TIPS FOR FOREIGN INVESTED ENTERPRISES ENTERING INTO LABOR CONTRACTS
-------X. W. Eric. Zhang

Companies from around the world come to China to establish enterprises for the purpose of selling their products in China, or taking advantage of attractive labor rates for manufacturing and assembly for re-export. In hiring personnel, there are several factors that enterprises should follow in order to help preserve the cost savings being sought by coming to China in the first place:

1. Review the Resume.

As with most companies around the world, foreign invested enterprises in China typically request a potential employee to file a resume with the company. Legally, an advertisement published by an enterprise in a newspaper or magazines can be regarded as an invitation of offer. Correspondingly then, a potential employee's application for an interview and presentation of his or her resume is also an offer. If that applicant makes false statements or misrepresentations in his or her resume, his or her offer could be considered as deceptive and he or she may be dismissed. Whether dismissed or not, the reality is that the enterprise winds up suffering a loss because they are not getting what they understood they would be paying for. Since labor quality losses are difficult to quantify, companies typically cannot make adequate claims for recovery directly from the problem employee and further, the chance of recovering funds from such an employee are slim anyway.

One step an enterprise can take when seeking potential employees is to make it clear in its regulations (and to the potential employee) that the applicant's resume is to be true and correct; and that if the important items included in the resume are not true, the employer has the right to revoke the labor contract based on the employee's breach of the company's regulations. Certainly, the enterprise should define "important items in one's resume"; the standard for this is "crucial enough to influence the decision of the enterprise on whether or not to enter into the labor contract." Doing this up front provides a firm basis severing the relationship, if needed.

2. Conduct Physical Examination.

Due to the expenses associated with physical exams, some enterprises pay little heed to this step, sometimes skipping it altogether. A physical exam, however, can be an important tool for the employer:

a. An exam helps an employer decide whether the applicant meets the health requirements for working in particular sectors. For instance, to ensure product quality and consumer health, the requirements for food manufacturing worker are rather strict. If a person is (or has) suffered disease, and such disease has not been completely cured, that person cannot be employed. Competition for good jobs is becoming more and more prevalent and many applicants conceal their negative medical histories. For this reason, a physical exam is important to protect the integrity of the product the company is putting out.

b. A physical exam also has an impact on the company's employee-compensation liability exposure. If a person suffered some sort of occupational disease prior to becoming an employee, a physical exam would show that. If the exam were not carried out and the employee is later found unhealthy, it would be more difficult to decide the actual cause of the occupational disease. The current enterprise could be held liable for economic compensation to that employee, even though it may be the case that the disease was contracted previously.

c. A physical exam helps to determine if a prior disability exists. For example, a mental patient could behave normally for a time and the enterprise would not know until an exam has been conducted. Under the legal provisions of the PRC, the enterprise can terminate the labor contract with the employee if he or she is found to be mentally imbalanced within the terms of an initial probation period. If the disease is confirmed after the probation period, the enterprise can be held responsible for that employee's medical treatment for up to 24 months.

3. Training.

In order to ensure the necessary skills of the employees, many foreign invested enterprises provide a training course. Only those passing the post-training test can be formally employed. The legal difficulty faced by the enterprise is the question of whether or not there is a contractual labor relationship between the enterprise and the person accepting the training. Many applicants who do not pass the post-training test make claims for economic compensation on the basis that the contractual labor relationship with the enterprise was already established at the commencement of the training course.

From the point of view of PRC law, a legal labor relationship is established if one party provides, and the other party accepts employment. In most cases, training courses prior to formal employment do not apply. The enterprise, however, should pay attention to the following points so as to more solidify this distinction.

a. The nature of the training must be specified in the advertisement and the training course should not be for too long a period of time;

b. The achievements of the trainee during the training course should not be sold as the product of the enterprise; and

c. The enterprise may, during the training course, pay some nominal training allowances to the trainee.

4. Confirming Whether the Employee has a Personal Labor Manual

The personal labor manual is a certificate that proves the identification of the interviewee. In principle, if a person is employed, his or her labor manual should be kept by the employer where he or she is working. If a person is unemployed, then the labor manual is kept by himself or herself.

Many foreign enterprises neglect to check the laborer's labor manual when employing staff. Also, some employees use a variety of excuses when the employers ask for their labor manual, delaying the process. This has resulted in many foreign enterprises employing staff members without labor manuals, which can be harmful to the employer. When an employee refuses to show his manual, there are a few possibilities:

1) The employee gave his labor manual to the residential district in which he lives. This is typically done to gain unemployment compensation; that worker can be so entitled because he previously took employment and salary in the unit;
2) The employee has not ended his relationship with his former employer or the former employer refuses to go through the formalities of termination. There are many possible reasons that such a prior employment relationship may not yet be formally terminated. One possibility is that the employee delayed paying for items owed to the enterprise, such as training or housing fees. Another possibility is that the former enterprise purposely delayed going through termination formalities;
3) The employee has ended his relationship with the former enterprise, but the necessary documentation has not yet been processed. Since the transition of the employee's file from the former unit to the residential district requires a certain period of time, the employee may not yet have received his labor manual. The new enterprise has the right to ask the employee for the prior job termination documentation from the former employer so as to demonstrate that he is presently unemployed. The new employer can also investigate with the employee's residential district.

If the staff member refuses to provide his labor manual and its whereabouts are unknown, the enterprise can turn down the engagement or end the labor relationship even if it has employed the employee for a time.

5. Signing the Labor Contract

Having been interviewed and having gone through all associated employment-related formalities, the interviewee will sign a written labor contract with the enterprise. This sets forth and confirms the terms of the parties' labor relationship. The labor contract can be for a fixed period or an unfixed period. For a fixed period contract, the parties can work out the termination conditions of the contract.

Many enterprises sign a probationary period contract before they sign a formal labor contract, which is not a proper practice. According to PRC regulation, contracts with probationary periods will be regarded as formal contracts. Thus, under PRC regulation, the two sides have not actually agreed to a formal probationary period because it is not enforceable. Rather, they have entered into a regular employment contract for whatever period the agreement stated. The correct method of achieving that is for the two sides to agree on a trial period within the formal labor contract. Of course, the length of the trial period should be set according to the applicable law and regulations.

6. The Place where the Contract is Signed

Labor contracts should be signed at the office of the enterprise and be signed by the employee then and there. This is to avoid later dispute. I have come across such disputes before: An employee and his employer wound up in a court. When the employer produced the labor contract signed by the two parties, the employee denied that it was he that signed the contract. The employer firmly believed that the employee had done so and demanded a signature test, to which the employee agreed. After the case's conclusion, the personnel management recalled that the employee had not signed then and there, but rather had brought the contract back to sign. The employee found there were some terms in the contract that he did not consider favorable, but was concerned that he would lose the job if he didn't complete the contract. Therefore, he had someone else sign it so that he could still get the job but have the ability to claim it was not him if he needed to. Although somewhat unusual, employers should be mindful of such practices and insist that the contract be signed on-site.

There are still many potential pitfalls involving labor contracts, so many that the constraints of this article cannot address them all. I do hope that the above pointers can be of benefit to foreign enterprises in handling their employment matters.