Recruiting in China

HONG KONG, June 12 (Reuters) - A new employment law in China will increase labour costs for foreign companies and restrict their flexibility in hiring staff, Australian law firm Minter Ellison said on Tuesday.
However the law, expected to go into effect in January, will also make it easier for companies to make large-scale layoffs in certain circumstances, such as bankruptcy.

The law is partly aimed at protecting employees in the private sector, lawyers say, and keeping up with changes in the labour market as a result of China's rapid economic expansion.

Thirty percent of new jobs in the country are now in service industries and private enterprises have replaced state-owned enterprises as the major employers.

"The greater part of the workforce is now employed by private enterprises and that brings a fear that those organisations don't necessarily have the interests of workers at heart," Pattie Walsh, an employment lawyer at Minter Ellison, told a conference in Hong Kong on Tuesday.

Foreign companies, which have flocked to China to tap into the country's booming economy, have favoured fixed-term employment contracts for local employees as laying off staff in China is difficult.

But under the new law, all companies will have to pay compensation at the end of a fixed contract and will have to allow employees to switch to an open-ended contract after twice renewing a fixed contract.

Lawyers also say probationary periods will be less effective because an employer will have to show evidence that an employee has failed to perform during probation before they can dismiss them.

"That means a company will have to monitor the employee during the probation period much more closely and will need to set criteria or an appraisal system so they can prove that an employee is not fulfilling the role," Walsh said. "This will put more pressure on the employee selection process to get the right people in."

Some analysts say foreign companies are being targeted in a drive to increase unionisation and U.S. retailer Wal-Mart Stores Inc and fast-food chain McDonald's , which has been accused of breaching minimum wage laws, are among companies that have moved to set up branches of state-backed unions.

Walsh said an existing employment law, introduced in 1995, is not always enforceable because it applies differently depending on the region and is often ignored in favour of local practices.

A final draft of the new labour contracts law is expected to be published within weeks and lawyers expect it to become effective on Jan. 1, 2008.

Many employees in China are working without formal contracts but the new law will require every employee to have a written contract drawn up within a month of starting work and companies will be liable to pay compensation if there is no contract.

Companies will however have more flexibility to lay off large numbers of staff in the event of bankruptcy, production difficulties, relocation to prevent or control pollution and changing economic circumstances.

Walsh said this indicated Beijing was bowing to pressure from companies to enable them to take difficult decisions when they go through tough times.

The law will also modify a "non-compete" clause, enabling a company to stop a senior member of staff or some other employee with confidential company information from joining a competitor within two years of leaving the company by providing compensation. Under the existing law the term is three years and is not restricted to senior staff and other special cases.

The terms of compensation will be agreed between the employer and employee when the employee first joins the company.

Lawyers said the "non-compete" clause helped companies protect their intellectual property and was a step ahead of some other jurisdictions.