China Employment Law Alert - Compliance Tip #3: Governing Law for Foreign Nationals in China

This alert brings together the basic rules and latest trends in practice on the choice of the governing law on employment of a foreign national in China.  Since there is no national law or regulation touching on this issue, the applicability of foreign laws is decided by local rules (if any).  We have summarized the local rules in some of the key locations for multinationals below.

Summary of local rules

In cities such as Guangzhou and Shenzhen, there is no local legislation that would prevent foreign law being applied as the governing law of employment of a foreign national in China. Multinationals are then free to choose for employment to be governed by, for example, the law of a US state. This will mean that only limited local employment protections apply, generally basic rights such as health and safety. In Beijing, on the other hand, it is accepted as a matter of practice that foreign national’s employment in China must be governed by Chinese laws.

In Shanghai, due to the inconsistency between local legislation and judicial interpretation, the answer is two-fold.  It was previously accepted that foreign nationals and their Chinese employers could freely agree which law governed the employment, mainly based on the following two local regulations:

(1) Article 16 of the Several Opinions on the Implementation of the Rules for Administration of the Employment of Foreigners in China (“Hu Lao Wai Fa [1998] No. 25”) issued by the Shanghai Labor Bureau, which regulates “foreign employees and their employers’ rights and obligations, such as employment term, position, compensation, insurance, working time, conditions for termination and responsibility for breach could be specified in the employment contract based on both parties’ mutual agreement”; and

(2) Article 26 of the Notice on Several Issues concerning the Implementation of the Employment Contract Regulations of Shanghai Municipality (“Hu Lao Bao Guan Fa [2002] No. 13”), which specifies “rights and obligations of foreign nationals (including those from Taiwan, Hong Kong and Macau) working in Shanghai may be agreed upon in their respective employment contracts, provided that such provisions have been pre-approved by the board of directors or management body of the employer.”

On this basis, it was accepted that employment contracts for foreign nationals which were governed by foreign laws would be valid and enforceable in Shanghai, based on mutual agreement.  However, the position became less clear-cut on the release of a white book published by the Shanghai No. 2 Intermediate People’s Court as of April 12, 2011 which provides that foreign national’s employment in Shanghai must be subject to Chinese law.  Since the Shanghai No. 2 Intermediate Court only governs certain districts of Shanghai, there is now a two-fold approach - Chinese law applies in districts governed by the Shanghai No. 2 Intermediate Court while the foreign governing law is still valid and enforceable in places covered by the other Intermediate Courts (i.e., Shanghai No. 1 Intermediate Court).

Recommendation

As such, where clients want to use foreign law as the governing law for the employment contract of a non-Chinese national, our current recommendation is to check where the employee will be working and to review the latest position in that town or province, as the rules of that town or province will generally apply.

If you would like further information please contact any member of our International Employment Law practice.