China: Companies with Over 300 Employees Shall Include Employee Representatives on the Board of Directors or Supervisory Board

Authors: Carol Zhu and Lynsey Liu

On 1 July 2024, the new Company Law came into effect. Article 68 of the new Company Law stipulates that for limited liability companies with more than three hundred employees, apart from those that legally establish a supervisory board with employee representatives, the board of directors should include employee representatives. Furthermore, Article 120 clarifies that the provisions set forth in Article 68 are equally applicable to companies limited by shares.

Prior to this, being an employee director in China was primarily a mandatory requirement for certain state-owned enterprises. However, following the implementation of the new Company Law on July 1, companies with more than three hundred employees are required to either establish a supervisory board and appoint employee supervisors, with the proportion of employee supervisors not being less than one-third, or appoint employee directors.

In addition to the requirement for employee directors/supervisors, the new Company Law also includes other provisions regarding democratic management that involve the participation of trade unions and employee representative congress. For example, Article 17 of the new Company Law stipulates that when a company is making decisions on significant matters such as restructuring, dissolution, bankruptcy application, and key operational decisions, or when drafting important internal policies, it shall seek the opinions of the company’s trade union and collect the opinions and suggestions of the employees through the employee representative congress or other channels.

Key Action Points

For foreign employers operating in China with a workforce exceeding three hundred employees, it is advisable to pay attention to the guidance and trends of local trade unions, the market supervision bureau and other departments, and closely monitor the implementation rules of the new Company Law for employee directors (or supervisors) issued by the national administrative authorities, the judicial interpretations of the Supreme People’s Court, and the judicial precedents of local courts in order to better understand and apply the new legal provisions. The company may prepare for the establishment of an employee representative congress and the election of employee directors or supervisors. This not only ensures compliance with the new Company Law but also aids the company in soliciting staff opinions when formulating internal policies.