Mastering HR compliance in China: essential insights for European businesses

Every European company operating in China hopes to have a successful and profitable business, yet many overlook the vital role of human resource compliance. Robust human resources (HR) compliance not only helps mitigate legal risks, fosters a positive workplace culture, and enhances employee morale and retention, but also safeguards a company’s reputation and operational stability in the competitive China market. This article covers frequently asked questions and emerging challenges in Chinese employment law to help your business thrive.

Anti-discrimination

As a general principle scattered across various pieces of legislation, employers must provide equal employment opportunities to all employees and applicants without regard to nationality, race, religion, gender or any other prohibited characteristic. Employment contracts cannot include restrictions on marriage or pregnancy for female employees. Additionally, discrimination against individuals with infectious diseases is prohibited, although those infected cannot work in specific high-risk occupations.

Furthermore, gender discrimination against female candidates during recruitment is also illegal. Employers cannot ask female candidates about their marital status or circumstances relating to childbirth or children during job interviews, and pregnancy tests are prohibited in pre-employment medical checks.[1]

Unlike the European Union's (EU’s) Artificial Intelligence (AI) Act, China does not have a law restricting the use of AI in recruitment and HR management. However, employers must still comply with anti-discrimination requirements when using AI tools.

Protection for female employees

In addition to the anti-discrimination requirements mentioned above, the law has established certain specific safeguards for female employees. For instance, employers are not permitted to reduce their salaries and benefits, restrict promotions, stop them from obtaining professional and technical titles or dismiss them due to marriage, pregnancy, maternity leave or breastfeeding. If a female employee's contract expires while she is pregnant, on maternity leave, or within the breastfeeding period (up to a child's first birthday), the contract must be extended until these circumstances end.

Workplace sexual harassment remains a hot-button issue in China, much like in Western countries, arousing public anger from time to time. To mitigate the risk of incidents in the workplace, the law places a variety of requirements on businesses, including formulating rules and policies against sexual harassment, carrying out education and training on prevention and stopping sexual harassment, and setting up formal complaint mechanisms for employees.[2]

Expatriates

A foreign employee needs a valid work permit to work for the company that sponsors their permit. Whether they are seconded to work in the host company in the PRC or hired directly by a PRC employer, they must get a work permit before starting work and a residence permit to reside legally in the PRC.

Data protection

Employers have the right to obtain from an employee the basic information which is directly relevant to the employment contract and must keep employees’ personal information confidential. 

The Personal Information Protection Law, which took effect on 1^st November 2021, has enhanced the protection of personal information. Obtaining consent remains central to processing employees’ personal information legally, while additional consent from individuals is required under certain circumstances, including for processing sensitive personal information.

Intra-group transfers of employee data is a common data export scenario for multinational corporations, which typically leverage global systems to manage employee data. EU businesses may seek to explore the HR management exemption under existing data protection legislation to export data. To satisfy the exemption, the onshore companies must implement relevant labour rules or collective agreements legally and demonstrate a ‘genuine need’ to export the employee data.

As part of best market practice, employers implement privacy notices or policies to inform employees about how their personal information will be collected and processed as well as their rights.

Labour unions

In China, labour unions help keep businesses stable and promote their healthy development. Unlike in many Western countries, they rarely oppose management’s goals or decisions. Employees have the right to form a union and are encouraged to do so, though by law an employer is not obligated to create one. 

Employees are free to become members of labour unions. Once a labour union is set up, the employing entity is required to allocate funds to the union, while union members are required to pay membership fees.[3]

Salaries

Generally, an employer cannot unilaterally change the terms of employment, including an employee’s remuneration. By law, any salary amendment must be in writing and signed by both parties. In practice, an employee is unlikely to challenge a salary increase, while a reduction is more contentious. The most prudent approach is to obtain the employee’s consent to any pay cut.

An employment contract may include provisions allowing for pre-consent to salary changes. These provisions can be challenged and are subject to review by labour arbitration tribunals and courts on a case-by-case basis.

Some courts hold that businesses facing economic challenges, such as those caused by Covid-19, may reduce employees’ salaries if a collective consultation is conducted. However, caution is advised, as reductions are not justified without an imminent need to lower costs. While collective consultation is necessary, this approach to salary adjustment is not universally recognised and remains to be tested.

Social insurance and housing fund schemes

China’s mandatory social insurance (SI) regime, which is a defined contribution scheme, combines the funds of four distinct types of insurance: basic pension, basic medical insurance, work-related injury insurance, and unemployment insurance. Furthermore, it is also an employer’s statutory obligation to make housing fund (HF) contributions for its employees. The contribution of both schemes consist of respective portions of both employers and employees. Below, we introduce two compliance issues related to SI and HF contributions commonly seen in practice. 

Bases of contributions: Subject to local regulations, contributions of SI and HF should be based on the employee’s actual average salary from the previous calendar year (Contribution Bases) to be multiplied by prescribed rates, subject to minimum and maximum thresholds set by local authorities. The employees’ monthly basic salary, bonuses, overtime pay, subsidy, allowance and other compensation should be considered when calculating the Contribution Bases. In practice, some businesses use in amounts (such as the employees’ monthly base salary or local minimum wage) as the Contribution Bases, causing a shortfall in contributions. If this happens, the employer may be required to make up the difference and pay surcharge for late payments. In severe cases, the employer could face a fine ranging from one to three times the overdue payments.

Locations of contributions: The law requires employers to make SI and HF contributions at their place of incorporation. However, in practice, it is not uncommon for employers to engage third-party agencies to make these contributions in the cities where employees are based. This allows employees to enjoy local insurance benefits. However, such employers might be seen by local authorities at the place of incorporation as not making the required contributions, which can lead to the sanctions specified above. Local regulators have been addressing this issue, and different regulators might take different approaches, gradually increasing enforcement to ensure compliance in the contributions. To mitigate risks, it would be prudent for businesses to set up local entities such as branch offices, to hire these employees and make the contributions for employees locally.

Termination of employment

China’s employment law is employee-friendly regarding termination. Employers cannot terminate contracts at will and must rely on grounds specified in China’s Employment Contract Law.[4] Employees are entitled to statutory severance in certain scenarios, such as performance issues or mass layoffs, but not in others (such as serious breaches of internal policies). Statutory severance is generally calculated as one month's average salary for each year of service.

Different grounds for termination are closely linked with specific procedural requirements, timelines, and costs. Without basing the case on statutory grounds and meeting the relevant statutory requirements, terminations are likely to be deemed wrongful, potentially leading to double severance payments or employment reinstatement (the latter being worse for employers). In labour dispute cases relating to an employer’s unilateral termination of employment, the employer bears the burden of proof to justify the termination.

Given the risks of wrongful termination, employers often pursue mutual agreements, offering severance packages higher than the statutory amount to incentivise employees to release potential claims.

Businesses are recommended to exercise caution when implementing unilateral termination against their employees. European businesses operating in China should ensure the following safeguards are in place:

• Maintain robust management systems (such as performance management monitoring and internal disciplinary investigation mechanisms), which could help document and address issues systematically.
• Be mindful of regulatory and legal requirements (if any) during in-house investigations (as appropriate) and consult specialist teams at an early stage.
• Review relevant legal requirements from both substantive and procedural perspectives before creating an action plan.
• Collect, secure and review all relevant evidence before making a decision on termination, and ensure that evidence will be admissible in a labour arbitration tribunal or court hearing.
• Explore alternative solutions such as mutual separation agreements or encouraging the employee to resign voluntarily, which will be more amicable and less legally contentious than unilateral termination.
• Consult with in-house or external legal counsel and seek legal advice before making a decision.

Increase in statutory retirement age

On 13^th September 2024, the Standing Committee of the National People’s Congress announced its decision to gradually increase the statutory retirement age for employees in China, effective from 1^st January 2025. Over 15 years (from January 2025 to December 2039), the statutory retirement age will gradually increase from 60 to 63 years for male employees and from 50 or 55 to 55 or 58 years for female employees, depending on their roles. Employers are advised to bear in mind this legal development and improve the management of employees approaching retirement age.[5] See our latest publication introducing the key aspects of this new policy and its impact on businesses.
 

Footnotes

[1] In 2013, a woman in China sued a major education and training company, alleging that their job advertisement was discriminatory as it specified the position was open to "males only". This case, which ended in a settlement, was hailed as China's first gender discrimination lawsuit.

Gender discrimination cases have continued since then. In March 2024, the Suzhou Intermediate People's Court published a collection of labour dispute cases heard between 2018 and 2023, all involving female employees claiming their rights had been violated. In one notable case, a female employee was terminated during her probationary period after becoming pregnant. Her employer cited her inability to "travel for business" and being "not competent for high-intensity work" as reasons for her dismissal. The court ultimately ruled in her favour, supporting her claim for reinstatement.

[2] In 2022, the Supreme People’s Court released a set of cases for lower courts’ reference. One case indicates that the Supreme People’s Court has supported an employer’s termination of employment of a senior manager who had failed to properly address sexual harassment in the workspace. It commented that managerial personnel must take reasonable measures to address employee complaints of sexual harassment. If they fail to do so, condone harassment, or interfere with investigations, the employer can terminate their employment for not fulfilling job responsibilities and violating regulations. Claims by managerial personnel that such terminations are unlawful will not be supported by any court.

[3] The employing entity is required to allocate an amount equal to 2 per cent of the total wages of all employees to the union fund. In contrast, employees who are members of the union are required to pay their membership fees, which should be 0.5 per cent of their respective monthly salary.

[4] The Employment Contract Law provides a variety of grounds for employers to unilaterally terminate employees. Termination with cause includes serious violations of internal rules, dereliction of duty or embezzlement causing severe losses to an employer, or incompetence. Additionally, the law allows redundancy of a large number of employees (more than 20 or over 10 per cent of the workforce) at once.

[5] By law, employment contracts expire when employees reach the statutory retirement age, which is a common statutory ground for termination. With the increase in statutory retirement age, and notably, due to individuals having different dates of birth and therefore different retirement ages, it will add to the administrative burden on employers' HR management regarding retirement and termination.