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SME Legal Bills In China. I’m So Glad You Asked.

By Dan Harris on Posted in Legal News

I was talking with a client today for whom we are doing what I consider to be our standard China start-up “package.”  We are helping them form a WFOE, helping with the legal side of their lease, registering and protecting their IP in China, and drafting their China employee manuals and employee contracts. 

I mapped out generally what the client could expect during its first year in China in terms of legal fees and then I very briefly talked about some non-legal accounting and wage issues with which it should be prepared to deal. The client then asked a great question and one that, surprisingly enough, I had never been previously asked. “How much should we set aside for China legal matters after the first year?  

I thought for a moment and then noted how unless there is a major corporate change, there usually is surprisingly little need for legal help after one’s first year in China. I then said our clients might call us after the first year with a labor law issue, but that those are usually very quickly and cheaply resolved. 

I got off the phone and five minutes later a client called. He had just been told by one of his female Chinese employees that she was entitled to 13 days leave for her marriage (as opposed to the standard three days) because she is 25 years old. The client thought his employee was making this up, but he wanted to be sure. Sure enough, brides over 22 years old are entitled to an extra ten days of leave time. They are entitled to thirteen days leave, but this leave shall include weekends (but not legal holidays). It took us all of ten minutes and we did not even bother to charge. 

  • kang

    Any chance that you’d be willing to ballpark the legal fees for setting up a small WFOE?
    Of course it is fully understandable if you prefer not to publicly say.

  • William

    Interesting leave policy. Is it intended to encourage women to wait to get married until they’re over 22? Is the groom entitled to any leave?

  • http://www.chinesefactorysourcing.com Daniel Eriksson

    And the concencus of this is? Do not hire women above 22? seriously, great to know. Thank you.
    Daniel
    -CFS

  • Twofish

    Erkisson: And the concencus of this is? Do not hire women above 22? seriously, great to know. Thank you.
    Well then who are you going to hire? If you hire women under 22 and then fire them all the second they reach 22, you are going to find yourself in front of a labor board pretty quickly. If you refuse to hire women at all, then you are competing against construction industries, and 23-year old women are less likely to lead riots than 25-year old men if you don’t pay them enough.
    The days in which companies (particularly foreign companies) can just squeeze maximum labor for minimum pay in China are over.

  • Twofish

    Designing a legal system is tricky because there are all sorts of trade-offs. One thing that tends to be true with Chinese law is that there tend to be more inflexible and explicit standards than there are in the United States. On the one hand, this sometimes leads to crazy, unfair, or sometimes unjust situations. On the other hand, if you have an explicit rule that says that women over 22 are entitled to 10 days leave, then it’s easy to follow, it’s easy to see if you’ve followed the rules or if you have broken the rules. Whereas if the law is vague (i.e. people should be entitled to reasonable leave), you’ll be in court forever arguing about what “reasonable” means.
    Also, labour hearings and court cases in China tend to be rather quick. The law says that you need to give 10 days, you gave 5. Judgement for plantiff, next case. One thing that happens in China is that people often ignore the law because they assume that they are “off the radar”. All you really need to do to scare someone is often just to show to them that the are on the radar.

  • http://www.chinalawblog.com Dan

    @ Twofish
    You’ve got it exactly right. There’s a choice. You use words like “reasonable” and the flexibility is great, until you find yourself spending hundreds of thousands of dollars fighting in court over what constitutes reasonable. Or you have a rule like a ten day rule and maybe 20 percent of the time it makes no sense at all.
    There is one additional thing at play in China though, and it is something I have written about at least once in the past, and that is foreigners using the excuse that the law is nonsensical or unclear, AFTER they have been challenged for having violated it. In this case, my client was smart and asked BEFORE doing anything, but I can tell you that in most cases, we get the call after the wrong decision was made.
    At that point, the client tells us that the law was nowhere to be found or that the law was unclear or that the law made no sense. I never know what to say other than that’s all well and good, but we are now facing a situation where you clearly acted in violation of the law and here are our options for dealing with it. I always give them the option of spending a lot of money on attorneys fees to fight it, with a 99 percent chance of losing, and that ALWAYS causes them to back down.
    China has some weird laws, for sure, but every country does, and the reality is that most of China’s laws are within the range of good sense. At least the laws related to foreign investment, anyway.

  • Twofish

    The problem with the claim that Chinese law is nonsensical or unclear is that it usually isn’t true. Chinese laws tend to be quite clear and direct. What is more often the situation is that someone expects that a given law is not going to be enforced or somehow doesn’t apply to then because they assume incorrectly that they have “connections”, and then finds out that they are wrong.
    One other issue is that people overestimate the role of “connections” in China. There are indeed people in China that have enough political power to get around the law, but the odds are that you don’t know any of them. The number of people in China that pretend that they have deep connections is far higher than the number of people that actually do.
    Something to remember about Chinese law is that the people that have real great political power are the people that *make* the law. It’s unlikely that you’ll be able to find the Politburo in violation of Chinese law, because they are the people that *make*, *interpret* and *enforce* the Chinese law, and if someone on the Politburo doesn’t like the law, they can (and do) change it. If the Politburo finds a law to be inconvenient, they can (and do) order the NPC to pass a new law or the SPC to issue an interpretation. They can (and do) order the PSB and the Procuratorate to either strictly enforce certain laws or ignore violations of laws, but it’s dangerous to rely on that because they are working from their interests and not yours.
    The corollary of this is that if you find yourself violating Chinese law, there are very strong odds that you are working *against* the wishes of the senior Chinese political leadership, which limits the amount of pull that you can get. The main motivation of the senior Chinese political leadership is to keep the Communist Party in power, and they figure that keeping workers rich and happy will keep them off the streets.
    Also people in the West often assume that the Chinese courts are far less effective than they actually are, because they read stories about how a peasants and workers fighting a connected local and corrupt Party official and losing. Those stories are true. If you are a peasant and worker and you try to use the court system to fight a Party official, you are not likely to get very far.
    However, in labor cases, the peasant and workers are *NOT* fighting Party officials. They are fighting you, and you are not a Party official, and the odds are that you don’t know any Party officials that will help you. In that situation, there is nothing to keep the courts and local government from nailing your hide against the wall if it will make worker happy and off the streets.

  • Twofish

    One other thing is that the people that make the laws do realize that people will try to get around them. One reason that they do have a rule that gives women over 22 extra leave is that they know that companies can’t easily circumvent them. Unlike the United States, China is not “employment at will” and if you want to fire someone, you have to go through some procedures.
    You can refuse to hire women, but the reason factories like to hire women for manufacturing in the first place is that having one thousand 19-year old women in your factory dormitory is considered to require a lot less baby-sitting than having one thousand 19-year old men. If you make 1000 19-year old women angry at you, they are likely to do much less damage to your factory and to you if they riot, which happens pretty frequently in Chinese factories.
    Also you have to realize that there are generational shifts. Twenty years ago, you would have been able to get people to do just about anything because they were desperate for work, and however bad conditions at the factory are, they were better than the alternative. If you hire an 18 year-old today, you are likely to get a “little emperor” that has been spoiled since birth, and they are less likely to put up with bad treatment, and more likely to e-mail their friends to get something done.

  • Bayonet

    I do this kind of quick consultation all the time. But once I consulted a partner from EU for two quick questions on competition law, he spent half an hour to explain even that I just wanted a simple Yes or No. I saw the conflict between two mindsets that are shaped by their own jurisdictions respectively. Chinese judges have little room to maneuver between the gaps of the laws and their ratio decidendi do not count. So for many issues, it is quite black and white.
    While in the EU, you’ ve got guidance, laws, cases, directives, decisions to go through before you can make an assessment. There is always a “balance off” of various elements.
    Personally, I like the EU/UK style, because that means more work and more billing time. But I see no way that Chinese courts would adopt that appoach in any given time. So for the increasingly competitive Chinese legal market, lawyers might want to return to the traditional litigation to keep their pots boiling .