Asian employment laws - One continent, many laws

HRM 19 Oct 2008

Hire someone in Mainland China and you will need a written contract. Do it in Hong Kong and an oral agreement may be enough to convince a court there is a legal relationship between the two parties. Fixed length contracts are de rigour in much of Asia, but Japanese hiring is typically open-ended, with the underlying assumption that a job is for life. Culture and history have played a significant role in the way laws and employment practices have evolved in different parts of Asia so it is understandable, given the diverse histories of this region, that its laws and legal systems are equally diverse. For an organisation with business operating across Asian borders, it is vital to have a basic understanding of the way each market operates, particularly when it comes to employment.

Understanding the laws of each country is made easier when you consider the adoption of various European common law and civil law systems. Former British territories such as Singapore and India developed legal systems based on the English common law system while countries like Korea and Japan have combined their traditional setups with parts of the civil legal systems of Western Europe. Even China, with its proud socialist-based legal system has been influenced to some degree by western jurisprudence.

Still, there are some significant differences. And HR departments need to understand the basic employment laws for each system that they operate within. They should also have access to specialist lawyers with experience and knowledge of employment law in each jurisdiction. While a recent trend has seen corporations choosing in-house lawyers over counsels hired on retainer, they would do well not to cast off the outside employment lawyers completely. In-house lawyers tend to handle more general legal issues and should not be expected to be experts in employment law. Specialised and, importantly, local legal knowledge is needed to ensure that a company stays on the right side of the law.

While each legal system is unique, a basic understanding of each will help HR departments ensure their policies comply with both the laws and customs of each country. Trying to explain the different employment laws in each of the key Asian markets in these pages would be an impossible task. But HRM is able to highlight a few basic employment contract points that are important and should be considered in the formation of any HR or employment policies.

Singapore

Even though Singapore is a young country, it has inherited an established common law system from its colonial past. Based largely on the English legal system, all labour issues and employment contracts are governed by the Employment Act. This legislation gives employers a good deal of freedom to create flexible working contracts – whether oral or written agreements – that suit the needs of both parties. Employers do, however, need to ensure their contracts comply with a series of statutory restrictions to ensure workers’ rights. Appropriate notice of termination, for example, cannot be waived, even if both parties were to agree to such a clause. The contracts must also ensure that all clauses are enforceable under Singaporean law. Clauses that prevent an employee from competing against the employer after the two have parted ways are generally considered ‘unreasonable restraint on trade’ and are therefore inappropriate for an employment contract.

Hong Kong

Although Hong Kong is now a part of China, the ‘One Country, Two Systems’  ideal has allowed Hong Kong to retain the common law system that developed under British rule. This system has one of the most developed and tested set of business laws in Asia and is well respected throughout the world. With extensive case law already in place, Hong Kong jurists have more recently focused their attention on more advanced employment issues, particularly those dealing with employee contracts and benefits.

One issue of importance is the distinction between an employee and an independent contractor. Although it might be beneficial for a company to consider a staff member a contractor, it is the nature of the work relationship that will ultimately determine the worker’s status. Courts have and will delve deeply into the relationship between the two parties to make a binding determination of the actual work situation.

If a Hong Kong court deems that there are enough facts to change the status of a worker, it may treat a contractor as an employee even if the two parties had agreed to a contractor agreement.  

Employment contracts are not strictly compulsory in Hong Kong. Upon request, employers must provide employees with a statement of terms and conditions associated with the employment but it is perfectly possible to have a long-term arrangement without any written evidence of a deal. But whatever is saved by not having a written contract may be lost by the ambiguity of a verbal or even no agreement. If a legal dispute arises, courts will recognise the existence of a ‘contract’ by the sole fact that there has been an exchange of services for payment. The court will then use previous case law, industry standards and any company history to determine what compensation is required.

To avoid this complication, companies are encouraged to use written contracts wherever possible. They cover both parties legally, avoid ambiguity and allow greater flexibility.

Mainland China

Ambiguity is definitely something China is trying to avoid. Over the last decade, the world’s most populous country has been working to improve its legal system to meet the demands of global business. Although the underlying legal system remains socialist at heart, the Chinese government has been keen to foster a pro-business legal environment to support the country’s fast-growing economy.

Under Chinese Employment law (known widely as the PEL), employers and employees are required to enter into a written employment contract. But this does not mean that the Chinese courts will invalidate an oral contract. If the conduct between the parties creates an employment relationship, the courts in China will generally find the oral agreement enforceable.

Employment contacts in China can be for a fixed term, or open ended. They can also be output-related and designed for the length of a specific project. Normally, the contracts will have a trial period of no more than six months, during which time the employer may terminate the contract if the employee is found to be unsuitable.

Recent changes to the PEL affect men and women who have been with a company for 15 consecutive years and are within five years of retirement. From this year, they have been legally protected from termination before that retirement date.

In addition, China has created the Employment Promotion Law to stimulate employment opportunities across the country. The law imposes obligations on employers to provide training and outlaws discrimination on the basis of age. It brings the PEL into line with existing fairness laws that forbid discrimination on the basis of nationality, race, gender, religion or physical disability.

South Korea

Unlike China, South Korea does not require a written employment contract. Instead, it has requirements similar to Hong Kong where employers must provide a written statement outlining the employee’s working hours, paid holidays, paid annual leave, and wages. The Korean Labour Standard Act (LSA) allows domestic employee contracts to take the form of an application that is countersigned by the employer. Most multi-national organisations use written offer letters or employment contracts to cover the legal requirements imposed by the LSA.

Along with the written statement, the LSA requires larger employers (10 or more staff) to prepare what is effectively a collective agreement. The comprehensive set of written work rules needs to be filed with the government and also made available to all employees. Furthermore, the employer is required to consult with employees and solicit their views before preparing or changing the rules. 

Japan

Unlike China, Hong Kong or Singapore, the Japanese have a cultural tradition of life-long employment within a single company or organisation. Employment periods are not typically stipulated in employment contracts and there is an underlying assumption that employees have a post assured for them for their entire working career. Written contracts in Japan are kept deliberately vague and most of the negotiation between employer and employee takes place verbally.

Despite the traditional outlook, fixed term contracts are permitted. While rare, they are perfectly legal and companies are not required to justify the limited validity. Most fixed term contracts cover periods of less than a year. On occasion, highly skilled and experienced workers will attract longer offers, usually for special projects. But even then, the contracts tend to be for fixed terms of no more than three years.

India

Slow, cumbersome, redundant and potentially inconsistent. That is a common way of describing the more than 45 separate pieces of legislation that make up India’s employment law. While also based on the English common law system, the sheer mass of legal scripture means the system lacks the order, efficiency and reliability of Hong Kong or Singapore. As a result, companies tend to look for ways around some laws, rather than subject themselves to the uncertainty of compliance.

A case in point is the laws surrounding dismissal of employees. For companies with more than 100 staff, legislation demands a full written explanation and approval from the state government before any employment contract can be terminated. Not surprisingly, many businesses have chosen to hire their staff indirectly, as contractors, so as to avoid the reach of the law. They contract workers from specifically set-up labour-hire companies who take on the legal risks and compliance costs.

Although this may not be the most efficient way of handling employees, it does limit a company’s exposure to other parts of India’s incredibly slow legal system. According to the Ministry of Labour, around 28,000 employment-related lawsuits have been working through the court system for ten years or more. All are still unresolved.

Keeping up with the law makers

Most in-house lawyers and legal advisers will seek outside advice when it comes to the specific laws in each country that a company operates within. But an understanding of how each legal system has developed and the way it treats the employee-employer relationship is certainly a useful tool for the HR shed.

With the expansion of global companies into Asian economies, the legal systems of each one has changed to accommodate the needs of both industry and its employees. The challenge for HR departments is to ensure compliance keeps up to date with changes in each country and each system. Unlike the west, where changes happen gradually – sometimes over decades – Asia is seeing enormous change taking place over much shorter timeframes. Knowing the basic principles and history of each system will allow HR professionals to better adapt their company’s policies to ensure legal compliance across the Asian region.

5 HR tips

  • Complete an annual review of each region to ensure that HR policies still meet the labour laws of each country
  • Keep HR employment policies country-specific. Do not utilise one policy for all Asian countries
  • If your company has an internal legal department, make sure you are requesting information on a regular basis. Laws in Asia can change quickly and current information is invaluable for policy planning
  • Do not rely solely on your in-house counsel for legal information. Network with employment lawyers in the region to ensure that up-to-date information is always coming into your department
  • Understand the difference between legal and social systems and how that affects your company’s employment policies

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