On May 8, 2008, the Legislative Affairs Office of the State Council issued the Draft Implementing Regulations for the PRC Labor Contract Law (the "Draft Regulations") for public comments. This article focuses on the Draft Regulations' attempt to close certain loopholes in the PRC Labor Contract Law (the "Labor Law") that may allow an employer to avoid circumstances in which an indefinite term labor contract must be put into place with its employee.

Indefinite term labor contracts do not have an expiry date and will continue to be in force until they are terminated by the employer, the employee or by operation of law. Because indefinite term contracts cannot be terminated generally unless for reasons that are specifically permitted under the Labor Law, these contracts are generally not favored. Employers prefer fixed term contracts with shorter terms that terminate on the expiry date set out in the contract. The Labor Law acts out situations in which an indefinite term labor contract must be put into place in order to prevent the avoidance of the requirements. For example, when an employer and an employee have entered into a fixed term labor contract for two successive terms, the third successive contract will be deemed as an indefinite term labor contract unless the employee requests for a fixed term labor contract. In addition, when an employee has worked for an employer continuously for 10 years or more, an indefinite term labor contract should be executed unless the employee requests for a fixed term labor contract.  

The Labor Law is ambiguous as to whether an employer can avoid entering into an indefinite term labor contract by terminating an existing employment relationship and creating a new employment relationship with the same employee through corporate restructuring. The Draft Regulations clarify this issue somewhat and state that if an employee moves to a new employer because of administrative orders, corporate plans or other reasons not caused by the employee, the employee's seniority with his/her old employer will count towards the 10 year period for the creation of a fixed term labor contract. This will prevent an employer from moving its employee to an affiliate to reset the clock for the 10 year period.

The Draft Regulations are unclear as to whether an employee's existing seniority will count towards the 10 year period if the employee's employment relationship is terminated and then recreated with the same employer, but the answer will likely be yes under the final version of the Draft Regulations, as a termination and recreation of employment relationship with the same employer is a more blatant violation of the policy objective behind the PRC Labor Law.

While the Draft Regulations are still subject to further comments and changes, the policy objective of the PRC legislators is clear – to protect employees' entitlement to indefinite term labor contracts and limit the ability of employers to circumvent this entitlement.