CHINA LABOR & EMPLOYMENT LAW UPDATE

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1 March Please contact us for more information: Beijing Wang Dongpeng Bai Hongjuan Shen Nan Shanghai Ma Jianjun Jeffrey Wilson Gordon Feng Bu Yimu Guangzhou Laura Fu Shenzhen Sandra Sun Government work report highlights employment issues The annual government work report delivered by Premier Li Keqiang on March 5 at the opening session of the 13th National People's Congress (NPC) stated that more than 66 million new jobs have been created in urban areas in the past five years with the country achieving relatively full employment. Among the government s targets for 2018 are more than 11 million new urban jobs with an urban unemployment rate under 4.5 percent. The work report also mentioned several national other employment-related goals: Increase the amount of compensation that is exempt from individual income tax and introduce deductions for children s education and medical treatment of serious illnesses. Employers would likely be required to assist with such deductions when making monthly employee tax filings. In addition, Shi Yaobin, vice minister of the Ministry of Finance, reportedly indicated that the current individual income tax system will be simplified with salaries and service income being taxed at the same rates. Eliminate employment discrimination. In support of such a goal, Tan Lin, a NPC representative as well as the vice-chairwoman of All-China Women s Federation, proposed that gender discrimination be added as an independent cause of action in order to facilitate the acceptance of discrimination claims by courts. She also proposed that a blacklist of employers that engage in discriminatory practices be compiled and published online and in the media. Enhance portability of statutory medical insurance. The work report recommended that direct payment for medical services expenses incurred by employees in provinces other than their home provinces be made possible instead of requiring employees to pay the full amounts up front and then seek reimbursement from the medical insurance fund. NPC and CPPCC representatives raise employment proposals Representatives of the NPC and the Chinese People's Political Consultative Conference (CPPCC) called for additional employment law changes during the March meetings of the two political bodies in Beijing. CPPCC member Lu Guoquan proposed tightening of regulations to prevent employees dying from overwork. Lu, who is also an official of the All-China Federation of Trade Unions, called for a clear definition of overwork death and that it be recognized as an occupational death under occupational injury insurance so surviving relatives can obtain compensation. In addition, Lu stated that local authorities should encourage employers - 1 -

2 to engage in collective bargaining with employees over working hours and labor intensity, and that working hours and intensity should be closely monitored. NPC representative, Liu Hanyuan, who is also chairman of the Chengdu-based Tongwei conglomerate, reportedly pushed for reductions in social insurance and housing fund contribution rates in order to ease financial burdens on employers. Liu argued that China s contribution rates far exceed similar insurance programs in western and neighboring Asian countries. He stated that these rates threaten the development of PRC enterprises as well as limit the possibility of salary increases for employees. Any contribution shortfalls could be met with increased government funding and transfer of state-owned enterprise profits into the social insurance funds. Several NPC representatives and CPPCC members also called for increased protection of workers in the gig economy and part-time employees, such as cleaners, delivery workers, and maintenance personnel. Areas of concern include working hours, overtime pay, social insurance, and protection from at-will termination. In a related development, the Chinese Communist Party Central Committee proposed on March 21 that social insurance contributions be collected by tax authorities nationwide instead of by social insurance authorities, as is currently the practice in certain cities, such as Beijing, Shanghai, and Tianjin. Implementation is expected to result in greater scrutiny of the calculation bases used by employers, and therefore increase contributions by employers and employees. The proposal, which is aimed at being effective by March 2019, is subject to issuance of implementing regulations. Legislative plan silent on amendment of Labor Contract Law An amendment of the Labor Contract Law in 2018 appears unlikely given its absence from the annual legislative plan issued on March 2, 2018 by the State Council. The legislative plan is a list of proposed laws the State Council expects to submit to the NPC for consideration in the current calendar year. According to an official from the NPC legislative affairs commission, a consensus has not yet developed among government agencies whether the LCL is responsible for creating an inflexible labor market and should be amended. Still, proposals continue to circulate for amending the law. CPPCC member and ACFTU official Lu Guoquan reportedly advocates for inclusion of detailed provisions on collective wage bargaining as a means to encourage bargaining to increase wages. Lu also supports adding provisions in the LCL to protect self-employed contingent workers. The State Council legislative plan, however, does include amendment of rules on unemployment insurance and housing fund. Under the amendments, migrant workers individuals holding household registrations in rural areas but are employed in urban areas would be included in unemployment insurance and would enjoy the same treatment as urban employees. Currently, only a portion of the estimated 280 million migrant workers are required to be enrolled under local - 2 -

3 unemployment insurance rules. Another proposed change would lower the combined employer and employee contribution rate from three percent to a maximum of two percent. Housing fund rules would be changed to permit funds to be used to pay for home renovation and management fees. Individuals without employers would also be permitted to participate in the housing fund programs. In addition, several NPC representatives and CPPCC members called for increasing the maximum percent of housing fund that renters can use, as well as including migrant workers in the housing fund program. Further liberalization in family planning limits proposed Employers may be required to give additional maternity leave and protections if proposals to further liberalize the country s family planning limits are adopted. Zhu Lieyu, a NPC representative and Guangzhou-based lawyer, proposed during in March that the current limit of two children be changed to three children in order to prevent an anticipated shortage of workers, to ensure the future competitiveness of local companies, and to better disperse the burden of supporting the elderly population due to the ratio of China s low-birthrate to its aging population. The replacement of the one-child policy with the two-child policy on January 1, 2016 has not resulted in the goal of couples having more children. According to the National Bureau of Statistics, the number of births actually declined by 630,000 from 2017 compared to 2016, totaling only million births. Zhu s proposal to increase the limit to three children has been met with skepticism. Some netizens have posted comments that workplace discrimination against women may worsen due to employers resisting responsibility to shoulder further burdens of pregnant employees and maternity leave arrangements. In response, Wang Xiaoping, a CPCC member and a former deputy director of the Xi an Human Resources and Social Security Bureau, proposed that the government provide financial subsidies and tax breaks to employers to help offset their increased costs. In a related development, the reorganization of the State Council in March resulted in the National Health and Family Planning Commission being renamed the National Health Commission. While the family planning functions remain with the cabinet-level agency, the name change likely reflects a de-emphasis on limiting population in the country. Raising retirement ages called inevitable Speaking at the NPC and CPPCC meetings on March 12, an official of the Ministry of Human Resources and Social Security (MHRSS) stated that increasing the retirement age is inevitable. Raising the statutory retirement age has become a pressing issue due to the declining workforce size, pressure to fund the statutory pension program, and the requirement that older workers continue to be protected by employment laws. In consideration of such issues, proposed changes to the retirement age are expected to be announced later this year

4 The current retirement age is 60 for men and 50 for women (and 55 for women holding management positions). In 2014, the Chinese Academy of Social Science released a report proposing that the retirement age for females be increased by one year every three years, and for men, the retirement age should be increased one year every six years, with the goal of a uniform retirement age of 65 achieved by 2045 for all employees. The MHRSS in 2014 announced that it would publish a draft policy on changing the retirement age for public comment by This draft policy is now expected to be issued later this year, with any increase in retirement age taking effect five years after approval of policy changes. The MHRSS official on March 12 reportedly supported a proposal to adopt a flexible retirement system under which employees would have the option of retiring between a certain age range. One reported proposal is to use an age range of The MHRSS has not commented on whether employees who retire before 65 under such a system would suffer any reductions in benefits from the statutory pension program. New rule may reduce potential tax exposure Overseas companies assigning employees to work in China may have a lower risk of enterprise income tax exposure as a result of a tax bulletin (Bulletin 11) issued on February 9, 2018 by the State Administration of Taxation (SAT). Bulletin 11 clarifies when a permanent establishment (PE) of a foreign company is deemed to exist due to the presence of an assigned employee (or a local agent) in China. The Bulletin applies to companies located in any of the 106 countries and regions that have a tax treaty or special arrangement with China. Bulletin 11 also lowers the risk of foreign national assignees from being held liable for individual income tax. Bulletin 11 clarifies that a 183-day threshold for the determination of a PE replaces a six-month threshold that is commonly seen in China s tax treaties signed prior to 2008, including the China- U.S. tax treaty and the China-Singapore tax treaty. For the determination of the six-month threshold, a SAT 2007 notice implemented a rule of one day equals one month, which resulted in foreign companies having personnel present in China for one day in a given calendar month counting as one month. Even through the relevant requirements of the 2007 notice were repealed by SAT in 2011, the issuance of Bulletin 11 was necessary in order to stop some provincial and city tax authorities from continuing to follow the old rule, and to require them to start following the 183-day threshold. Agencies responsible for work authorization changed Further policy changes for the employment of foreign nationals in China are expected following the reshuffling of cabinet-level agencies approved on March 13, 2018 by the NPC. The State Administration of Foreign Experts Affairs (SAFEA), which is in charge of policies and approval of all foreign nationals working in China, will be transferred from the Ministry of Human Resources and Social Security (MHRSS) to the Ministry of Science and Technology (MOST). While the reform plan did not explain the reason for the transfer, the move could indicate a greater - 4 -

5 emphasis on attracting foreign national employees in the science and technology sectors as China continues to advance its economy. It is currently unclear whether the responsibility for the issuance and management of foreign nationals work permits will be transferred with the SAFEA to MOST, or whether such administrative functions will be retained by the MHRSS. Given the recent implementation of a new on-line nationwide work permit system, employers may experience further uncertainty for the requirements and procedures for hiring foreign nationals if MOST assumes responsibility. The cabinet reshuffle also sees the creation of an Immigration Bureau under the Ministry of Public Security. This new bureau will merge the duties of the Exit-Entry Administration, which is responsible for the issuance of visas and monitoring of foreign nationals in the country, and the Border Control Department, which is responsible for enforcement of immigration at China s borders. The Immigration Bureau will be in charge of exit-entry inspection, management of foreign nationals residence and permanent residence, and repatriation of foreign nationals illegally staying in China. The creation of the Immigration Bureau may result in the restriction of the relatively common practice of foreign business travelers who fail to obtain required work authorization after staying in the country for 90 days. With the merger of the two agencies, closer monitoring of foreign nationals in China is expected. Work permit requirement dropped for Hong Kong, Macau residents Hong Kong and Macau residents are no longer required to obtain mainland China work permits to work in Shenzhen s Qianhai district starting from March 16, This is reportedly the first policy that permits Hong Kong and Macau residents to work in mainland China without obtaining local authorization, and represents a step to further the economic integration of the Guangdong - Hong Kong - Macau Bay Area. Shanghai moves to cancel household registrations Shanghai household registration (hukou) holders who obtain foreign nationality could see their registrations cancelled as result of new city rules taking effect on May 1, The new rules give local police the right to cancel registrations if the holders do not complete deregistration procedures within one month after receiving a cancelation notice. While PRC nationals who have obtained foreign nationality have long been required to cancel household registrations, the new Shanghai practice is apparently aimed at cracking down on individuals who want to continue to enjoy rights limited to PRC nationals, such as to receive certain statutory pension benefits, purchase real estate, and engage in business areas restricted or prohibited to foreign persons. This Shanghai rule is reportedly a pilot program that if successful may be rolled out nationwide

6 Cap on Shanghai statutory severance increases to RMB 21,396 Shanghai authorities on March 29, 2018 announced a new average salary of RMB 7,132 per month, thereby increasing employer severance and social insurance requirements. With the cap on statutory severance based on 300% of the local average salary, the severance cap in Shanghai increased from RMB 19,512 to RMB 21,396 per year of service. The new average salary figure, which became effective from April 1, 2018, is also used to compute maximum and minimum bases for social insurance contributions owed by employers and employees. The current contribution bases and contribution rates for employees and employers in Shanghai are illustrated in the following chart: Pension Medical Unemployment Occupational Maternity Contribution Basis Contribution Rates Maximum Minimum Employer Employee 20% 8% 9.5% 2% 21,396 4, % 0.5% 0.2%-1.9% 0 1% 0 Shanghai minimum monthly salary increases to RMB 2,420 Shanghai increased minimum wages from April 1, 2018 with minimum monthly salaries set to hit RMB 2,420. The minimum wage for part-time workers will increase to RMB 21 per hour on that date. The previous minimums were RMB 2,300 per month and RMB 20 per hour. Beijing: Job fair organizers face greater scrutiny Organizers of job fairs in Beijing are now under additional obligations to vet employers for deceptive practices and combat discrimination as a result of a notice issued on February 11. Organizers must now review the qualifications, recruitment documents and publicity materials of employers to ensure that they are accurate and do not discriminate based on ethnicity, religion, or gender. Job fair organizers are also required to set up windows at job fairs to accept complaints from job seekers regarding deceptive or false recruitment information and discriminatory practices. Under the notice, Beijing labor inspection authorities are charged with supervising job fairs and publicizing certain information regarding the job fairs, employers, and complaint hotlines. Job fair - 6 -

7 organizers and employers who commit violations may find their records published on the website of the enterprise credit system. Job fair organizers could be prohibited from holding job fairs in the future while employers could be barred from participating in fairs. Shanghai court strikes down at-will termination of foreign national Band 1: Employment Chambers Asia Pacific Guide, 2014, 2015, 2016 & 2017 Outstanding: Labor & Employment in 2016 Asia Law Profiles, 2015, 2016, 2017, 2018 Tier 1 Law Firm for Employment in 2016 Asia Pacific Legal 500, 2015, 2016 & 2017 PRC Firm of the Year, Labor & Employment China Law & Practice Awards, 2015 Employment and Industrial Relations Law Firm of the Year China Business Law Journal, 2013, 2014 & 2015 Employment Law Firm of the Year Thomson Reuters ALB China Law Awards, 2014, 2017 Employment Firm of the Year ASIAN-MENA COUNSEL In-House Community, 2016 In a recently released court decision, the Shanghai Second Intermediate People s Court upheld a lower court ruling striking down an at-will termination clause in an employment contract of a foreign national. The decision raises further doubts about the continued viability of Shanghai s unique local practice in China that allows employers to opt out of Labor Contract Law (LCL) protections for foreign national employees by including agreed termination clauses in employment contracts. According to the decision of the intermediate court, Sofie Nilsson was employed on an open-term contract with Ruimaotong (Beijing) Consulting Co., Ltd., Shanghai Branch, which is the China affiliate of the Sweden-China Trade Council. Her employment contract provided that she could be terminated without cause with one month s notice. The company gave her notice and terminated her effective September 30, 2016 with only statutory minimum severance. After her claim for reinstatement was rejected in labor arbitration, Ms. Nilsson then sued in Huangpu District People s Court. The district court did not apply the LCL, but instead ruled that labor law does not permit employers and employees to agree on termination grounds. As a result, the at-will termination provision was found unenforceable. The company was ordered to reinstate Ms. Nilsson, but only until the October 20, 2016 expiration date of her work permit and not on the basis of her openterm contract. The judgment was upheld by the intermediate court, which did apply the LCL to the dispute, finding that (i) an at-will termination provision for foreign nationals was against a LCL principle of protecting the legal interests of employees, and (ii) the LCL gives no basis for employees and employers to agree on termination grounds. Both the district court and intermediate court failed to address the defendant company s argument that a 2006 Shanghai High Court opinion gives employers and foreign national employees the right to agree on termination grounds. The decision evidences a split in Shanghai given that the Second Intermediate People s Court tends to apply the LCL to foreign national employees and strikes down at-will termination clauses. In contrast, the First Intermediate People s Court, the jurisdiction of which includes the city districts of Pudong, Changning, Xuhui, and Minhang, generally respects the Shanghai High Court opinion and therefore allows foreign nationals and employers to opt out of the LCL and agree on termination grounds in employment contracts