The labor law of the PRC is based primarily on the PRC Labor Law and the PRC Labor Contract Law. Overall, Chinese labor law is quite employee-friendly, especially compared to countries such as the United States, and it contains some very specific principles on overtime pay. This article will briefly describe the basic principles as well as commonly-used loopholes and high-risk strategies employed by foreign-owned companies in China.
The Formal Rules on Overtime Pay
Following are the standard rules on overtime pay in the PRC (which can be bent under certain circumstances):
- Working time that exceeds the eight hour a day standard must be paid at 1.5 times the employee’s contracted rate.
- Time worked on a Saturday or Sunday must be paid at twice the employee’s contracted rate.
- Time worked on an official holiday (such as New Year’s day) must be paid at three times the employee’s contracted rate.
- An employee cannot be asked to work more than three hours of overtime on a weekday, and may not accumulate more than 36 hours of overtime in any given month.
Loopholes in the System
Two main loopholes exist that allow employers to soften the harshness (from the employer’s point of view) of the PRC overtime pay requirements. Both require third-party approval. To receive approval, you must include the necessary modifications in the employee’s contract, or else modify the contract to add modifications. Both of these alternatives, of course, require employee consent.
The Comprehensive Working Hour System
Under the comprehensive working hour system, you set the standard work day at more than eight hours in the employment contract itself. If it is 10 hours, for example, time-and-a-half payment obligations would only kick in after 10 hours of work in a single work day. This arrangement must be approved by the PRC government, which approval gives you a certain measure of protection against employee complaints.
The Flexible Working Hour System
Under the flexible working hour system, you negotiate with the local labor council on the issue of requiring sales staff and top executives (not rank-and-file laborers) to work more than 40 hours per week without overtime pay. The labor council may agree to this arrangement if the employee’s salary is high enough that strict adherence to legal overtime pay requirements unnecessary. This arrangement should be codified in the employment contract.
Both of the foregoing alternatives stand a decent chance of winning approval, as long as they do not violate the “spirit” or ultimate intentions of PRC labor law. Further alternatives to strict adherence to PRC overtime requirements might be possible with the approval of the labor council and/or the appropriate PRC government bureau.
High-Risk Strategies You Should Probably Avoid
High-risk strategies involve overtime pay arrangements that do not comply with the letter of PRC law and do not seek the approval of, or perhaps, even the knowledge of, the local labor council or the PRC government. While more than a few companies in China do employ such methods, they are dangerous and can get you into a lot of trouble if a dispute arises. Writing them down, either in an employee handbook or employment contract, can be particularly dangerous.
Please see the examples below:
- Some companies offer trade-offs with their employees whereby the employee works, say, 12 hours on a particularly busy day, in exchange for a four-hour workday later in the week or perhaps even the next day. As long as the employee wholeheartedly agrees, this arrangement can work well for a while, but it is still dangerous. It is at its safest when the offer is made to rank and file employees, not top executives or sales staff.
- Another risky practice, that is commonly (and legally) practiced in the US and elsewhere, is to pay management-level employees the same salary no matter how many hours they work in a month (in other words, completely ignore overtime rules based on the idea that the employee is being paid a monthly salary rather than hourly wages). This approach is particularly dangerous if used for low-level employees.
One of the most potent dangers of high-risk strategies is the possibility that the employee may decide that you are abusing the flexibility of the arrangement. Suppose, for example, that you informally agree with a mid-level manager to pay a set salary with no overtime payments. If the manager is anticipating 50-hour workweeks and you demand 80-hour workweeks, he could decide to file a grievance, which could lead to big trouble.
Unfortunately, the same is true (but to a much lesser extent), even if you apply one of the legal loopholes mentioned above with full official approval. Although labor disputes can be resolved through negotiation, mediation, arbitration and even court proceedings, an employee is permitted to take a dispute directly to arbitration with no attempt to negotiate a solution or participate in mediation.
PRC labor arbitration tribunals are so notoriously employee-friendly that you should endeavor to avoid them under almost any circumstances. Unfortunately, however, the very prospect of arbitration can give an employee a critical edge in bargaining power, either in private negotiations or in mediation. Although it is possible to appeal an adverse arbitration decision to a court, an employer’s possible grounds for appeal are far narrower than an employee’s possible grounds.
The most obvious risk management strategy is to hire enough employees so that you rarely have to ask an employee to work overtime. In some industries, of course, workloads fluctuate so rapidly that this might be impossible without serious overstaffing problems during times of low workload.
Another healthy practice, at least if you are not pursuing a high-risk strategy, is to document every move the company makes with respect to overtime pay in as thorough a manner as possible, so that you will be able to present admissible evidence to defend yourself in case a dispute arises.
Be sure to consult with an experienced PRC business lawyer if any doubts arise as to the level of legal risk your company is taking with respect to particular business practices. The earlier you do this, the less likely it is that an unexpected dispute or sanction will threaten the health or even the existence of your company.