The Risks of Not Signing A Written Labor Contract

Last month, we published an article suggesting that employers should sign labor contracts with their employees to avoid being punished and having to pay double wages, today, we will continue to explore this topic and elaborate on further risks employers may encounter if they do not sign a written labor contract as well as the dangers for foreigners if they do not sign a written labor contract with their employer.

Open Ended Labor Contract

After one year of failing to sign a written labor contract, as opposed to receiving double wages as reimbursement, an employee will be deemed to have entered into an open-ended labor contract with their employer, according to the Chinese Labor Contract Law. In an open-ended labor contract relationship, an employer and employee have agreed not to stipulate a definite termination date, additionally, an employer would not have the same termination rights as under a fixed term contract (30 days advance notice for expiration).

Generally speaking, in cases where employer wishes to terminate a fixed term contract with an employee and only pay economic compensation, it would be difficult for the employer to prove the incompetence of the employee, especially after training or an adjustment of their position, therefore, in these circumstances the employer would be entitled to pay double economic compensation to the employee. In practice however, employers may wait until the expiration of a labor contract, so that they will only be obliged to pay economic compensation and not be punished. However, in contrast, when terminating an open-ended labor contract, employers will run a greater risk of being punished and must show strong evidence that such termination did not violate the law, showcasing a distinct difference between Fixed Term and Open Ended Labor Contracts and the rights of the parties in the employment relationship.

Foreign Workers in China

In instances where a foreigner works in China without a labor contract, the fundamental issue is that they cannot obtain a work permit without a written labor contract, which means that they are working illegally in China. Under such circumstances, the foreign worker may be fined up to RMB 1,000 and sent back to their home country, while the employer can be fined from RMB 5,000 to RMB 50,000 and may be ordered to cover all expenses of repatriation. Additionally, should a labor dispute arise with an employer, the employee would not be protected by Chinese Labor Contract Law. In the absence of a written labor contract and work permit, a foreign worker has no legal labor relationship with the employer, and cannot get economic compensation that other employees are entitled to.

In relation to Chinese employees, the courts may find an existing labor relationship even without a written labor contract, however, a labor relationship between a foreign worker and an employer will not be so construed, as the foreign worker does not have a work permit. The relationship will be deemed as service provider and the remuneration received would be equal to that of a service fee, which is much lower than economic compensation based on labor law.

In conclusion, the purpose of signing a written labor contract is to protect both employers and employees’ rights and interests and improve the employment environment in China. If you have any further inquiries on this topic, feel free to contact us at info@dandreapartners.com.