In order to promote the labour harmonization and protect the labour benefits, The Standing Committee of the National People's Congress proposed the "Draft Labour Contract Law of the People's Republic of China" ("Draft Law"), which would probably be enacted and implemented in May 2007.

The new law will be applicable to all domestic and foreign enterprises in the People's Republic of China ("PRC"). The existing labour contracts will have to be amended or re-formulated in accordance with the new law. In addition, all the company's rules and regulations, labour handbooks have to be revised accordingly.

The major amendments are as follows:

1. Enterprises have to pay compensation upon expiry of the labour contract
The existing Labour Law does not state the compensation obligations of the enterprises upon expiry of the labour contract. According to the Draft Law, enterprises have to pay compensation upon expiry of the labour contract on the basis of "half of the monthly salaries upon completion of half-a- year services, one month salaries upon completion of the full-year services". This is for the purpose of restricting dismissal and stabilizing labour relationship.

2. Compensation of non-competition covenant with the threshold of annual salaries
According to the Draft Law, if the labour contract includes any non-competition covenants (with the ceiling of 2-year period), the enterprises have to pay compensation, which is equivalent to the employees' annual salaries or above. On the contrary, the Draft Law penalizes the employees who violate the covenant. In this case, the employees have to pay compensation to the enterprises with the ceiling of treble what the enterprises would have to pay.

3. Rules and regulations pass prior to the agreement of employees
According to the Draft Law, the enterprises have to obtain agreement of employees or employee representatives when making rules and regulations that are "closely related to the employee benefits".

However, there is no precise definition of "employees' interests".

4. Three levels of probation periods
The existing Labour Law does not precisely state the requirement of probation period. According to the Draft Law, probation period would be applicable to the labour contract which last for the period of three months or above. Each enterprise can have one probation period for the same employee. The probation period will be of three levels basing on the job nature: ceiling of one month for non-technical positions; two months for technical positions; six months for senior professional positions.

Moreover, the Draft Law classifies labour contract into three categories: fixed term; open term; job-based. For those labour relationships without signed contract, they would be deemed as contract on open term.

5. Enterprises have to compensate for delay of salary payment
According to the Draft Law, enterprises have to compensate the employees ranging from 50% to 100% of the amount payable for any delay of salary payment.

6. Termination of contracts by employees
In regard to termination by employees, the Draft Law adds to the circumstances of the Labour Law as to when this can occur. Whilst the existing Labour Law permits the employee to terminate labour contract in the following circumstances (b), (c) and (e), the Draft Law introduces two more circumstances (a) and (d) of the following five circumstances: (a) enterprises do not pay the social insurance; (b) enterprises do not pay full amount of salary on time; (c) enterprises do not provide the working conditions in accordance with the labour contracts or not meeting the safety standard; (d) enterprises not in compliance with the laws and regulations; (e) employees in the period of probation.

However, if an employee wish to terminate a labour contract without giving 30 days'written notice in advance to the employer, according to the Draft Law, the employee has to pay compensation to the employer with an amount equivalent to two months'salary.

7. Enterprises may impose a service bond for training
If the employer provides an employee with off-the-job training for more than six months, the employer may impose a fixed-period service bond. Employee have to compensate the employer for breach of the bond, with the ceiling of the training expenses incurred in respect of the remaining service period.

8. Termination of contracts by employers
An employer may terminate a labour contract provided it gives a notice in writing to the employee. If it is an open term contract, an employer may terminate the contract either with 30 days' notice in advance or with payment of one month's salary in lieu of notice, provided it fulfill the following conditions: (a) if the employee has fallen ill or has sustained injuries not from work and is incapable of undertaking the original work, and no agreement is concluded regarding the amendment of contract upon discussion between the employee and the employer after medical treatment is completed; (b) if the employee is incapable of doing the work either after training or after the work has been adjusted; (c) if there have been major changes to the conditions for conclusion of the labour contract which lead to the contract incapable of being performed and no mutual agreement has been reached after consultation between employee and employer regarding the contract modification.

In addition, according to the draft law, if there are inconsistent interpretations or disputes regarding the labour contracts between the enterprises and employees, the contract should be interpreted in a common-sense manner. If there are two or more interpretations, it should adopt the one more favorable to the employees.