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Avoid China Labor Arbitration. It’s A Sucker’s Game And You Will Be The Sucker.

By Dan Harris on Posted in China Business, Legal News

The following story, told by the China Leadership Blog, is absolutely typical:

I know a German factory in a first tier city here [in China] that hired the wrong Finance Director. When they let her go, she took them to arbitration. The factory had followed the law in how they hired her and in how they let her go. However, even after following the law, they still had to pay an extra three months salary beyond what they had already offered her. The decision shocked the German company. The arbitrator explained that though they followed the law correctly, the former finance director is very upset, so you still need to pay her. Ouch. The ruling was not based on a point of law, but rewarded the most upset person. And the big company had to pay the worker.

In fact, every story I have ever heard of a foreign company going to arbitration against a terminated employee ends similarly. The foreign company is pretty much always loses. I think this is not so much because the foreign company is a foreign company as it is to do with the fact that China is still a communist country and worker’s rights are still (at least in theory) pretty paramount. 

Because the odds are so stacked against the employer, my firm always counsel our clients to try their utmost to work out a settlement with any employee they intend to terminate before the termination. We have been involved in countless of these settlements and in every instance I believe the company has paid less in settlement than it likely would have had to pay in arbitration. Additionally, settlement meant the company did not need to pay the attorneys fees and arbitration costs involved in the arbitration itself. 

One caveat. If you are going to settle with your soon to be (or already) terminated employees in an effort to avoid arbitration, you must also be sure to make them sign a settlement agreement/release that ensures they both will not sue you and ensures that if they do sue you, their case will be dismissed. 

I love a good fight as much (probably more actually) as the next guy, but fighting Chinese employees in arbitration just is not a good fight to undertake.

What do you think?

  • Sucker

    What you describe is exactly how it is. We fired a bad employee and she sued us claiming we had fired her because she was pregnant (trust me, there was no way we could have known). To make a long story short, she was awarded two years pay. We almost settled with her for six months pay, but then our big boss insisted we fight it so as to show the other employees that we don’t roll over. Well now they all know about the two years so what do you think they are going to do when it’s their turn?

  • Twofish

    There’s no requirement that the arbitration be based according to the law. If either party is dissatisfied with the arbitration panel, they can reject the finding and go to court.
    The funny thing is that labor arbitration panels are very popular in China. I think they have something like a 80-90% approval rating among workers that have gone through the process. The reason that the panel usually finds for the worker is that if the worker is really upset, they can take to the streets, and having lots of upset workers in the streets is something that the government wants to avoid.

  • dan berg

    Why: “this is not so much because the foreign company is a foreign company’? Do you really think that a typical worker fired for whatever reason from a Chinese firm would receive the same treatment?

  • http://www.chinataxinsights.com Matthew

    Dan,
    At the firm I previously worked in China, we had some success for foreign companies with Labour arbitration. My experience was that labour arbitration in China tries to divide the spoils. The employer wins on some points and the employee on other points.

  • http://www.shigroupchina.com Jim Nelson

    Dan,
    I would like to add a little, In my story the key was who was most upset, so managing the emotions of the person you let go is quite important which it worth mentioning. Actually, I agree with Matthew too. It is not completely unfair in arbitration, but one needs to understand the rules and not let those upset people get to arbitration like you said

  • http://www.affenstunde.com James Barnes

    @dan berg: it only costs about RMB 100 to make a claim against an employer at arbitration, local companies have it far worse than foreign companies; pop along to the Haidian arbitrator for an afternoon and you’ll see what I mean.
    In my experience, if it’s an important case to win, put your best black suit on and get yourself in front of the arbitrator making a statement on behalf of your own company. Make it clear that you have been affronted too. Don’t leave it up to your local HR or friendly advisors. Worked for me.

  • Prof. Andrew M. Williamson

    The terminated employee’s “face” (mianzi) is at issue and must be protected, otherwise (s)he will use his/her personal network (“guanxiwang”) to rubbish the foreign employer as bad, no matter how good or fair they may actually be. This is true of all performance management interventions between foreign employers and Chinese employees. See my book THE CHINESE BUSINESS PUZZLE @ http://www.howto.co.uk/abroad/chinese-business-culture/underpinning_behaviours/#conflict-management; and the Chapter on HR Management