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How To Terminate China Employees. Oh, And Be Sure To Pay Them.

Posted in Basics of China Business Law, Legal News

Though Western companies getting tripped up in China due to differences in legal systems makes for common fodder on this blog, in the employment law context the reverse often holds true.  Far too often my law firm gets contacted by companies in trouble for either assuming China’s labor laws are completely different from the West’s or for just not knowing Western labor laws enough even to give their actions much thought in China.

Let me explain.

In the United States, it is pretty common for employers to give fired or laid off employees a severance package, contingent on the fired or laid off employee signing a release of all claims he or she might have against the employer.  It is surprising to me how so many employers seem not to realize that doing the same thing typically makes sense in China.  It is possible that “my numbers” are skewed but it seems that we get more calls from employers asking us how to handle a recently terminated employee than we do from employers seeking our assistance on terminating an employee.  When we do get requests to help with terminations, we usually do some brief research regarding the particular employee’s (or employees) possible claims against our client and then we work with our client to strike a deal with its soon to be terminated employees that will ensure that the employee both will not and cannot sue our client in the future.

Another employment area where we too often see a strange disconnect is in withholding an employee’s pay.  I do not know US law very well on this beyond the following:

  • Virtually all states in the US treat employers incredibly harshly for not paying their employees.
  • In Washington State (at least a few years ago this was true) an employer that does not pay its employees will be liable to its unpaid employee for double the wages, plus attorneys’ fees.  Maybe ten years ago, a friend of mine at a local startup tech company (that no longer exists) came to me because he was owed $19,000 in unpaid wages.  As a favor to my friend, I wrote a letter to his employer saying that employer had better immediately pay my friend the $19,000 or risk having to pay him double, plus whatever attorneys’ fees he incurred in having to collect.  In response, I received a “screw you” letter from the company’s lawyer saying that my friend had been such a terrible employee and had so often failed to show up for work that nothing was owed to him. That made me mad and so we sued, seeking double damages plus attorneys’ fees. The company fought us for a very short time and then fired their initial lawyer.  A new (much smarter) lawyer came on and called me all but begging to settle.  Within that same day, we had settled for $45,000.  The attorney wisely knew that fighting these cases makes no sense at all.

I think there even can arise a point in some US states where not paying an employee can rise to the level of a criminal offense.  Therefore, smart employers, virtually no matter what, pay their employees their wages.

China employees should generally be handled the same way, but too many foreign companies do not realize that.

Twice in the last year, I have been called by companies threatened with lawsuits for not paying a former employee wages owed during the employee’s tenure with the company.  In both instances, the companies were justifying the non-payment of wages based on some allegedly horrible thing the employee had done during its tenure.  One of these companies also was trying to contend that a contracted-for yearly bonus did not constitute wages.

What these companies did not realize is that China has very strict laws regarding payment of wages and that failing to pay wages can lead to criminal charges.  So our advice is always “just pay” and worry about everything else later or not at all.  Unless of course the responsible parties within the company are so committed to their legal positions that they are willing to risk having to argue for it from a jail cell.

We first wrote about paying wages to avoid a criminal sentence back in early 2011, in a post entitled, Pay Your Wages In China Or Go To Jail. Do Not Pass Go, back when China formally criminalized non-payment of wages:

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.

Article 276(1) of the China’s Criminal Code provides 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.

Failing to pay wages subjects the company to a fine and 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 when the effects are severe.

Back then we noted some issues that were unclear about the law, including the following:

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.

We then concluded that the safe thing to do (of course) is not to “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.

China continues to get tougher on employers that mistreat their employees and — no surprise — this is particularly true for foreign employers. If you have employees and you have never read China’s Labor Contract Law, I urge you to do so now.  If you want something more in depth on China’s labor laws, I recommend you read the book, Understanding Labor and Employment Law in China, by Ronald C. Brown.

Bottom Line:  1) Get full releases from employees you terminate.  2) If you owe wages, pay them.  3) Do not mess around.  4) Do not try to be cute.  5) Do not let your anger at your ex-employee cloud your judgment.

Any questions?

  • ollumi

    It’s always a good idea to part with an employee on amicable terms, I would say particularly so in a place where the burden of proof indiscriminate of how ridiculous, wide ranging, or plain far-fetched the claim may seem to be inevitably lies on the “company” since they are the “stronger” party.

    True story: I had to deal with a person who refused to take back their labor booklet after their contract has ended (and I had the post office refused registered mail notes to prove it), then make a faked company sealed document 2 years later. so obviously false the giant spaces between the fake stamp had everyone in court snickering behind their hand other than the “judge”, but get supported for a “witholding proper documents” claim over a period of 2 years. The ex-employee’s basis consisted of 1)above said faked document, 2)a doctored screenshot which was doctored so badly the font was obviously different from the official government site it was supposedly taken of, and 3)average pay of some supposed job he’s supposedly qualified for instead of what his previous contract was based on a newspaper clipping. Guess what? Doesn’t matter, you lose. And don’t even get me started on the girl who took a year and a half off for a pregnancy which didn’t exist, then demanded fictional pay based on fictional raises.

    Now you already have to deal with cases off the deep end like that, and you want to shoot yourself in the foot by carrying a personal grudge and “stick it to them”? Believe me, I understand the motivation, but like the blog points out pretty clearly, it hurts you a lot more than them, China or no China.

    I do have to disagree on one thing – I’ve tried full releases, and they’ve basically came out to this: If I provided one that’s signed and dated, and they don’t provide one and claim I fake my document, the burden then falls on me to prove that the one I signed is true, including paying for any “experts”, who’ll inevitably not be of any help. I would think even a DNA signature would be insufficient to prove “willingness” at the time, or, for that matter, help the one case where a “judge” outright ruled that I can’t have employees sign these kind of releases, regardless of the fact that they received payment in turn. So, I’ve basically done away with that and just try to part amicably even with the worst employees.

  • Emilio Pucci

    Sometimes lawyers are best left out of these problems. It only accelerates and aggravates the employee. Better to negotiate and pay up and get rid asap.

    • http://www.chinalawblog.com/ Dan Harris

      I half agree with you. You are right that lawyers should not be apparent to the terminated employee as that will only make him or her think there is more at stake than there is or should be. However, it would be crazy not to have a lawyer draft the settlement and release agreement because failing to make that perfect could lead to subsequent claims (and I have seen that happen more than once).

      • Zhang Jerome

        Dan is right.

  • Simon

    What about employees for JV? Is the situation the same with its WFOE counterpart?

    • Zhang Jerome

      Their rights are the same.

  • Robyn

    Are foreigners covered by Chinese Labor laws regarding non payment of wages? I’m a European citizen employed by a Korean company for over 10 years in China. 2 months ago they cut my offshore compensation by 50%. My local salary is now nearly a month overdue. I’m not sure if the company is WFOE or JV. Do you have any advise for me?

    • Zhang Jerome

      Absolutely right.

  • mudsharkcentral

    Thanks for this post. I’ve forwarded it to my colleagues (all of whom found it extremely useful).

    However, this post is largely about employees who have either resigned from or been terminated by their employers. What about employees who are currently working? Does Chinese law proscribe against employers taking retributive action against current employees who sue them for back wages?

    In other words, many Chinese employees are fearful of taking action out of concern that their current employers might make it difficult for them to find a job in the future. Similarly, foreign employees need to secure letters of release and other documents from current employers before changing to another.

    • http://www.chinalawblog.com/ Dan Harris

      aprove

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