*Alan Wang of DLA’s Shanghai Office contributed to this article.

If you are an avid shopper, you may have noticed in the past holiday season that fewer and fewer items on the shelf had the familiar “Made in China” label.  In 2013, the International Monetary Fund (IMF) forecast that the era of cheap labor in China would come to an end soon.  (Last accessed on March 26, 2015).  For international employment lawyers dealing with China on a regular basis, this forecast does not come as a surprise.  Neither should it for you.

Chinese Flag with Protest Sign EPS10The IMF attributes the disappearing cheap labor in China to the aging of the workforce and the rapidly rising wages in China. Id. Both points are true but the underlying causes lurk in some of the employment laws that govern a workforce in China. Here is a list of the legal issues that are fueling that wage trend:

1. Two fixed terms and the employee will be pretty much untouchable.  In China, everyone is entitled to a written employment contract.  Usually, a new employee starts with a fixed-term contract of 1-3 years in duration, including a 1-6 month probationary period.   The catch is that after renewing the fixed-term contract twice, the employee will most likely be entitled to an indefinite term contract.  This means that the employee cannot be lawfully and unilaterally terminated without notice or severance except for serious violations of the company’s rules, serious dereliction of duty, criminal offense, etc.  Notably, poor performance is not one of those grounds.  Instead, the law requires that if performance issues arise, the employer must provide training or an alternative position before resorting to termination.  If the employer does not provide a “second chance”, the employee could claim illegal termination and seek double statutory severance (which is explained below) or even reinstatement.   Even assuming the employee flunks the “second chance” and the employer may legally terminate, statutory severance would still be required to be paid to the employee.

2. Statutory severance payments are almost mandatory and are expensive.  Statutory severance is mandatory in China except for rare circumstances (employee committing severe violations of company policies, engaging in criminal conduct, retirement or voluntary resignation).  The amount of statutory severance due is the employee’s monthly salary (capped at 3 times the local average monthly salary for service years after 2008; no cap for service years before 2008) x his or her years of service.  This means that for a blue-collar employee who has worked for the company in Beijing for 10 years and making the average local monthly salary (RMB 5,793), he/she would be entitled to a statutory severance pay of almost USD 10,000, even if he/she was terminated for perfectly valid performance reasons.  What’s more, in the case of termination for poor performance, in addition to the statutory severance pay, one month of pay in lieu of notice would also be required if the company wants to terminate the employee immediately.

3. Paying a 13th month salary is the norm, although not required by statute.  It behooves companies to make sure that their employment contract specifically provides that the 13th month’s salary is included in the annual base salary; otherwise, the employee could claim an extra month of salary on top of the annual salary.  Further, if the employee leaves before the end of the year, he/she will in most cases be entitled to a pro-rated amount of the 13th month’s salary, again even if the employee is terminated for not doing his job.

4.  Today, Chinese employees will fight for their legal rights.  Social media and smart phones help spread the word about what employees are entitled to.  According to data from the Hong Kong-based China Labour Bulletin, Chinese workers went on strike or protested at least 1,378 times in 2014, nearly twice the number of strikes and protests in 2013.  Workers organize through non-profits and professional associations; indeed, Beijing already has its own chapter of the Lean In organization.  Recently, a 21-year-old female college graduate, challenging an employer’s men-only job advertisement, won a high-profile gender discrimination case in China. According to media reports, the plaintiff had received an outpouring of support from the public which pressured the court in Beijing to eventually take her case.  (Last accessed on March 26, 2015).

5. Defending a labor arbitration or lawsuit in China are no longer cheap.  In coastal cities like Beijing and Shanghai, defense fees may run tens of thousands of dollars depending on the complexity of the case.  Adding to the cost are the facts that courts in China expect everything to be translated to Mandarin and that emails in and of themselves are not admissible evidence unless “blessed” by a complicated notary certification process.  Further, courts and arbitrators in China are not friends of employers, especially employers that are well-known multinational “deep pockets.”

Employers who are culturally and legally well-advised can beat the IMF’s projected trend line on labor costs in China.  But, there, as elsewhere, it will take planning to minimize the escalation of labor costs.