JC Master Special Feature | 23 Common Risks in Corporate Employment and Compliance Management [Summary]

23 Common Risks in Corporate Employment and Compliance Management [Summary]

Compliance in labor and employment is increasingly becoming a critical component of corporate compliance frameworks; however, in practice, this area often remains a weak link. As corporate growth is inextricably tied to talent, legal risks related to labor and employment pose challenges for businesses of all types and sizes. Moreover, these compliance risks permeate every stage of business operations: from recruitment and hiring, working hours, payroll disbursement, and day-to-day management, to the termination of employment contracts—each step carries the potential for risk.
At present, the labor‑employment sector is rife with acute conflicts and recurring problems. Some enterprises, facing operational and financial difficulties, resort to wage cuts and layoffs to reduce costs and boost efficiency; others employ labor dispatch, business outsourcing, and flexible‑work platforms to “de‑relate” their employment relationships. Though pursued through different means, these practices all aim to lower labor costs and mitigate legal risks—yet they also pose significant challenges to compliant labor‑management. Accordingly, fostering a culture of compliance, implementing a robust labor‑compliance management system, and establishing a well‑defined, practical, and risk‑controlled framework are essential to ensuring the long-term sustainability of any enterprise.
This article aims to comprehensively identify common legal risks in corporate employment practices and, in conjunction with relevant laws and regulations, offers compliance‑related remediation recommendations for reference only.
01 Risk Point One: Content of Job Advertisements
Recruitment is the first stage in managing an enterprise’s labor‑employment risks. Companies typically place job advertisements in newspapers, on websites, via WeChat official accounts, or through recruitment apps. Such advertisements usually specify requirements and constraints regarding work location, salary and benefits, educational qualifications, age, work experience, and relevant skills and competencies. To mitigate the legal risks associated with job postings, employers should pay close attention to the following considerations when publishing recruitment ads:
(1) Posting false job advertisements
When posting job advertisements, employers must ensure the accuracy and authenticity of information regarding the position, hiring requirements, and compensation and benefits. If false information is provided and a worker enters into an employment contract with the employer based on such misrepresentation, the worker may argue that the contract is void due to the employer’s fraud, seek to terminate the contract, and demand economic compensation from the employer.
(II) Employment Discrimination
Nowadays, it is quite rare for job postings to explicitly specify a preference for male applicants. Nevertheless, many employers still conduct detailed inquiries during interviews—asking about candidates’ romantic relationships, marital and childbearing status, and their ability to balance work and family life. If they determine that a female candidate may become pregnant in the near future or may be unable to devote herself fully to her duties, they often resort to other pretexts to politely decline her application. Such practices constitute gender discrimination.
China’s Employment Promotion Law, the Law on the Prevention and Control of Infectious Diseases, and the Regulations on the Prevention and Treatment of AIDS all stipulate that, except in certain specialized sectors such as catering, food processing, and education, employers may not refuse to hire individuals on the grounds of their status as carriers of the hepatitis B virus or the HIV virus. Should an employer engage in such practices, it may be deemed to constitute employment discrimination.
(3) The recruitment announcement did not specify the hiring criteria.
If an employee is found during the probationary period to fail to meet the hiring criteria, the employer may terminate the employment contract immediately. Clearly defined hiring criteria are a prerequisite for an employer to lawfully exercise its right to terminate the employment contract.
(4) Related Regulations
Article 39 of the Labor Contract Law;
Articles 3, 27, and 29 of the Employment Promotion Law;
Articles 14, 16–20 of the Regulations on Employment Services and Employment Management;
Articles 24 and 38 of the Interim Regulations on the Human Resources Market.
(5) Risk Prevention Recommendations
1. Employers shall ensure the authenticity of their recruitment information. 2. Recruitment advertisements must refrain from including any content related to employment discrimination, such as unreasonable restrictions based on “gender, marital status, ethnicity, household registration, or health condition.” 3. The “employment requirements” must be clearly defined and specific. For each position, the employment requirements shall be disclosed to job applicants in advance, and relevant evidence must be retained.
02 Risk Point Two: Onboarding Screening and Personnel File Management
The Labor Contract Law explicitly grants employers the right to be informed of employees’ basic information directly relevant to their employment contracts. Employers should exercise this right diligently by conducting thorough pre‑employment background checks and maintaining proper personnel records. This not only helps standardize an employer’s labor management practices but, more importantly, ensures that evidence is preserved in case of future labor disputes.
(1) Failure to conduct a thorough review of the application materials.
Enterprises should collect and review applicants’ information to prevent risks associated with employing child laborers, hiring workers who have not yet terminated or whose employment contracts with other employers remain in effect, or assigning personnel to positions for which they are unsuitable. If an interviewee uses fraudulent means or conceals criminal facts, the consequences may range from rendering the employment contract void to exposing the enterprise to legal liability.
(2) Employee files have not been established.
Once a hiring decision is made, the employer should establish and maintain comprehensive records of the employee’s application materials and post‑onboarding documentation to prevent potential disputes. For example, even if an employer determines during the probationary period that an employee does not meet the hiring criteria, it must still provide evidence to substantiate this determination. The employer should collect and systematically organize relevant documents, including personal information, the employment contract, non‑compete agreements, training records, records of rewards and disciplinary actions, payroll records, and time‑keeping data.
(3) Relevant Statutory Provisions
Article 15 of the Labor Law;
Article 39 of the Labor Contract Law;
Article 91 of the Labor Contract Law provides: “If an employer hires a worker who has not yet had their labor contract terminated or dissolved with another employer, and such hiring causes losses to the other employer, the hiring employer shall bear joint and several liability for compensation.”
(IV) Risk Prevention Recommendations
1. Employees are required to complete an onboarding registration form, which should include a clause stating that the employee warrants the accuracy of all information provided and assumes full responsibility for any falsification, with the company bearing no liability. The documents to be collected from applicants should also comprise: a personal resume, the onboarding registration form, a certificate of termination of previous employment, documentation related to the five social insurances and one housing fund, proof of educational qualifications, a medical examination report, background check results, and a criminal record clearance. To prevent the labor relationship from being deemed invalid or terminated due to an improper contracting party, applicants must further certify that they have not been subject to any criminal penalties imposing professional restrictions, have not entered into confidentiality or non‑compete agreements with other employers, and that they are not foreign nationals lacking work authorization. 2. Applicants must provide proof of the termination or dissolution of their employment contract with their previous employer, retaining the original document. In exceptional circumstances where the employment contract has not yet been terminated, a letter of consent to hire from the former employer must be presented. 3. Establish employee files and systematically organize and maintain records of each employee’s personal information during their tenure.
03 Risk Point Three: Conclusion of Labor Contracts
(1) Failure to sign a written employment contract in a timely manner
In practice, double wages for failure to conclude a written employment contract is one of the most common claims made by employees in arbitration. Employers are required to enter into a written contract within one month from the date of actual employment; otherwise, they must pay the employee double wages starting from the second month. At the same time, employers should take steps to prevent situations where employees deliberately refuse or unduly delay signing the employment contract. To this end, they may collect and preserve evidence of such malicious refusals, thereby safeguarding against potential labor arbitration proceedings. Furthermore, employers should recognize that an offer letter, a separate probationary‑period agreement, or a collective bargaining agreement cannot substitute for a formal employment contract.
(2) The method of execution is unlawful.
In practice, where a minority of employers, by means of fraud or coercion, or by taking advantage of another’s vulnerable situation, induce employees to enter into labor contracts against their true intentions, or where such contracts exempt the employer from statutory liabilities or deprive employees of their rights, those contracts may be deemed partially or wholly invalid.
Employers shall prohibit the practice of having another person sign a labor contract on their behalf and should, to the extent possible, avoid retroactive or subsequent signing of such contracts. The validity of a labor contract signed by another person depends on whether the employee has granted authorization or subsequently ratified it; if the employee has neither authorized nor ratified the signature, the employer must pay the employee twice the wage for the period during which no written labor contract was in place.
(3) Imperfect terms in the labor contract
Article 17 of the Labor Contract Law stipulates that a labor contract shall include the following clauses: (1) the name, domicile, and legal representative or principal person in charge of the employer; (2) the worker’s name, domicile, and the number of the resident identity card or other valid identification document; (3) the term of the labor contract; (4) the job content and work location; (5) working hours, rest, and leave; (6) remuneration; (7) social insurance; (8) labor protection, working conditions, and occupational hazard prevention; (9) other matters that laws and regulations require to be included in the labor contract. In addition to the mandatory clauses specified above, employers and employees may agree on other matters such as a probationary period, training, confidentiality obligations, supplementary insurance, and welfare benefits.
When entering into an employment contract, employers must ensure that all statutory provisions are fully in place and carefully specify key terms—such as remuneration, work location, and job position—leaving no room for ambiguity or negotiation. If the contract contains any additions, deletions, or alterations, the employer shall require the employee to conoffice such changes. In addition to verifying the completeness of the contract terms, employers must also conduct a legality review. Article 26 of the Labor Contract Law stipulates that any labor contract that exempts the employer from legal liability or deprives the employee of their rights is invalid, or partially invalid.
(4) Related Regulations
Article 82 of the Labor Contract Law;
Article 62 of the Regulations on Employment Services and Employment Management.
(5) Risk Prevention Recommendations
1. Promptly conclude a written employment contract with the employee. 2. If an employee refuses to sign the contract, relevant evidence may be preserved; furthermore, at the time of hiring, it should be explicitly stipulated that applicants who decline to sign will not be hired. 3. When an employer hires an employee, it shall complete registration procedures and file with the local public employment service agency within 30 days from the date of hire. 4. In accordance with the provisions of the Labor Contract Law, all terms of the labor contract must be fully set forth, and additional clarity and strengthening are required regarding restrictions on the conditions for terminating or ending the labor contract, as well as the legal liabilities for unlawful termination of such contracts.
04 Risk Point Four: The Duration and Amendment of the Probationary Period
Among the circumstances under which an employer may terminate an employee, dismissal during the probationary period is relatively common. The Labor Contract Law stipulates that an employer may only terminate a labor contract if it can demonstrate, during the probationary period, that the employee does not meet the hiring criteria. The law imposes specific rules and requirements for terminating employees during the probationary period; however, due to the widespread misconception that employers may terminate at will during this phase, the number of labor disputes in which employers lose on the grounds of unlawful termination during the probationary period continues to rise in practice.
(1) A probationary period that violates the agreed terms
If the probationary period agreed upon in violation of the provisions of the Labor Contract Law, it specifically includes the following three scenarios:
(1) Failing to stipulate a probationary period in accordance with the law, or arbitrarily altering or extending the probationary period during its term without any legitimate reason. The Labor Contract Law sets clear limits on the duration of the probationary period; employers must agree to such a period within the legally prescribed timeframe, and any extension beyond that limit is invalid. If a labor contract only specifies a probationary period, that period shall not be deemed valid, and the entire term of the contract shall be regarded as the employment contract’s duration. (2) Agreeing to more than one probationary period with the same employee. (3) Entering into a separate probationary‑period contract during the probationary phase and deferring the decision on whether to formally hire the employee until after the probationary period has expired.
(II) Risk Prevention Recommendations
1. The probation period shall be strictly in accordance with the statutory provisions. 2. Upon expiration of the agreed probation period, the employee shall be deemed to have passed the probation and shall be entitled to the same benefits as regular employees. If, during the agreed probation period, the employee’s sick leave prevents the employer from conducting a substantive evaluation, the probation period may, as mutually agreed, be extended. 3. Where an employee is reassigned to a different position, a new probation period may not be stipulated. To assess whether the employee can perform the duties of the new role, the employer may enter into a “Probationary Period Agreement” with the employee.
05 Risk Point Five: Payment of Wages During the Probationary Period
(1) Salary Standards During the Probationary Period
According to the Regulations for the Implementation of the Labor Contract Law, where the place of performance of the labor contract differs from the employer’s registered location, the minimum wage shall be determined in accordance with the relevant provisions applicable at the place of performance. If the standards in the employer’s registered location are higher than those at the place of performance, and the employer and the employee have agreed to apply the standards of the employer’s registered location, then the standards of the employer’s registered location shall prevail.
(II) Risk Prevention Recommendations
During the probationary period, wages shall be set in accordance with two minimum requirements: they must not be lower than the local minimum wage standard; and they must not be lower than the lowest‑grade salary for the same position at the employer’s establishment, or 80 percent of the aforementioned minimum wage.
06 Risk Point Six: Benefits and Compensation During the Probationary Period
From the date of employment, a labor relationship is established between the employee and the employer, and the employee is entitled to all rights prescribed by law. The employer is obligated to fulfill all duties in accordance with statutory requirements and the terms of the employment contract, and this obligation remains unchanged regardless of whether the employee is on probation. Accordingly, except that the wage rate during the probationary period may, within the limits set by law, differ from that of a regular employee, employers must treat probationary employees no differently than regular employees in all other respects, safeguarding their relevant rights and interests, including making social insurance contributions and providing other benefits.
07 Risk Point Seven: Handling Upon Expiration of the Probationary Period
(1) Lawful termination during the probationary period
In practice, some employers and employees agree to a probationary period orally, without putting it in writing. This creates two problems: first, it is difficult to prove the duration of the probationary period; second, it is hard to establish clear hiring criteria. Even when an employee does not meet the conditions for employment, the employer must still bear the burden of proof. In practice, this typically hinges on two factors: whether the employer has clearly defined the job duties and requirements for the position, and whether the employer has maintained objective records and evaluations of the employee’s performance during the probationary period.
(II) Related Regulations
Article 70 of the Labor Contract Law stipulates that parties to a part-time employment relationship may not agree on a probationary period; Article 69 provides that parties to a part-time employment relationship may enter into a verbal agreement.
Article 39, Paragraph 1: Where a worker falls under any of the following circumstances, the employer may terminate the labor contract: (1) During the probationary period, it is proven that the worker does not meet the hiring criteria…
(III) Risk Prevention Recommendations
1. Any agreement regarding the probationary period must be in writing. 2. Strengthen performance evaluations during the probationary period; if an employee fails to meet the job requirements, gather and preserve evidence and, where appropriate, terminate their employment to avoid unnecessary labor disputes. 3. Before the probationary period expires, the employer must promptly communicate its intention to terminate the employment contract to avoid unlawful termination. 4. Employers must strictly adhere to statutory provisions when setting the probationary period and may not arbitrarily alter or extend its duration without just cause.
In summary, once the probationary period has expired, for an employer to terminate a labor contract, it must satisfy the following requirements: a valid probationary‑period clause; clearly defined hiring criteria; established facts and evidence demonstrating that the employee does not meet those criteria; and compliance with the prescribed termination procedures. Failure to meet these conditions may result in the termination being deemed unlawful.
08 Risk Point Eight: Renewal of Employment Contracts
(1) Failure to renew labor contracts in a timely manner
Regardless of the underlying reason, if a labor contract expires and the renewal or termination procedures are not promptly completed, there is a heightened risk of establishing a de facto employment relationship. Once such a relationship arises, the employer will face greater legal risks when seeking to terminate it. Moreover, if the contract is not renewed upon its expiration, the employer may be required to pay compensation to the employee.
(II) Related Regulations
Article 14 of the Labor Contract Law defines an open-ended labor contract as a labor contract in which the employer and the employee agree on no fixed termination date. With mutual consent, the employer and the employee may enter into an open-ended labor contract. Where any of the following circumstances exists, and the employee requests or agrees to renew or conclude a labor contract, an open-ended labor contract shall be concluded unless the employee expressly requests a fixed-term labor contract: (1) the employee has worked continuously for the same employer for ten full years; (2) when the employer first implements the labor contract system or when a state-owned enterprise undergoes restructuring and re‑enters into labor contracts, the employee has worked continuously for the same employer for ten full years and is less than ten years away from the statutory retirement age; (3) the employee has consecutively entered into two fixed-term labor contracts, and there are no circumstances specified in Article 39 or in Paragraphs 1 and 2 of Article 40 of this Law. If, from the date employment commences, the employer fails to conclude a written labor contract with the employee within one year, it shall be deemed that the employer and the employee have concluded an open-ended labor contract.
(III) Risk Prevention Recommendations
1. Compile information on employees whose contracts are due for renewal, promptly prepare a list of those eligible to renew their labor contracts, and communicate with them one month in advance regarding their intention to renew. 2. Conoffice well in advance whether the employer and the employee wish to renew: if the employer agrees but the employee does not, the company will have sufficient time to recruit a suitable replacement; if the employee agrees, the employer can proceed with drafting the new labor contract; if the employer disagrees but the employee does, this situation may involve issues related to economic compensation—recommended preparation of relevant documentation and arrangements for renewal one month ahead of time; if both the employer and the employee agree, the contract can be prepared accordingly; if neither party agrees, the employment relationship should be terminated through mutual consultation. 3. After a labor contract expires, if, due to reasons attributable to the employer, no formal termination or renewal procedures are completed and the employee continues to work for the same employer, thereby establishing a de facto employment relationship, such arrangement shall be deemed as continued performance of the original labor contract. The employer is required to pay the employee double wages starting from the second month. Therefore, it is essential to maintain proper records and documentation of contract signings, ensuring that expiring contracts are renewed promptly.
09 Risk Point Nine: Delivery and Amendment of Employment Contracts
(1) The labor contract has not been delivered to the employee.
Unlike ordinary civil and commercial contracts, the law imposes mandatory formal requirements on labor contracts. The Labor Contract Law stipulates that both the employer and the employee must conclude and amend labor contracts in writing. The process of concluding a labor contract encompasses not only the mutual agreement and the signing of the contract document but also the delivery of the contract to the employee.
(2) Amendment of the Labor Contract
Changes to an employment contract may be categorized as either changes to the parties to the contract or changes to its terms. Since changes to the contracting parties do not entail employment‑related risks, this discussion focuses on modifications to the contract’s content. An employer is entitled, pursuant to its internal labor rules or any written agreement between the parties, to adjust an employee’s job duties and remuneration. However, the risk lies in the fact that, should a dispute arise, the employer bears the burden of proving both the legality and reasonableness of such adjustments. Accordingly, the preferred approach for amending contractual terms is to reach a mutually agreed‑upon modification with the employee; if no agreement can be reached, Article 40 of the Labor Contract Law provides that, when an employee falls under any of the following circumstances, the employer may “proactively” modify the employment contract: (1) the employee is ill or suffers a non‑work‑related injury and, upon expiration of the prescribed medical period, is unable to perform their original job, in which case the employer may assign alternative work; (2) the employee is unable to fulfill the requirements of their current position, in which case the employer may reassign them to a different role; (3) significant changes occur in the objective circumstances upon which the contract was based, rendering performance of the contract impossible, provided that, after consultation between the employer and the employee, they have reached an agreement on modifying the contract’s terms.
(3) Related Regulations
Article 16 of the Labor Contract Law: A labor contract shall become effective upon mutual agreement between the employer and the employee, and upon the signature or seal of both parties on the text of the labor contract. Each party—the employer and the employee—shall retain one copy of the labor contract.
Article 35 of the Labor Contract Law: With mutual consent, the employer and the employee may amend the terms stipulated in the labor contract. Any amendment to the labor contract shall be made in writing. Upon amendment, both the employer and the employee shall each hold one copy of the revised labor contract.
(IV) Risk Prevention Recommendations
1. To mitigate the legal risks associated with invalid changes, it is recommended that employers adopt the following measures to ensure proper management:
(1) After the parties have reached agreement through communication on amending the labor contract, they should, to the extent possible, document the terms of the amendment in writing and properly preserve relevant evidence, such as a written amendment to the labor contract signed by both parties or a conofficeation letter signed by the employee acknowledging the changes to salary, position, working hours, or work location. (2) If, for various reasons, a written amendment cannot be executed, the parties should carefully retain records of their communications, promptly conoffice with the employee at an appropriate time that the amendment has been mutually agreed upon, and preserve evidence demonstrating that the employee has, over an extended period, performed the duties under the amended terms without raising any objections.
2. For an employer to ensure the legality of unilateral job reassignment, it must meet the following conditions:
(1) If the labor contract explicitly stipulates that the employer has the unilateral right to reassign an employee’s position based on business needs, adopting a boilerplate provision such as “the employer and the employee may, by mutual agreement, amend the terms of the labor contract” could leave the employer in a vulnerable position. (2) The employer’s internal rules and regulations should clearly set forth the legal consequences for employees who refuse to comply with a reasonable reassignment, ensuring that such matters are handled in accordance with those rules. (3) Prior to implementing a reassignment, the employer must, in compliance with the law, communicate with the employee and provide adequate notice regarding the reasons for the reassignment and any other relevant working conditions thereafter, thereby safeguarding the employee’s right to information. (4) The reassignment must be necessary—e.g., when changes occur in the company’s organizational structure, scope of business, or geographic operating area, rendering the original position redundant—reasonable—e.g., without adversely altering key employment terms such as job duties, workload, or remuneration—and legitimate—i.e., not motivated by malice toward a specific employee or by a disguised attempt to terminate employment. If the employer targets an individual employee or seeks to use reassignment as a pretext for dismissal, such action would lack legitimacy.
10 Risk Point Ten: Termination of the Employment Contract
(1) Risk of Contract Termination
Several key legal points that businesses must know:
1. Employees have the right to terminate their employment contracts at any time, without needing to provide any reason, by giving thirty days’ notice. However, if the employer has previously engaged in unlawful conduct, the employee may be entitled to economic compensation or even damages.
2. An employee’s unauthorized departure cannot be automatically deemed “voluntary resignation.” Since the termination of an employment relationship requires a formal declaration by the party concerned, an employee’s absence without submitting a resignation letter constitutes mere absenteeism and does not amount to “having already tendered resignation.” The employer may notify the employee to return to work through various means, such as registered mail, email, or text message, and may impose disciplinary measures up to and including termination of the employment contract.
3. When an employer terminates an employee’s employment on the grounds of fault, it is not required to provide advance notice or pay an additional month’s salary; however, if the employer effectuates a termination without fault, it must either give the employee 30 days’ written notice in advance or pay an additional month’s salary in lieu of such 30-day notice.
4. In cases of termination by mutual agreement, if the agreement does not specify which party initiated the negotiation to terminate the contract, economic compensation may still be claimed after the agreement is signed.
5. “Termination for serious violation of company rules and regulations” is a commonly invoked ground by employers when terminating employment contracts. To invoke this basis, the following conditions must be met: (1) the democratic and public notice procedures governing the rules and regulations are lawful and valid; (2) the content of the rules and regulations is lawful and reasonable; (3) the employer has evidence demonstrating that the employee has engaged in a serious breach of such rules and regulations; (4) the termination procedure complies with applicable legal requirements; and (5) the notice of termination has been duly served, supported by appropriate evidence. Where an employee’s conduct constitutes a serious violation of company policies warranting termination, the employer may also encourage the employee to resign voluntarily.
(II) Risk Prevention Recommendations
1. When resigning or leaving a job, be sure to retain written documentation. 2. Before terminating an employee, the reasons for resignation should be carefully reviewed; such reasons must stem from the employee’s personal circumstances, not from the employer’s actions, as failure to meet this requirement may trigger the obligation to pay economic compensation. 3. If the parties agree to terminate the employment relationship through mutual consultation, the termination agreement must clearly specify which party initiated the termination. 4. When dismissing an employee for serious violations of company policies, employers must satisfy numerous legal requirements and bear significant evidentiary burdens. To avoid disputes, employers may encourage employees to resign voluntarily. To safeguard against situations where the employee refuses to resign on their own, employers should also gather evidence demonstrating the employee’s severe breaches of company rules and regulations.
11 Risk Point Eleven: Failure to enter into a non‑compete agreement in a timely manner, or overly broad scope of the parties involved.
The law does not specify a particular time for entering into non‑compete agreements. In practice, employers often assume that the non‑compete obligation only arises upon termination of the employment contract and thus tend to wait until an employee leaves before executing such an agreement. However, the non‑compete obligation is not a statutory duty; if the employer and the employee have not reached a prior agreement, there are no effective mechanisms to enforce compliance when the employee refuses to sign.
Furthermore, the Labor Contract Law explicitly stipulates that non‑compete restrictions apply only to a company’s senior management, senior technical personnel, and other individuals who are bound by confidentiality obligations. Moreover, such restrictions extend solely to employees under standard employment contracts and do not apply to workers in other forms of employment.
[Risk Mitigation Recommendations] It is recommended that, upon onboarding, employees be facilitated in signing non‑compete agreements. Since compensation must be paid for non‑compete obligations, the scope of the restriction should be determined in accordance with applicable legal provisions.
12 Risk Point Twelve: The non-compete agreement does not provide for compensation.
Upon termination or dissolution of the labor contract, the employer shall provide the employee with monthly economic compensation during the non‑competition period. The amount of such compensation shall be agreed upon by the employer and the employee, but it may not fall below the local minimum average wage; otherwise, the agreement may be deemed invalid.
Where the non‑competition agreement does not expressly provide for economic compensation, in accordance with Article 36 of the Interpretation (I) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, if the parties have stipulated a non‑competition obligation in the labor contract or a confidentiality agreement but have failed to agree on economic compensation upon termination or dissolution of the labor contract, and the employee has fulfilled the non‑competition obligation, the people’s court shall support the employee’s claim that the employer pay monthly economic compensation equal to 30% of the employee’s average monthly wage over the twelve months preceding the termination or dissolution of the labor contract. If the 30% of the monthly average wage specified in the preceding paragraph is lower than the local minimum wage standard where the labor contract is performed, such compensation shall be paid at the level of the local minimum wage standard.
If the employer fails to stipulate economic compensation in the non‑competition agreement, it shall directly pay the employee the statutory amount of such compensation.
13 Risk Point No. 13: Payment of Non-Compete Compensation
Under the Labor Contract Law, the obligation of non‑competition applies after the termination or dissolution of the labor contract; accordingly, the employer’s payment of non‑competition compensation should also commence following such termination. In practice, employers should avoid the following situations:
(1) If an employer and an employee agree to pay monthly economic compensation for non‑competition obligations during the term of employment, such payments will be deemed part of the employee’s wages. This is because the Labor Contract Law explicitly stipulates that non‑competition compensation is payable on a monthly basis after the labor contract has been terminated or ended, and throughout the duration of the non‑competition restriction. (2) “Non‑competition economic compensation” and “confidentiality fees” should not be equated.
It is a statutory obligation of employees to safeguard the company’s trade secrets, while non‑compete restrictions are obligations agreed upon between employers and employees. In practice, non‑compete clauses restrict employees’ right to seek employment and may impinge upon their right to subsistence; therefore, such restrictions may only be established through a written agreement. Accordingly, in real‑world application, both employers and employees should strictly adhere to the concept of non‑compete compensation and refrain from substituting it arbitrarily, so as to avoid adverse consequences.
[Risk Mitigation Recommendations] Upon onboarding, require employees to sign a non‑compete agreement that clearly specifies the payment schedule and form of non‑compete compensation, and includes provisions to prevent employees from deliberately refusing to accept such compensation.
14 Risk Point 14: Unclear Scope of Trade Secrets
The duty of confidentiality is a statutory obligation. It arises directly from legal provisions; Article 10 of China’s Anti-Unfair Competition Law sets forth specific rules governing the infringement of trade secrets. Regardless of whether an explicit agreement on the protection of trade secrets exists between the employee and the employer, the employee remains bound by this duty even after leaving the company. Defining the scope of trade secrets, however, poses a significant challenge in practice. Employers must, based on their specific circumstances and the nature of the employee’s position, specify concrete confidentiality obligations. Failure to do so may leave the employer unable to prove that a confidentiality agreement covering particular trade secret information was reached, thereby creating an awkward situation in which accountability cannot be pursued.
15 Risk Point Fifteen: Failure to Determine the Method for Calculating Losses of Trade Secrets
When an employee breaches the terms of a confidentiality agreement, the employer may seek damages; however, proving such damages is often difficult and not easily enforceable. Moreover, in judicial practice, there remains considerable debate as to whether the employee should be required to pay liquidated damages upon breaching the confidentiality agreement.
One view holds that, pursuant to Articles 22 through 25 of the Labor Contract Law of the People’s Republic of China, if a worker breaches an agreement on the service period or non‑competition restrictions, the worker shall pay liquidated damages to the employer as stipulated in the agreement. Except for such circumstances, employers may not agree with workers that the workers shall bear liquidated damages. Contracts that violate mandatory provisions of laws or administrative regulations are void. Accordingly, any clause in which an enterprise and a worker agree that the worker shall be liable for liquidated damages for breaching confidentiality obligations is invalid because it contravenes mandatory legal provisions.
Another view holds that an employee who discloses trade secrets shall bear contractual liability regardless of whether the employer has suffered actual losses. If the liquidated damages stipulated in a confidentiality agreement are excessively high, the court may reduce them at its discretion. This position effectively recognizes the validity of such liquidated‑damages provisions in confidentiality agreements.
Accordingly, enterprises may, where liquidated damages have been agreed upon, negotiate with employees in advance to specify detailed methods for calculating losses, taking into account the type and level of commercial secrets involved. This enables them to assert claims for damages under the agreement once a breach occurs. Furthermore, when entering into confidentiality agreements with employees, it is advisable to stipulate both liquidated damages and a non‑competition clause.
[Risk Prevention Recommendations] Enter into confidentiality agreements with employees and pay close attention to the drafting of specific provisions:
(1) The content and scope of confidentiality; (2) The rights and obligations of both parties to the confidentiality agreement; (3) The term of the confidentiality agreement; (4) The method for calculating damages and the scope thereof may be specified in the liability for breach of contract.
16 Risk Point Sixteen: The entity authorized to formulate rules and regulations is not legally qualified.
Article 4 of the Labor Law and Article 4 of the Labor Contract Law both explicitly stipulate that employers shall, in accordance with the law, establish and improve their labor rules and regulations. According to these legal provisions, the entity responsible for formulating such rules and regulations is the enterprise itself, not its administrative departments; consequently, any rules or regulations drafted by a specific department and issued in that department’s name carry risks of lacking legal validity. To ensure the authority and enforceability of these rules and regulations, they must be promulgated in the enterprise’s official name.
17 Risk Point No. 17: The content of rules and regulations is unlawful, unreasonable, or lacks operability.
The content of a company’s rules and regulations must be lawful; any provisions that contravene the law are null and void. If such rules and regulations are unreasonable, they may infringe upon workers’ legitimate rights and interests and give rise to unlawful legal consequences. Moreover, due to their inherent irrationality, they often exacerbate conflicts between employees and employers during implementation, thereby undermining the effective enforcement of these policies.
As for the criteria for determining reasonableness, the law does not provide explicit provisions. Enterprises should, in accordance with the principle of fairness and in light of the general standards applied by ordinary persons, take into account their own type, size, production and business operations, management model, and the specific characteristics of each job position, ensuring that their internal rules and regulations are specific and quantifiable, thereby rendering them both practicable and reasonable.
18 Risk Point No. 18: The procedures for formulating rules and regulations are unlawful.
The legality of the procedure for formulating rules and regulations means that such rules must be adopted through legally prescribed democratic procedures. Even if the substantive content of a company’s rules and regulations is lawful and reasonable, failure to follow the required statutory democratic procedures renders them unlawful. The democratic procedure for drafting rules and regulations consists of two steps.
The first step is the discussion procedure, whereby the rules and regulations shall be deliberated by the workers’ congress or all employees, who shall submit proposals and opinions. The second step is the consultation procedure, in which the employer and the trade union or employee representatives engage in equal consultation to determine the content of the rules and regulations.
In general, where a company has established a trade union, it shall consult with the union; where no trade union has been established, it shall consult with employee representatives. In labor dispute cases, the employer bears the burden of proving that the formulation of its rules and regulations followed due democratic procedures—namely, the company must furnish evidence demonstrating that the rules and regulations were adopted through discussion and consultation processes. Accordingly, the company should diligently collect and preserve evidence of the election of employee representatives; prior to convening any meeting, it should prepare an attendance register; during the meeting, it should keep minutes and draft a formal record, requiring all attending employee representatives to sign and affix their fingerprints as conofficeation, thereby mitigating the legal risk of failing to meet the evidentiary burden.
19 Risk Point No. 19: Failure to publicly disclose rules and regulations in accordance with the law
Public notice is one of the essential prerequisites for the entry into force of internal rules and regulations. In judicial practice, courts scrutinize the methods of publicizing such rules and regulations quite rigorously. Without evidence—such as the employee’s signature conofficeing receipt or awareness of the contents of the rules and regulations—that directly demonstrates that the employer has fulfilled the obligation to make the rules publicly available, labor arbitration bodies and courts are unlikely to recognize that the employer has indeed discharged this duty toward its employees.
In practice, the following seven methods are commonly used to publicly disclose internal rules and regulations:
(1) Posting on a bulletin board. (2) Email notification. The company drafts the rules and regulations into document form and sends them to employees via email, requiring employees to reply to conoffice that they have acknowledged the contents and undertake to comply with them. When using this method of public notice, the email address through which employees receive the rules and regulations must be conofficeed in advance by both parties, for example, by explicitly specifying such an address in the employment contract or the job application form. (3) Publication on the company website. Some companies, particularly those practicing paperless office operations, post their internal rules and regulations on the corporate website or within the internal intranet to enable employees to access the relevant information at any time. (4) Training on the rules and regulations. Certain companies adopt training sessions as a means of publicly communicating their internal policies to all employees. In such cases, attendees are required to sign in, and details such as the date, time, location, participants, and training content must be recorded. (5) Examination on the rules and regulations. The company organizes examinations to help employees deepen their understanding of the provisions. When employing this method, the company should retain examination papers and other relevant materials as evidence of participation. (6) Circulation of the rules and regulations. Some smaller organizations use a circulating‑document approach to disseminate their internal policies. This method requires employees to sign a conofficeation form or other written documentation demonstrating that they have been informed of the contents. (7) Distribution of the employee handbook. The company compiles rules and regulations that directly affect employees’ rights and interests into a separate document titled the “Employee Handbook,” distributing one copy to each employee—either as a standalone item or as an annex to the employment contract. Under this method, employees must personally sign to conoffice receipt of the handbook.
Among the seven commonly used methods of public notice outlined above, the first three are not recommended for standalone use. Posting rules and regulations on a bulletin board is far from a simple matter of affixing notices; while online platforms offer convenience and speed, these three methods can be difficult to substantiate in the event of a labor dispute. Consequently, the sixth and seventh methods are more widely adopted, as they are both straightforward and efficient. A company may select the most appropriate method based on its specific circumstances and even combine several approaches. To mitigate the risk of failing to meet the burden of proof, whether employing a single method or multiple ones, it is advisable to retain written evidence—such as employees’ signed acknowledgments conofficeing receipt of, or awareness of, the company’s policies—and their commitment to comply with them.
20 Risk Point Twenty: Shared Regulations Established by the Group Company and Its Affiliates
In practice, many enterprises operate as corporate groups, with all subsidiaries sharing a common set of rules and regulations. As to whether the policies and procedures of the parent company apply to the subsidiary, judicial practice has yielded differing views:
(1) A subsidiary with independent legal personality shall apply the parent company’s rules and regulations. If the subsidiary has complied with the democratic procedures prescribed in Article 4 of the Labor Contract Law of the People’s Republic of China, or if the parent company has complied with such procedures and has duly publicized or notified the employees within the subsidiary, the parent company’s rules and regulations may serve as the basis for resolving labor disputes arising at the subsidiary. (2) Alternatively, some argue that the subsidiary must adopt its own rules and regulations through democratic procedures, or, by means of such procedures, incorporate the parent company’s rules and regulations into its own framework.
In light of the two perspectives outlined above, employers must formulate their internal rules and regulations in accordance with the procedures prescribed by such rules and notify employees thereof before they may be applied.
21 Risk Point Twenty-One: Hiring University Students for Internships
(1) Main Risks of Hiring University Students for Internships
University internships are generally categorized into three types: employment‑oriented internships (on‑the‑job placements), work‑study internships, and training‑oriented internships. Employment‑oriented internships are intended for students who have reached the legal working age and whose primary goal is to secure permanent employment. Work‑study internships involve current students engaging in part‑time work during their spare time; in such cases, no formal employment relationship exists between the student and the employer. Training‑oriented internships, on the other hand, are integrated into the university’s curriculum and are arranged centrally by the institution, with students undertaking practical assignments in relevant departments.
Such internships should be regarded as part of the educational process; they do not constitute employment, and the employing entity generally does not provide remuneration to interns. Article 12 of the former Ministry of Labor’s “Opinions on Several Issues Concerning the Implementation of the Labor Law of the People’s Republic of China” stipulates that when students engage in work-study activities during their spare time, such activities are not considered employment, no labor relationship is established, and a written labor contract need not be concluded. However, this provision applies solely to work‑study arrangements. Except for the prohibition set forth in Article 15 of the Labor Law against employers hiring minors under the age of sixteen, Chinese law contains no other provisions expressly barring students from becoming parties to a labor relationship.
Whether an injury sustained by a university student during the course of employment can be recognized as a work-related injury is a common issue in practice. If such an injury is deemed work‑related, the employer is required to bear all associated workers’ compensation benefits; even if the employer argues that it cannot provide workers’ compensation insurance for students, this defense will not be upheld by the court. Conversely, if the injury is not classified as work‑related, it may be handled under the framework of an employment relationship or as a general civil tort case.
(II) Risk Prevention Recommendations
1. Employers are required to verify students’ certificates, review recommendation letters issued by the school, or enter into an internship agreement among the employer, the school, and the student. 2. The terms of the internship agreement should ensure that the internship period does not coincide with the working hours of regular employees. 3. The internship organization shall provide safe working conditions and fulfill its obligation to provide safety training to intern students. 4. Employers shall obtain employer’s liability insurance for interns.
22 Risk Point No. 22: Hiring Retirees Who Do Not Qualify for Retirement Benefits
In practice, companies may hire individuals who have reached retirement age to fill positions that are less specialized or less attractive to younger workers. There is often a misunderstanding regarding the relationship between retirees and their employers: some assume that once someone has retired, they can no longer establish an employment relationship with the company and thus are exempt from the employer’s statutory obligations toward employees. However, this is not the case.
Where a person who is already receiving basic old-age insurance benefits or a pension enters into an actual employment relationship with an employer, such relationship shall be governed as a service‑provision relationship. With respect to the recruitment of retirees who have not yet begun to receive basic old-age insurance benefits, Article 32 of the Interpretation (I) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases provides that if an employer brings a lawsuit arising from an employment dispute with a person it has hired who is already lawfully entitled to old-age insurance benefits or a pension, the people’s court shall treat the matter as a service‑provision relationship. As for employees on unpaid leave, those who have retired early before reaching the statutory retirement age, laid‑off or awaiting reassignment workers, and employees placed on extended leave due to the enterprise’s suspension of operations, if they bring a lawsuit arising from an employment dispute with a new employer, the people’s court shall treat the matter as a labor relationship.
Article 2 of the Ministry of Human Resources and Social Security’s “Opinions on Several Issues Concerning the Implementation of the Regulations on Work-Related Injury Insurance (II)” provides: “Where an employee has reached or exceeded the statutory retirement age but has neither completed retirement procedures nor legally received basic old-age insurance benefits for urban workers, and sustains an accidental injury or contracts an occupational disease while continuing to work for the original employer, the employer shall bear the work-related injury insurance liability in accordance with the law.”
[Risk Prevention Recommendations] Older workers may still be in an employment relationship with the enterprise; in addition to safeguarding their basic labor rights, employers are required to arrange work-related injury insurance for them.
23 Risk Point No. 23: Risks Associated with Hiring Part-Time Employees
Article 68 of the Labor Contract Law stipulates that non‑full‑time employment refers to a form of employment in which remuneration is primarily based on an hourly rate, and under which the employee’s average daily working hours at the same employer generally do not exceed four hours, with total weekly working hours not exceeding twenty-four hours. In practice, the following risks should generally be borne in mind when engaging in non‑full‑time employment:
(1) Enter into a written agreement
The Labor Contract Law permits parties to a part-time employment relationship to enter into a verbal agreement. However, in practice, if an employer fails to maintain rigorous attendance records for part-time employees and cannot demonstrate that the employee’s working hours meet the criteria for part-time work, the employer may face adverse consequences in the event of a dispute if it is unable to provide evidence of the employee’s actual working hours.
(2) Purchase of Work-Related Injury Insurance
Employers are required to pay pension insurance, medical insurance, unemployment insurance, and work‑injury insurance for full‑time employees they hire. For part‑time workers, employers need only provide work‑injury insurance. According to Article 12 of the former Ministry of Labor and Social Security’s “Opinions on Several Issues Concerning Part‑Time Employment,” employers shall, in accordance with relevant state regulations, pay work‑injury insurance premiums for part‑time workers with whom a labor relationship has been established. If an employer fails to fulfill this statutory obligation, it must, upon the occurrence of a work‑related injury, provide work‑injury benefits in accordance with the standards set forth in the Regulations on Work‑Injury Insurance. In cases where no written agreement has been concluded and no work‑injury insurance has been paid, the adjudicating authorities may nonetheless determine that the parties have a service‑contractual relationship, thereby holding the employer liable for compensation for personal injury. Generally speaking, liability for personal injury is more severe than work‑injury compensation, and the risk of such compensation cannot be legally diversified through work‑injury insurance.
[Risk Prevention Recommendations] Enter into a written contract that clearly specifies working hours, the method and frequency of wage payment; employers should establish and implement a flexible‑hour system for part-time employees, strictly monitor actual working hours, enforce time‑clock attendance recording and maintain records, and provide workers with workers’ compensation insurance or supplementary commercial insurance.
(Reposted from: Jiangsu High People’s Court)
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