China stock optionsThe China lawyers at my firm have been experiencing a big uptick in the number of companies and individuals contacting us after having been offered stock in a Chinese company as an alternative to payment in cash. This swapping of stock for pay is a relatively new phenomenon, so I want to explain how it works and, most importantly, why it cannot work for foreigners.

This is how this stock scam typically goes down. The Chinese company — usually in the tech sector — is in desperate need of the expensive skills or knowledge of a foreign person or entity. The Chinese company states: “we need your services, but we are a start up.” So, instead of paying hard cash, the Chinese company offers founders’ stock or employee stock options in their Chinese entity. Just as is the case with Silicon Valley founders stock/stock options, the idea here is that the Chinese entity will go public (“do an IPO”) and the stock it is giving will then provide a windfall benefit to the foreigners to whom they have given the founders stock or the stock options.

Unfortunately, this is all an illusion for the simple reason that no foreign person can own stock in a Chinese domestic company not already listed on a stock market. So any such option or stock transfer is void from the start. Foreigners are not permitted to be shareholders of Chinese domestic companies, nor does China recognize the concept of nominee shareholders.

Even though the offering of stock in Chinese companies is a fraud, we are still seeing many foreign individuals and companies taken in by such offers, most commonly in the fintech sector. Whatever the sector though, the Chinese company will use the “standard” Silicon Valley approach of offering a stock option package as a key benefit in the employment package. By offering stock options, the Chinese company can pay less and secure greater loyalty, while still exploiting the skills/extracting the knowledge of foreign individuals in developing an innovative software or other high tech product.

This exploitation/extraction period typically lasts one to three years, at which point the Chinese company tells the foreign individual, “sorry, the Chinese government has now informed us that we cannot issue stock options to you.” Sometimes, to better hide the scheme, the Chinese company will propose a series of fantasy work arounds, such as elaborate nominee schemes illegal under Chinese law. These proposals often convince the foreign person to waste another year or two with the Chinese company. But, in the end, the result is always the same. The Chinese company defaults on its promise to provide the foreign individual with stock in the company and the foreign individual is left high and dry. Since the founders stock/stock option scheme was void from the start, there is nothing the foreigners can do to enforce their rights in China, since they never had any such rights.

A similar scam is often perpetrated on foreign entities. The foreign entity has a technical service of great value to the Chinese company. The Chinese company then says: “We really need your services, but we are growing so fast these days that we simply do not have the free cash to pay you in cash for that. However, since we are growing so fast, it is certain we will soon do an IPO on the Shanghai stock exchange. So, instead of our paying you in cash, we will agree to pay in you in stock options. Our stock will provide you with far more monetary value than the paltry fee we would pay you for your services and by working with us, you will gain entry into the lucrative Chinese market and highly profitable work for Chinese companies will follow.”

This scam results in the same sad result as the employee stock option scam. First, as with employee stock options, a foreigner cannot own stock in the Chinese entity, so the option is void from the start. Second, the private Chinese entity never does an IPO on the Shanghai market, so the whole concept was an illusion. Third, the only thing the foreign entity achieved was to identify itself as an easy mark, which means there was no future profitable work available in China. Finally, the foreign company does not figure out the scam until after it has already transferred its service or valuable information to the Chinese entity.

There are a couple of elegant variants Chinese entities use to implement the Chinese stock scam. In the rare case where a private Chinese company actually completes an IPO, the listing is on a foreign exchange: usually either Hong Kong or the United States or London, where due to Chinese law requirements the actual listing entity is not the Chinese company for which stock options or stock were purportedly given. Instead, the listing entity is some form of subsidiary or other affiliate of the Chinese company, so that when the IPO takes place, the holder of the scam option or stock in the Chinese company can be told: “your stock option (or stock) is with the Chinese parent; you do not have an option with the affiliate actually listed. Sorry.”

Private companies in China are effectively locked out of China’s domestic IPO market. On the other hand, such companies have become attractive targets for private equity financing. But the story here is the same. The private equity financing occurs in China, resulting in a big payout to existing shareholders of the Chinese entity. The foreign stock option holder looks for an equivalent benefit. The Chinese entity then responds: this was a private equity deal, not an IPO. You did not own any stock at the time of the private financing, so you are not entitled to any benefit.

Bottom Line: Foreign individuals and companies should not accept promises of stock options or stock in a Chinese company in place of employment compensation or payment for services. Any Chinese company that makes the offer of payment in stock is either ignorant of the requirements of Chinese law or intentionally committing fraud. Either way, foreign individuals and companies should refuse to work with any Chinese company that makes this kind of stock offer. We have seen many of these deals. None have ever worked out well, and it will not work out well for you.

China independent contractorsDespite the many risks, our China lawyers still see far too many foreign companies engage in pointless gyrations to convince themselves that their relationship with their China “agent” or “independent contractor” or “partner” is anything other than an employer-employee relationship. We know that the costs of hiring an employee in China is high, but you have to trust us when we say that the costs of improperly trying to get around this in China will almost certainly eventually be considerably higher. For just how bad this can get, I urge you to check out this Forbes Magazine article, China’s Tax Authorities Want You.

But now that I have scared you, I should note that China recently opened the door a crack to allow independent contractor like relationships “online to offline” (O2O) world.

In a series of cases concerning ride-hailing service drivers (think Uber or Lyft or Didi), China’s courts have held that the drivers were not employees. In each case, the driver and the company entered into an e-ride-hailing driver cooperation agreement.

Let’s look at one recent case (decided in 2015). The plaintiff, a ride-hailing driver for Beijing Yi Xin Yi Xing Auto Technology Development Service Co., Ltd. claimed he was an employee of Yi Xin and was paid RMB 4000 (about USD 600) per month during the term of his employment, but Yi Xin failed to make social insurance payments and withheld his wages for no good reason and terminated his employment without cause. The former driver initiated a labor arbitration claim against Yi Xin, demanding (among other things) double statutory severance pay for illegal termination of an employee relationship. The former driver lost at arbitration and then took his case to court, where he lost again. The former driver then appealed to the intermediate court and lost yet again.

The intermediate court held that the former driver bore the burden to prove he had been in an employment relationship with Yi Xin and he had failed to meet that legal burden. The court’s analysis is unsatisfactorily brief: it says that in seeking to determine whether an employment relationship existed between the parties, it will consider the following: (1) whether the employer and the employee qualified as employer and employee for purposes of the Chinese labor and employment laws; (2) whether the employee was subject to the employer’s rules and regulations and the labor management of the employer and undertook work arrangements from the employer for remuneration; and (3) the employee’s services constituted a part of employer’s business. The court’s ruling did not discuss (1), but I note it generally means the employer must be a China entity with a business license and the employee must be at least 18 years old. The court went on to say that the parties signed a cooperation agreement, pursuant to which the former driver provided ride-hailing services to clients and charged fees accordingly. Yi Xin then deducted information service fees from the service fees held by the former driver. The former driver worked flexible hours based on his own desires and Yi Xin did not pay him a fixed monthly wage. Therefore, the characteristics of an employment relationship were lacking and no employment relationship existed between the parties. In reaching its conclusion, the court focused on the former driver’s flexible schedule and how he did not take orders from Yi Xin.

In a case currently pending in Chaoyang District People’s Court in Beijing, seven chefs brought a legal action against Lekuai Information Technology Co., LTD for unlawful termination. The main issue in their case is the same as that in the Yi Xin former driver case: did an employment relationship exist between the parties? Much like the arguments made by Yi Xin, the defendant in this case, Lekuai, has claimed that it was in “a cooperation relationship” with these chefs, and not an employment relationship. Lekuai further asserts that the parties had agreed in their written “cooperation agreement” that “there was a business cooperation relationship between the parties” and the chefs would not be subject to Lekuai labor management and the chefs themselves would be solely responsible for its work product.

In July of this year, China published a set of interim provisions on the administration of ride-hailing services, which will take effect on November 1, 2016. The interim rules require ride-hailing companies enter into various “kinds” (whatever that means) of labor contracts or cooperation agreements with their drivers and provide all sorts of training to the drivers. The initial draft of these rules explicitly required the companies sign full-time employment contracts with their drivers, but this requirement has been removed from the official rules set to go into effect in about a month.

We do not see this cases as abrogating the need for foreign companies doing business in China to treat pretty much every individual that performs services for them as an employee, and to pay all of the taxes and benefits that go with that. In any employee-like dispute, China will no doubt continue to favor the individual against the company, and this holds double for foreign companies. But in an O2O context, it certainly appears that China is loosening the employer-employee strings and its courts are no longer treating all situations where employee-like individuals had independence and flexibility as traditional employees. Do note that the courts did not use the concept “independent contractor” as we commonly see in the U.S.

This could be huge. No employment relationship means the company is not obligated to treat the cooperating party as an employee, thereby saving large amounts on labor costs, such as employer taxes, social insurance, and housing fund payments. Termination will also be considerably easier. But what all of this means (if anything at all) for China employers outside of the O2O context remains to be seen.

Bottom Line: If you regulate someone pursuant to your company’s rules and regulations, the chances are an employment relationship exists between you and such employee. But if you are an O20 company and if you have a written contract (in Chinese) that clearly delineates in multiple ways that the role of your cooperating individual is not that of employee, you will have a good basis for claiming that person is not an employee. If you want to be really safe though, you should consider requiring that your cooperating individual form his or her own Chinese domestic company and then have your company contract with that company. As this recent article notes, the number of Chinese domestic companies being formed is rising rapidly as those formations become considerably easier and cheaper.

But whatever you do, do not confuse the above cases with China’s flexible working hours system nor forget that foreigners still need a proper work visas to stay and work in China. Most importantly, if you are going to try to set up a cooperation relationship to avoid an employer-employee relationship, just be sure you are documenting it correctly and in Chinese.

Hiring a foreigner in China usually requires all of the following be true:

Foreign Employees in China

  • The candidate is in good health and over the age of 18
  • The candidate possesses the skills and work experience required for the job
  • The candidate has no criminal record
  • The candidate has a specified employer
  • The candidate holds a valid passport or any other valid travel document in lieu of passport

Note though that the local rules need to be consulted and, like everything else regarding China employment law, they can vary by locale. For example, some municipalities require a different number of years work experience. And there are almost always exceptions to the general rules. For example, even though most places impose an upper limit on the candidate’s age, many allow exceptions for candidate that satisfy certain other conditions. Adding to the confusion and the difficulty in getting things right, in some places many (sometimes most or all) of the local rules and exceptions are not available to the public and the only way to know what you as an employer can or cannot do is to “hash it out” by talking with the relevant authorities. In other words, if you really want to hire an employee who does not satisfy the requirements listed above, you should absolutely not give up.

Employers generally need to follow the following steps to bring on a foreigner as an employee. First, the employer must obtain an employment license from the local labor authorities and then secure a work visa invitation confirmation letter from the relevant foreign affairs office. With that letter, the employee may then apply for a work visa at the Chinese Embassy in the employee’s home country. Upon arrival in China, the employee must obtain (1) an alien employment permit from the relevant labor authorities and (2) an alien residence permit from the relevant public security department. Note that these permits need to be updated periodically.

A company that employs a foreigner must do so via a written employment contract and that employment contract should accord with applicable national, provincial and local laws and regulations. For example, most places require the contract term for a foreign employee not exceed 5 years. I know this sounds obvious, but do not have your foreign employee start working before he or she has secured the proper visa. Wait until you have all the necessary paperwork in place, NOT just after you have a signed employment contract. Before too quickly can cause your employee to be fined, lose his or her job, or even to be deported. The employer can be hit with a much larger fine and be ordered to bear all costs in connection with removing the illegal worker. Serial violators can even lose their ability to hire foreigners under any circumstance.

Beginning in 2014, China started drafting a regulation called the Provisions on the Administration of Foreigners Working in China, which is intended to focus on attracting more foreign talents into China. The goal is to replace the current Provisions on the Employment of Foreigners in China, which was promulgated by the Ministry of Human Resources and Social Security in 1995 and recently amended in 2011. Note the interesting change of words from “employment” to “working.” This is intentional and was done to deal with how foreign self-employed individual can legally work in China, not just be employed. The rule is not universal in China on this issue. There is nothing in Chinese law specifically prohibiting a foreigner from conducting business as a self-employed individual (except for residents from Hong Kong, Taiwan and Macau, who are explicitly permitted to do so). However, some places, such as Beijing, explicitly prohibit a foreigner from doing so and registering such a business in those places is impossible. I will not be holding my breath waiting for this new set of regulations to come out, but when and if it does, we will — of course — let you know.

For more on the hiring of foreign employees in China, check out the following:

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys are often asked some version of the following question:

I’m making a low-budget independent movie set in China. Can I just take my cast and crew to Xi’an on tourist visas and film a movie without bothering with permits?

Our answer:

It is illegal for foreigners to engage in film production in China by themselves. Full stop. Guerrilla filmmaking may have a certain romantic appeal, but things get a lot less romantic when viewed through the bars of a prison cell. Or when you lose all your footage and equipment and have to pay a substantial fine. Maybe you’ll get away with it, but is it really worth putting you, your cast, and your crew in harm’s way? Independent films may be inherently risky, but that’s because most of them lose money, not because making the movie is dangerous. Unless you’re making a movie with Werner Herzog in the Amazon. (When Klaus Kinski is in the mix, all bets are off.)

Note also that although changes have been proposed to the laws and regulations governing film production in China, those changes will not change anything about foreigners seeking to film in China.

Doing business with China
Leaders of the TPP countries. What no China?

Far too many on Facebook and Twitter keep describing the Trans-Pacific Partnership as a “secret” document and then use that as a reason for opposing it. Go ahead and oppose TPP — that’s your right — but it is factually wrong to claim it is a secret document as you can find its full text right here on the Office of the United States Trade Representative’s website.

And if the straight text is not enough for you, or if you are interested in how the TPP (if it passes, which is looking increasingly unlikely) will impact China businesses and foreign companies doing business in China or with China, check out the following:

China importsLast month I wrote about how importers from China need to be on their guard since U.S. Customs and Border Protection (CBP) has implemented new regulations to investigate allegations of antidumping (AD) and countervailing duty (CVD) evasion. See Importing From China: One More (New) Thing You Need To Know.

It didn’t take long, as U.S. Customs has already begun its first wave of investigations: Wheatland Tube, a US steel pipe producer, on September 14, 2016 announced it had filed with CBP an allegation of duty evasion on imports of Chinese circular welded steel pipe.

CBP has published a timeline for conducting its investigations and a process diagram (EAPA Investigation Timeline) and this newly filed allegation will be a test case to see how CBP will conduct its new duty evasion investigations. Hopefully, CBP will soon address many of the questions raised by the new regulations. How will parties be allowed to participate? What information from the investigation will be made public? How will CBP define “reasonable suspicion” of duty evasion?

This steel pipe investigation is likely to be the first of many CBP duty evasion investigations that are to come, many (probably most) of which will target Chinese products subject to AD/CVD duties. For how to figure out the risk quotient for the products you import from China, check out China Imports: Know Your Risks.

The new antidumping and countervailing duty regulations will unquestionably require an increased number of importers and foreign manufacturers to formally respond to CBP’s questions in response to allegations. Given the strong political pressure by domestic U.S. industries calling for tougher enforcement of US trade laws (not to mention the rising opposition to free trade among the American populace), Chinese producers and exporters and US importers should be prepared for increased CBP activity. CBP is likely looking to punish someone hard to set an example of their improved enforcement.

 

The eight keys for navigating China's employment laws
Eight keys for navigating China’s employment laws

It is far cheaper in the long run to avoid China employment law problems than to have to deal with one that has arisen. If you follow the following eight rules, your chances of having a China employment problem will markedly decrease.

1.  Use written employment contracts. China’s employment system is a contract employment system. This makes it a very different system from the United States, where U.S., employers can terminate employees pretty much at any time and for any reason. The U.S. system is called employment at will. China is most assuredly not an at-will employment jurisdiction, and American companies often get themselves in legal trouble in China for failing to realize this. As a China employer, you must have written employment contracts with all of your full-time employees.

China employers without a written employment contract are exposing themselves to penalties, administrative fines and the risk of being deemed to have entered into an open-term employment contract with their employees, which essentially means no definitive end date to the labor relationship.

If an employer goes more than a month (note that this period is shorter in some municipalities) without having a written employment contract with an employee, the employer will be required to pay its employee double the employees’ monthly wage. In addition to having to paying double the employee’s monthly wage, the employer must immediately execute a written employment contract with the employee.

If an employer goes more than a year without having a written employment contract with an employee, the employee lacking the written employment contract will be deemed to have entered into an open-term employment contract with his or her employer. Such a contract generally means the employer must retain the employee until his or her retirement age. As explained below, once an employee has completed his or her probation period, it is very difficult to terminate the employee during the term of the employment contract. It is even more difficult to terminate an employee on an open-term contract.

2. Put the mandatory provisions in your China employment contracts. China’s Labor Contract Law mandates that employment contracts contain the following provisions:

  • Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
  • The explicit term/duration of the employment contract (and any probation period)
  • A description of the work the employee will be performing
  • The place of work
  • The working hours
  • Rest and leave time
  • Salary
  • Social insurance
  • Applicable labor protections and labor conditions and protection against occupational hazards
  • Other matters required by relevant laws and regulations

Many locales also require employers put additional provisions in the contract, and in addition to what is mandated by law, employers generally should be sure to include provisions describing any additional benefits they provide to particular employees,

3. Be clear with the term of your employment contracts and your probation periods. It often makes sense to include in your employment contract with any new employee a probation period to give the employer (mostly) and the employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. The general rule is that for employment terms of more than three months but less than one year, you may set a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months and for employment terms of more than three years or for an open-term employment arrangement, the probation period cannot be longer than six months. You may use only one probation period for the same employee.

Since it is difficult to terminate an employee who has completed his or her probation period, we usually recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee.

This approach also makes sense because in most places in China the employee will automatically be converted into an employee with an open contract term when you re-hire the employee pursuant to a second fixed term contract. Terminating an employee on an open term contract is much more difficult than terminating one on a fixed term. Having a long probation period will delay the onset of the open term period so you can take advantage of this period to determine whether you should convert the employee to a lifetime employee.

But just like pretty much everything having to do with China employment law, the general rule is just that; it is not the right way to go in every circumstance since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.

4. Know China’s working hour rules. In China, most municipalities enforce an 8-hour work day and 40-hour work week, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is akin to the U.S. salaried employee system and applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined in local rules. The flexible working hours system can benefit employers needing greater employee hour flexibility, without having to pay overtime every time one of their employees works outside the basic hours. Under the comprehensive working hours system, employers may have their employees work beyond eight hours a day or 40 hours a week without having to pay overtime wages, however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

But with very limited exceptions, before a China employer can implement either a flexible working hours system or a comprehensive working hours system, it must secure prior approval from the local labor bureau and such approval does not last indefinitely: you need to submit an application for renewal before the expiration of the term specified in the government approval letter.

Regardless of which working hours system you as a China employer choose to implement, the safest approach (to avoid having to pay overtime) is not to have any employee work on Chinese national holidays, if at all possible.

5. Know China’s rest time and vacation rules. Every employee will have two rest days, typically Saturday and Sunday.

Employees who have worked continuously for one year are entitled to paid annual leave. The statutory vacation period, based on the employee’s total years of service (with anyone, not just for you), is as follows:

  • More than 1 and less than 10 years service: 5 days vacation
  • More than 10 and less than 20 years service: 10 days vacation
  • More than 20 years service: 15 days vacation

Employers are required to make arrangements for employees to take vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who fails to allow an employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation day. And trust us when we tell you that Chinese employees are well aware of this law and they virtually always seek the 300% owed to them (and more) when they leave your employment.

6. Get clear on your salaries. Your written employment contract must set forth a salary. One issue to consider is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This 13th month of salary is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month of salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.

It also makes sense for you to determine early on whether you are going to pay this extra month because many a foreign company doing business in China has felt compelled to add this 13th month only after calculating their expenditures based on a 12 month system. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may want a lower salary structure with an annual bonus which is usually paid in the early part of the following year. This will add no cost to you, but your China employee can benefit from the preferential tax treatment on his or her annual bonus, which means less individual income tax burden for the employee.

7. Get clear on social insurance and housing fund payments. As a China employer, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your China employees. The exact type of social insurance you must pay depends on the local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Do not make the common mistake of paying for your expat employees’ social insurance when you do not have to do so or the equally common mistake of failing to pay for your expat employees’ social insurance when you are required to do so, as both mistakes can be very costly.

8. Use Chinese as your employment contract’s governing language. We recommend making clear in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. The advantage of a one-language contract is that it eliminates costly disputes between the two “official” languages which happens pretty much every time with dual language contracts. Equally importantly, it makes things clearer for both you and your employees. Nonetheless, even though the English language portion is not an official version, we still draft our China employment contracts in English as well so that our clients who do not read Chinese can figure out what it says both when we draft it and in the future.

How to get your product through U.S. CustomsIf you are importing products from China you need to do your homework to make sure your incoming shipments into the United States comply with U.S. Customs laws and regulations. Compliance with U.S. Customs laws and regulations is critical in avoiding your shipments being detained or seized, and/or penalties assessed. Common issues importers of products from China typically face include the following:

  • Not determining proper classification and duty rate for products. If you plan to import and sell on a Delivered Duty Paid basis, you should consider customs duties in your costs and that means you should know all of your applicable duty rates before you import.  Also certain products are subject to high antidumping or countervailing duties in addition to regular customs duties, which may be as high as 300%.
  • Failing to mark the product with the country of origin of manufacture. Generally goods of foreign origin for import into the U.S. or immediate containers of the goods must be marked legibly and in a conspicuous location with the country of origin in English. Failure to do so accurately can result in civil and even possibly criminal penalties.
  • Not properly marking wood packing material. All wood packing material for products imported into the U.S. must be properly treated and marked prior to shipping. Failure to meet the treatment and marking requirements may cause shipments to be delayed and penalties issued.
  • Failing to provide complete commercial invoices. Customs regulations provide that specific data must be included on the commercial invoice for U.S. Customs purposes, including a detailed description of the merchandise, and correct value information. Omission of this information may result in improper declaration to U.S. Customs at the time of import and expose you to penalties.
  • Failing to meet other U.S. Government agency requirements. Goods imported for sale in the U.S. must satisfy the same legal requirements as those goods manufactured in the United States. U.S. Customs enforces the laws of other agencies in the U.S., including, the Food and Drug Administration, the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency, in addition to others. Therefore, if toys, for example, are exported to the U.S., detailed CPSC requirements, including for testing, must be met prior to export.
  • Distribution of many trademarked and copyrighted items. Items which are trademarked and copyrighted are restricted by contractual agreements that give exclusive rights to specific companies to distribute the product in the U.S. Imports of improperly trademarked or copyrighted items can be seized at the U.S. border and can subject you as the importer to penalties.

Taking the time to identify the required U.S. Customs laws and regulations for the products to be shipped to the U.S. from China will help you maintain seamless delivery of your merchandise to U.S. customers and avoid civil and criminal penalty exposure.

China Employment LawEvery employer in China should have its own set of Rules and Regulations because without one you will have an extremely tough time terminating a China employee.

Many companies doing business in China have learned the hard way that terminating a China employee is not easy. Recognizing this many foreign employers in China now have a Rules and Regulations document and most have even translated this document into Chinese for their China employees. This is a good start but it may not be enough. Here are a few additional basics you should bear in mind if you are going to employ anyone in China.

Your Chinese-language Rules and Regulations need to be a lot more than just a mere translation of the employee manual you use in the United States, Australia and/or Europe. It needs to be tailored for your China employees in your business. And just as is true for any legally important document, literal translations  do not work. You need a document that all your employees could understand as the Rules and Regulations usually apply to everyone in the company, not just to your expat employees. This is not just about being culturally conscientious: the Chinese language version of your Rules and Regulations needs to be clear enough to form the basis for your being able to terminate your employees.

You need to make sure your employees actually receive a copy of your Rules and Regulations and that you have prove that they did so. If you ever get into a dispute with one of your Chinese employees, there is a good chance he or she will claim never to have received a copy of your employer Rules and Regulations. Your best counter to this argument will be to provide the arbiter with a Chinese language signed acknowledgement of receipt form, proving that your employee got a copy of your Rules and Regulations.

If we could only name one section that you absolutely must have in the Rules and Regulations, it would be the section on disciplinary actions. What employee misconduct triggers punishment? Make sure your Rules and Regulations make clear the grounds for terminating an employee. Think hard about the misconduct that could be committed by your employees and put those actions in your Rules and Regulations as being subject to discipline or termination. Without this section, your employee can do terrible things that harm your business and yet you will likely find yourself without a basis to discipline or terminate the offending employee.

Far too often foreign employers make the mistake of filling their Rules and Regulations with mission statements and incentives and things they encourage the employees to do. This is all nice to have, but it misses the point of having Rules and Regulations, which should have very different goals from an employee handbook. Your Rules and Regulations should set forth the rules on how you manage and oversee your employees. It is the governing law for your organization. This is why Rules and Regulations are generally negative in tone; it sets forth what you do not want your employees to do so that you can discipline them if they do these things.

But not only do you need a china-focused set of Rules and Regulations, you also need to give your employees opportunities to comment on or question your Rules and Regulations and stay on top of addressing those comments and questions. If you fail to address an employee’s concerns about your Rules and Regulations, or even if you fail to clarify those Rules and Regulations in response to a question, you can be at risk for your actions being deemed unreasonable and disproportionate. Your action can more easily be called into question, which could lead a court to order you to pay some statutory severance to your terminated employee or, even worse reinstate the employee.

If the time comes where you need to discipline one or more of your employees pursuant to your written Rules and Regulations, you now need to make sure that your discipline is pursuant to your own Rules and Regulations and that your employee knows that he or she has been disciplined. It is not uncommon for China employees to claim that they never received your discipline decision. This is of particular importance when your employee commits a minor wrongdoing and then starts escalating with his or her offenses. If you cannot show that you previously disciplined your employee for his or her past offense(s), you may not be justified in terminating the employee for being a repeat offender? Put it on paper every time you issue a warning. We advice our clients to hand deliver their discipline notices to their employees with a witness there to record it. In addition, use email and require confirmation and/or an outside courier service that requires a signature for the delivery. If you have an internal procedure for appealing disciplinary actions, follow that procedure.

China Imports and dutiesEvery year U.S. producers file 10-15 petitions asking the U.S. government to investigate whether certain products imported into the US are sold at unfair prices (antidumping or AD) or are unfairly subsidized (countervailing duty or CVD). Many of the AD/CVD cases target products imported from China. Odds are good that at least two new AD/CVD petitions will be filed by Halloween and as many as five by year end.

Our clients often ask our international trade lawyers how they can determine the likelihood of a AD/CVD petition that could adversely affect their ability to compete in the US market. Each AD/CVD petition is unique to the product and industry it covers, but most of AD/CVD investigations fall within a handful of categories. Understanding what has led to the filing of previous AD/CVD petitions can help you as a producer, exporter, or importer, recognize if and when to expect a new AD/CVD petition that could directly affect you. The following are some of the indicators you should be checking to determine whether your imported into the USA product will be next.

The Regulars. Certain domestic industries have been frequent filers of AD/CVD actions. Companies in these industries are veterans of AD/CVD actions; they don’t ask if a new petition will be filed, only when it will be filed.

  • Steel of all types (carbon steel, stainless steel, flat products, pipe, rebar, wire rod, wire, etc.) from all over the world. The latest wave of steel AD/CVD investigations are being completed with high AD/CVD margins in most cases.
  • Softwood Lumber from Canada. The latest round of the US-Canada Lumber wars is set to begin as new AD/CVD petitions are likely to be filed in October 2016. Filing a new AD/CVD petition may be necessary to push US-Canada negotiations to a meaningful level.

The Big Box Effect. When Walmart, Lowes, or Target switch their sourcing of a product from a domestic manufacturer to a foreign (read Chinese) one, it is quite common for the jilted domestic supplier to file an AD/CVD petition in an effort to save their business. Boltless steel shelving units, wood flooring, ironing tables, and candles are all examples of this, and all involving products from China.

US Products Squeezed by Imports. It is not uncommon for an AD/CVD petition to be filed by a US producer that makes a higher quality product but is starting to lose out to foreign producers with lower quality but cheaper products. Frozen shrimp from multiple countries, garlic from China, and wooden bedroom furniture from China are some examples of this.

Pressure from Downstream Customers. Many AD/CVD petitions involve products that are material inputs used to make a downstream finished product. Petitions can be triggered by larger downstream producers switching to, or just threatening to switch to imports to pressure smaller upstream suppliers to lower prices.  Many chemical products from China, tire products from China and other countries, kitchen racks from China are examples of this.

AD/CVD Actions on Upstream ProductsSometimes AD/CVD actions filed by other domestic industries trickle down and harm downstream domestic industries. For example, US wire rod producers filed AD/CVD petitions that resulted in AD/CVD duties against imported wire rod. But these wire rod duties ended up hurting US wire producers, who in turn filed their own AD/CVD duties against imported wire.

Dying Dinosaurs/Last Survivors. Some AD/CVD petitions are filed by the remaining members of a nearly extinct domestic industry dealing with decreasing demand and increased import pressure. Sometimes the AD/CVD actions allow the surviving US producers to stay in the US market protected from import competition.  Examples of this are wooden bedroom furniture and innersprings from China.

Other Countries’ AD/CVD actions. The US is not the only country that acts to protect its domestic industries from unfair foreign trade. AD/CVD actions filed in Canada, India, the EU, Brazil, and even China are warning signs of industries facing tight competitive pressure. Imports blocked from one market are often diverted to other available markets. A primes example of this are products from China which first had AD/CVD filed in the EU before the US took action.

All of the above scenarios are good indicators of of an imminent filing of a new United States’ AD/CVD petition, so if you are seeing these market conditions in your industry, an AD/CVD petition in your near future.