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Pay Your Wages In China Or Go To Jail. Do Not Pass Go.

Posted in Legal News

The 19th Session of the 11th National People’s Congress last week revised the criminal code to provide that it is a crime for a company to intentionally withhold the wages of employees. A company that does this is subject to criminal fines and the responsible individuals are subject to imprisonment for up to seven years.

This is obviously a very significant issue and we are not surprised by this law change.

We are frequently contacted by owners of WFOEs in China who are experiencing financial difficulties. Very often the owner/manager reports that the company is behind on paying wages. Our advice always is to deal with the wage issue immediately because local officials will not allow a company to liquidate or restructure when wages are outstanding.

Now, our advice on wages is even more critical.

If you do not pay your wages, there is a good chance that you, as the manager/owner, will be charged with a crime and you could face seven years in a Chinese jail. Note also that this law change has retroactive effect. That is, if you failed to pay employees before the law was passed and that failure to pay continues, you are subject to criminal prosecution.

The new legislation is as follows:

1. Article 276(1) of the Criminal Code is revised to provide that willful withholding of employee wages is a crime. The elements of the crime are as follows:

a. The company has the means with which to pay the wages.

b. The company willfully withholds payment of wages by either refusing to pay or by intentionally transferring assets to escape liability for payment.

c. The situation is serious or the effects are severe.

2. The company is subject to fine. Persons within the company who are directly responsible are subject to fine and imprisonment. Imprisonment is up to three years where the situation is serious and up to 7 years where the effects are severe.

There are several points that are not clear. The most important are:

1. How does a company demonstrate that it does not have the means to pay? A simple statement will not work. In our opinion, the only way to ensure that there is clearly no means to pay is to file for a formal petition in bankruptcy or to go through the complex economic based layoff system prescribed by the Labor Contract Law?

2. Who is directly responsible? For a normal WFOE, this will certainly include the general manager and the Representative Director. It will also likely include accounting or related personnel if they are actually responsible for making the wage payment decision. This almost certainly means this applies to the foreign Representative Director, even if that person is based outside of China and is not involved in day to day decision making.

You cannot rely on these possible defenses to liability. You must take payment of wages seriously. You do not want to be in the position of making a defense after you have been arrested for a serious crime. Chinese employees have become very aggressive about ensuring their foreign employers pay their wages. This weapon will be added to the employee arsenal and we expect the weapon to be used aggressively.

In the past, we always stressed to our clients that if they were not going to pay their Chinese employees, they had better leave China before making that clear as we have been involved in a number of hostage situations involving non-payment of debts. We have also always stressed that their failure to pay those wages will almost certainly mean that their company will never be allowed back into China and many of those connected with the company will likely be barred as well.

We will now be telling them that if they stay in China or seek to return to China at some later date, they run the very real risk of going to the big house for a long time.

What do you think?

 

  • Chris

    This law is primarily aimed at fly-by-night domestic companies and, particularly, subcontractors in the construction industry that are notorious for asset stripping, packing up overnight and running, owing many staff a full year’s salary.
    Any decent WOFE and foreign investor that has been paying salaries on a monthly basis should not have that significant a salary liability should they need to shut the operation down. Definitely worth paying from a business, ethical and legal perspective.

  • Rick

    Since the law is retroactive, I wonder what effect that would have on foreign joint venture partners who walk (or walked) into a common situation where wages are long overdue even before the joint venture is consummated.
    Our local JV partner was significantly behind in paying salaries long before we ever got involved, and the extent of the liability was almost impossible to determine during negotiations. That was over 10 years ago and the JV tanked soon after the ink dried. I fear that some of us may have been at significant risk had the current law been in place.
    I’d be interested in any insights.

  • light487

    I’m curious whether this law also applies to foreign nationals working on an approved Working Visa? Your article puts forward the most likely scenario of a foreign company operating in China who are not paying local Chinese workers but what about the other way around?

  • Twofish

    Dan: How does a company demonstrate that it does not have the means to pay? A simple statement will not work. In our opinion, the only way to ensure that there is clearly no means to pay is to file for a formal petition in bankruptcy or to go through the complex economic based layoff system prescribed by the Labor Contract Law.
    Bankruptcy is not going to work. The problem is that if you create a WFOE that is owned by a US company, even if you dissolve the WFOE, if you have assets in a US company, then you are still subject to criminal liability since you have assets you can use for payment.
    Also if you can pay your lawyers, why can you pay your workers?
    This shouldn’t be a problem for a foreign company that pays wages in a regular basis. Also if you wind up, you did have registered capital, didn’t you?
    The problems with unpaid wages come with construction contracting companies in which the the employee is paid a lump sum at the end of their work.
    This may make things more complicated for foreign companies with local subcontractors. Before local companies would wait until the end to pay wages because *they* didn’t get paid until the end. With the new law, local companies might push to get paid earlier before they hire workers, so that they don’t go to jail at the end.
    —————–
    light487: I’m curious whether this law also applies to foreign nationals working on an approved Working Visa?
    I think so.

  • Damien

    I love this law. I think the lowest thing a business person can do it not pay their employees. I 100% agree in putting them in jail whether they do it in the future or they ripped off the poor unsuspecting employees 10 years ago by using some intricate corporate structure. If the owner/shareholders/parent company still has funds they should pay the employees before they pay themselves.
    In over 15 years of business in three different countries it has always been a rule of mine that the employees get paid before i do. Its only fair as I am the one who should take the business risk and not the employees. I have seen it far too many times where rotten companies rip off their workers. It is even worse when the workers are relying on the money to feed themselves.
    To anyone who has avoided wages in the past in China, or any other country for that matter, you should find the employee and PAY THEM. If you do this maybe next time you pass through the Chinese border you will not be freaking out about being put in jail, not seeing your family, eating rice everyday and probably getting beaten by the inmates who hate all us foreigners.
    Well lets also hope that this law applies to all of the English centres who hire foreigners and dont pay them. ;)

  • scott

    I Just returned from China as a sub-contractor for a WFOE on a construction project who fell behind on finances to complete the project……the general contractor, who paid a large deposit up front to the WFOE felt that some of the funds must have been spent elsewhere notified the authorities and they went to his hotel,and took his passport telling him he is not going anywhere until he could justify where all the money went……….we haven`t heard from him since