminate the employment relationship after the second contract has expired and there is no obligation to conclude a fixed-term contract. Courts in Dalian City and Sichuan Province have made similar decisions on this matter.

Judicial authorities in most other areas think differently. For example, the judicial guidelines of the Beijing, Guangdong and Zhejiang Courts specifically provide that a fixed-term contract be entered into as long as the employee suggests doing so after the second fixed-term contract expires. In other words, at the end of the second fixed-term contract, the employer has no option to automatically terminate the second contract if the employee intends to renew it.

Q3: Is it still possible to conclude a fixed-term contract if the legal requirements for concluding an open-ended contract are met?

The answer is yes. Based on the relevant legal provisions, a fixed-term contract is legal and possible even if the employee is entitled to a fixed-term contract (e.g. in the situations described in Q1 and Q2 above) if:

  • The employee himself applies for a fixed-term contract; or
  • The employer proposes another fixed-term contract to the employee, and both parties agree on this.

If an employer wishes to try to propose another fixed-term contract, it is recommended that the employer provide the employee with a notice before the relevant employment contract expires. The employer can use such prior notice to obtain the employee’s thoughts on the extension of the contract and on the intended contractual terms. It should be noted that in certain areas such as Beijing, Jiangsu 1 and Heilongjiang, there is a mandatory requirement for the length of the notice period. Employers are advised to follow these local requirements when notifying their employees. Even if such local requirements do not exist, we recommend that the employer allow a reasonable period of time (e.g. 30 days) to allow the employee to react and, if necessary, to consult both parties.

Q4: Can an employee change their mind when they agree to a fixed-term contract when they should have been eligible for a fixed-term contract?

The position of the judiciary in this regard is uniform across the country. As long as both parties have agreed on a fixed-term contract, such an agreement becomes binding. The employee’s application for a fixed-term contract will not be supported unless he can prove that the employer was involved in fraud or violence at the time the fixed-term contract was signed.

While the third fixed-term contract, if agreed, is usually considered valid, what remains to be seen after this third contract expires. In this regard, the different practices after the end of the second contract, as described in our answers to Q2 above, also apply. Namely, employers in Shanghai, Dalian and Sichuan can choose not to renew (a permanent contract is required once the renewal is decided). Employers in other areas have no choice but to sign a permanent contract if the employee so wishes.

Q5: Can foreign employees sign open-ended employment contracts?

According to Article 17 of the Regulations on the Administration of the Employment of Foreigners in China, the term of the employment contract signed with a foreign worker is up to five years. The five-year limitation period has led to controversy over whether foreign workers can enter into open employment contracts with their employers.

The PRC labor laws and regulations have not clarified whether the obligations to enter into an open employment contract also apply to the employment of foreign workers in China in the above circumstances. Due to the recent legal practice, the judicial authorities in the respective locations are usually of the opinion that the employer is not obliged to enter into a fixed-term employment contract with his foreign workers in accordance with the relevant provisions of the LCL. Since the PRC Labor Code does not actually prohibit this, the judicial authorities also tend not to directly recognize an open contract with a foreign worker as invalid.

However, the fulfillment of fixed-term contracts with foreign workers largely depends on the effective duration of the work permit of foreign workers. The employer is obliged to apply for an extension of the foreign worker’s work permit if it expires while the employment contract is being performed. Otherwise, both parties cannot continue to carry out the open-ended contract due to the lack of an effective work permit. Relevant judgments by the Shanghai and Beijing courts ordered employers to provide severance pay / compensation for failing to renew the foreign worker’s work permit under the performance of a fixed-term contract.

A major change came recently when the State Council announced on August 3, 2018 that it would lift the legal requirement for work permits for workers from Taiwan, Hong Kong and Macau. Previously, as with foreigners, a fixed-term contract generally did not apply to such workers from Taiwan, Hong Kong and Macau, as the duration of their employment contracts is limited by the effective duration of their work permits. Now that they no longer need a work permit, the question arises as to whether employers are equally obliged to enter into fixed-term contracts with these employees if the relevant legal conditions of the LCL are met. The employers concerned must observe a further interpretation by the legislature in this regard in order to ensure compliance with the legal provisions with regard to employment contracts.

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