Wanna Get Sued In China? Don't Pay Overtime.
China's Labor Contract Law (which law applies to every employment relationship in China) is very clear: employers must pay their employees for overtime.
Though there are some exceptions, these exceptions are not nearly as broad or as easy to obtain as is widely believed.
Overtime payments are 150 percent for each overtime hour worked on a normal work day, 200 percent for each overtime hour worked on a day off, and 300 percent for each overtime hour worked on a statutory holiday. China considers forty hours per week as generally considered standard.
Though high level management and other staff can be considered exempt from overtime pay, to be so, prior government approval is typically required. To make matters even more complicated, local regulations definitely can vary on what constitutes an exempt employee and what is required by way of approval.
My firm has handled around a half a dozen cases where foreign companies came to us after having been sued for having failed to pay overtime. In every single instance, our advice and eventual action was to settle the claims because they were all valid. Interestingly, despite all of them having been valid, we were able to settle them for considerably less than full value because the employees were so desirous of getting a lump sum payment and fast.
I thought of these cases today after a reader sent me a China Daily article entitled, "Labor Disputes Skyrocket in Beijing." The article talks of how "about 80,000 [Beijing] workers had been involved in disputes with their employers by the end of November, double the number of last year" and up from 26,000 disputes in 2007. The article then noted how "about 50 percent of the cases were related to overtime rates and payment" and the reader asked me if I had been seeing the same thing elsewhere in China with respect to foreign employers.
My answer was, "Yes." Employees and ex-employees are suing their foreign employers in China way more now than just a few years ago and most of those lawsuits are stemming from a failure to pay overtime, a failure to pay sufficient wages without a written contract, or from a termination not provided for in the employee manual. We are finding these cases very easy to settle at a fairly reasonable cost, but virtually all of these could have been avoided with just basic care. There is no excuse for not paying overtime or not securing an exemption for your employees to whom you believe overtime is not necessary. There is also no excuse for not having a written contract with your employees or a written employment manual setting out the grounds for firing.
Oh, and if you think the person you are paying is an independent contractor and not an employee, there is about a 99.9% chance you are wrong and that person is, in fact, an employee.
What are you seeing out there?
Comments (29)
Read through and enter the discussion by using the form at the endJoe - December 19, 2009 5:30 PM
Not paying people for working overtime is so suspect. Really it's just trying to take advantage of someone else's time and willingness to get the job done.
Lee - December 20, 2009 1:09 AM
Dumb question, but is an ayi considered an "independent contractor"? If so, are employers obligated to pay 300 percent when they come on holidays?
David - December 20, 2009 7:17 AM
@Dan - Please tell me more about exemptions. I didn't think exemptions were possible. "Flexible working hours" for sure but a pure exemption for people regularly working extra hours?
@Joe - I don't agree, I'm afraid. Overtime for extra hours requested of you for specific tasks by your employer, no problem. I work in IT and there is a basic fact (detailed very nicely in the recent HBS book "The Adventures of an IT Leader") that some people can do in 25 hours what others will do in 40 and other still can do in 50. In a world where I had to pay 10 hours overtime to the slowest people because they need more time to get the job done, then I'm more likely to fire them after so long because their performance isn't up to scratch (allowing for training, etc.). The truth is, however, that if they don't mind putting in the extra hours to compensate and make sure they hit all of the deadlines, I really don't mind.
Dave Gordon - December 20, 2009 9:46 AM
I'm not sure how a business manager would react to your post. On the one hand, if you don't pay overtime, you have a very significant chance of getting sued. On the other hand, you will be able to "settle them for considerably less" than full value. That makes it pretty tempting for a business manager to take the risk.
Yokie Kuma - December 20, 2009 8:35 PM
We have not seen any law suits or had any issues. But we have very clearly stated in our labor contracts that overtime hours are only authorized prior (in writing) by certain company senior managers. I am not sure how this will work if we are confronted by it, but again, we have not had any issues to date. Oh, and we also never ask for people to work overtime .... and we have no formal system for tracking hours. Are we asking for trouble ... don't think so but it only takes one unhappy employee .....
Matthew - December 20, 2009 9:14 PM
Dan,
Interested in your comment about independent contractors and would love to hear more about your view on this area.
Chris - December 20, 2009 10:51 PM
In general, for funds to be paid to an 'independent contractor', they need to either has a registered company and issue a company invoice and provide a formal tax receipt, or, if used on an ad hoc basis, income tax needs to be deducted from their payment. We do use freelance translators on occasion and our accountant's advice has been that this is OK if the services are genuinely ad hoc and we deduct the income tax.
Matthew - December 21, 2009 1:28 AM
David,
I could be wrong but I doubt the law would require you to pay overtime where the work is done on a voluntary basis. I have practiced a little in employment law in China (but not a lot) and it is my understanding that generally the requirement to pay overtime is where the employer compels an employee to work. Good practice in these circumstances would be to have a company policy stating that overtime can only be worked where written approval is given by a supervisor. If an employee then decides to stay back to finish his/her work (without approval, there should be any obligation to pay overtime rates.
andeli - December 21, 2009 2:08 AM
This also happens because there are no independent unions or labour associations in China. The only way for laobaixing to get a piece of the cake is to sue for every little thing they think are unfair.
Dan - December 21, 2009 6:20 AM
Lee,
Great question. Technically, they are probably considered employees to whom you do need to pay overtime. Believe it or not, we got a call a few years back from someone who was being deported for having illegally hired an ayi. We did not take on the case and I have always suspected the person being deported had done more than simply hire an ayi without a written contract, but who knows?
We also were contacted by someone who was being sued by their ayi for having been injured during work. We referred the case out to a Chinese lawyer to defend and I do not know how it concluded, but it was a very real injury and a very real case. I bring this up because these sorts of lawsuits are a very real possibility and very few people consider this.
Dan - December 21, 2009 6:22 AM
David,
Exemptions are possible (sometimes and in some places) for very high level employees. Our view on these is that unless you have a real one in hand, there is no exemption.
Dan - December 21, 2009 6:27 AM
David Gordon,
I would think a business manager would do a cost benefit analysis. My experience has been that the better run companies seek to avoid overtime and when it does occur, they pay for it, so as to avoid future risk. My firm's experience has been that we have been able to "buy out" unpaid overtime at a decent price, but we are a small sample and things change.
My overall view is that it virtually always makes sense to engage in preventative measures so as to decrease the likelihood of having to call in a lawyer on a litigation matter. Lawyers live for litigation matters where they can tell their clients they have "no idea" what it will cost because it is going to depend on what the other side does and what is found out about the facts.
Dan - December 21, 2009 6:36 AM
Yokie Kuma,
Certainly, what you are doing should help, but there are always many things that can be done to avoid a situation where you are sued by an employee.
Dan - December 21, 2009 6:39 AM
Matthew,
Not sure what more you want to hear re independent contractors. Our view is that virtually anyone believed to be an "independent contractor" is, actually, under Chinese law, an employee, and should be treated as such. To keep it simple, one should generally view anyone who does work for your company as an employee, unless the work is being done pursuant to a company to company contract.
Dan - December 21, 2009 6:43 AM
Chris,
Maybe. But there are other things one should be doing with employees beyond simply paying income tax on them. There are all kinds of other required payments also, like pension payments, unemployment payments etc., and you also you may be opening yourself up on firing issues if you do not have a written contract. There are some law differences with respect to workers paid by the piece and seasonal workers and a few other categories, but if I were you, I would either make sure that translators come under some sort of exception (they very well might????) or know whatever risk you are taking. I do NOT know what risk you are taking here because I do not know the full nature of the work nor the full nature of what you are doing in terms of contacts, payments, etc.
Dan - December 21, 2009 6:50 AM
Matthew,
Without knowing the law at all here, I strongly disagree with you on this. I started my career as a litigator and my view of litigation is that sometimes you pretty much have to ignore the law and this is one of those times. I think you are probably right that an employer is not liable for overtime that the employer did not request. At least I suspect that is the law.
Having said that, do you really think many judges are going to believe that your worker completely voluntarily chose to work overtime, without there being at least some pressure on the employer's part to do so? I think no matter what the facts really are, if an employee can show he or she worked overtime, it will be very difficult for the employer to convince anyone that the employee should not be paid for it. A few months ago I commented on how in every case of which I was aware in which a Chinese employee sued a foreign company, the Chinese employee has prevailed. I asked if anyone was seeing anything else out there and by comments and emails, I was told "no." Now I am not certain that foreigners are really losing all of the cases, but if a foreign company came to me under the scenario you just described (and even though my first reaction anytime one of my clients is sued is to CRUSH the other side), I am guessing that in nearly every case, my advice would be that we should try to settle.
Do you agree with me?
Dan - December 21, 2009 6:54 AM
Andeli,
There is, no doubt, some truth in what you are saying about how the "only way for laobiaxing [the common man] to get a piece of the cake is to sue for every little thing they think is unfair," but most of the employee lawsuits in which my firm has been called to assist on have involved very well paid managerial level employees. We do not get called when some company is being sued for $900 by an employee, unless the company is being sued for $900 by 200 employees.
Matthew - December 21, 2009 4:13 PM
Dan,
Talking about independent contractors, I am little confused by this. I would have thought for example a translator who did one translation for your company would not be considered to be an employee. I agree that this is on the extreme end and that there will be other more borderline cases that I wouldnt like to litigate.
In terms of the voluntary v compulsory overtime, this sounds more like an issue with the labour arbitration process rather than overtime itself. I actually have a 1 or 2 foreign companies succeed in labour arbitration, although I agree they are in the minority. Regardless of merits i always encourage clients to settle such cases here because the unavailability of costs awards means that settling will always be to the party's commercial advantage.
Jay - December 21, 2009 9:27 PM
My guess is that (Chinese) employees sue (foreign) companies for O.T. etc because they can (win). In my (admittedly limited) experience there are three legal systems in China (nice topic for another post?):
1) The official legal system, which (much like you expect) follows the law, considers evidence, gives reasonable (or harsh, if that is reasonable) verdicts according to law and legal precedent, etc.
2) The socialist legal system, whereby the law and evidence are interpreted more 'flexibly', with a definite 'share the wealth' notion. I.e. a poor party sues a rich party, the poor party will likely win (unless system 3 is used) and get some level of compensation. With the 'fact' that (foreign) companies are rich and employees are poor, regardless of who said what, the employee will win and get some cash. This system also works on the road, when two cars crash, the one with the better brand and/or better insurance is 'by definition' (mostly) at fault and has to pay up.
3) The practical legal system, whereby whoever pays the highest hongbao wins. Evidence plays no role whatsoever. I'm guessing most of these overtime suits against foreign companies are handled in system 2 because foreigners don't generally do hongbao, and many suits against chinese companies are thrown out in system 3 because hongbao is just a part of doing business.
My experience with the courts in China is mostly in systems 2/3, so I can't tell what goes on in system 1 other than from what I read in the paper, but I do know that it is possible to shift between systems depending on whether you are willing and able to raise the profile of the case (i.e. go on TV to complain), although that might back-fire.
Bottom line, if a (former) employee sues a (foreign) company for O.T., they'll win and you pay up, end of story. Only in incredibly obvious (and suitably high-profile) cases, e.g. some guy who has never worked there sues for O.T., do you have any chance of winning, unless your pockets are deep, you don't want to get on TV and you have an aversion against hongbao, then you still loose through system 3...
David - December 22, 2009 3:11 AM
Matthew
I agree with Dan here. The wording in the overtime clause is (at least in translation) quite vague "...may not compel or in a disguised manner compel workers to work overtime."
There's plenty of space here for an employee to lodge a case and half of the problem for management in a smaller firm is the consumption of their time in defending a case, let alone the costs of the case itself (I've participated in four so far).
Ron Brown - December 22, 2009 2:23 PM
Yes there is clear risk in misclassifying employees as independent contractors or as management employees. While there are exceptions and exemptions for coverage of overtime (and other labor and employment law obligations), usually you can count on their being an obligation unless you actively assess and understand the applicable laws, especially the local laws. Though admittedly self-serving, these issues are dealt with in Understanding Labor and Employment Laws in China (Cambridge University Press 2010, now available)
Dan - December 22, 2009 3:36 PM
Matthew,
I agree it is weird to consider someone who does a five hour translation for you as an employee, but that is, at least technically, pretty much how they should be considered in China.
We certainly agree though that foreign companies being sued by their employees in China is virtually never a good thing.
Dan - December 22, 2009 3:41 PM
Jay,
I really love your analysis and I am going to "steal" it for a future blog post, no doubt.
Your description of #2 is different from the one I use, but I am not disagreeing with you in terms of its impact. I see it as the Chinese courts being less "legal" and more "equitable." In the US, arbitrators are famous for looking more at the equities of a situation than do the courts. The saying is that arbitrators tend to "split the baby." Chinese courts are generally more concerned with the equities of a case than a US court would be. I did a post on this, entitled, "On China Litigation And Getting Harmonized To Death. Ugh." You can find that post here: http://is.gd/5xRP6
Dan - December 22, 2009 3:45 PM
David,
Add to that the problem of convincing the arbitrator in a "he said, she said" case and it is just not likely to be a good use of a company's time and resources. Having said that, there are times when a company is better off spending a lot of money even on a small case it knows it will probably lose, just so the world does not come to consider it an easy mark.
Dan - December 22, 2009 3:48 PM
Ron,
I like your statement that "you can count on there being an obligation unless you actively assess and understand the applicable laws, especially the local laws." The local labor laws can really be killer. Killer. Sometimes even finding them can be killer. You need to look at the National, the Provincial, and the City.
P.S. You have an open invitation to do a guest post on China's labor law.
Matthew - December 22, 2009 7:01 PM
Dan
I dont disagree with anything you have said. In fact, employment law is one area that is sufficiently local(what area isnt) in China that I am comfortable deferring to others. I was more expressing my surprise, particularly on the independent contractor issue as this is obviously a fairly common arrangement even in Chinese owned companies (and I have never seen the issue litigated). In fact, China's individual income tax law has a whole section dedicated in the independent contractors. This actually leads to an interesting thought in respect of how to respond to such claims - forward any documentation claiming employee status to the tax authorities.
Independent contractors are taxed on a flat 20% basis whereas employees are taxed at a marginal rate - up to 45%. In the right circumstances, where the income is significant, it could be very disadvantageous to be considered an "employee".
Dan - December 23, 2009 4:48 PM
Matthew,
And that is one of the problems. Nobody seems to want an employment relationship in China. What I always find interesting is when a foreign company has been paying its Chinese "employees" way over market wages and then decides to get legal and form a WFOE and actually hire these people as employees. What then should the company pay? The same inflated salary PLUS all the taxes and benefits, or a reduced salary. My sense is that in the end, the employer ends up paying the same amount (or nearly the same), PLUS all the taxes and benefits on top of that. Which is just another reason why it makes sense to start out legal, rather than switch to it later at some point down the road.
Tam - March 30, 2011 10:23 PM
When working on public holiday, you need to pay 300% on top of the 100% paid-holiday, it means employer has to pay total 400% on that particular holiday
When working on rest days (any 2 days in a week and normall are Saturday and Sunday), you need to pay 200%, but since rest days are not counted as paid-day, it means employer has to pay total 200% on that particular day only
Disregard of 150%, 200% or 400% (including 100% paid-day), the calculation can always be based on minimum wage, not necessary based on the actual wage
Ken - November 14, 2011 12:44 PM
I agree when it comes to paying hourly workers. But what about high level managers that are paid a salary and know that it will take extra hours on their part to accomplsih tasks. Do you still have to pay overtime???