One of our clients is coming to the end of its contract term with the bulk of its China employees. They wrote Steve asking him some questions regarding fixed term employment contracts under Chinese law. Steve's reply is a made to order blog post, so here goes:
Pursuant to Chinese law, you are permitted to enter into two fixed term contracts with an employee. The term of these contracts can be any fixed term that is agreed between the parties. Typically, in China, the term ranges from one to five years. At the end of the second fixed term contract, you have two choices. You can chose not to continue the employment relationship or you can chose to continue the employment relationship under an open term relationship.
An open term relationship requires a written contract. This contract has no term. It terminates only under the following circumstances: 1) the employee voluntarily resigns, 2) the employee reaches retirement age or 3) the employee is terminated for "cause." Termination for cause is complex and difficult in China. There are two basic areas for cause. In the first, the employee has committed a crime like theft or a gross breach of conduct rules, such as arriving to work drunk. In this case, termination is straightforward. In the second, the employee shows up to work on time and follows all the rules, but is simply incompetent. In the current situation in China, it is virtually impossible to terminate an employee who falls into this second category.
Accordingly, you should never enter into an open ended employment relationship with an employee who you suspect will fall into this second category. However, it is often hard to predict. In actual practice, there are various ways companies deal with such employees. However, the fact is that an employee with a "thick face" who is willing to earn minimum wage and engage in dead end tasks is very difficult to terminate under the current Chinese system.
China's labor laws are new, so many of the issues have not yet been fully worked out. However, the trend is towards increased employee protection and not towards more employer freedom. The trend is the same in Europe, so there is nothing unique about the Chinese approach. China follows a European approach and that is the place to look for analogy. The U.S. is NOT the place to look to for guidance; the Chinese system is as different from the U.S. as any system could be.