Basics of China Business Law

Foreign employees in ChinaChina recently initiated a pilot program for foreigner work permits that integrates foreigner entry employment licenses and foreign expert employment licenses into one “foreigner employment permit.” The PRC State Administration of Foreign Experts Affairs (SAFEA) has been tasked with carrying out this new program. This pilot program is intended to streamline current application and administration procedures and processes and to attract more high level foreign talent to China. SAFEA will begin implementing the pilot program next month (October) in a few cities and provinces, including Beijing, Tianjin, Hebei, Shanghai, Anhui, Shandong, Guangdong, Sichuan and Ningxia. The program will then go national on April 1, 2017.

Here are a few highlights of this pilot program:

Most importantly, the current foreign expert work license and foreigner employment license will be integrated into one document called the foreigner work license notice. The employer and foreign applicant will be able to complete and submit the license form electronically. The original “alien employment permit” and “foreign expert certificate” will be integrated into one permit called the foreigner work permit. Every foreigner will have one permit number per foreigner work permit, which will be used by the same individual for life. Effective April 1, 2017, the foreigner work license notice (外国人工作许可通知) and foreigner work permit (外国人工作许可证) will be formally used. The currently effective employment licenses can continue to be used up to their respective expiration dates.

A nationwide administration service system for foreigners coming to China will be established. The application materials required for submission will be way fewer than before and application letters, expert/employment permit application forms, bilingual resumes, and letters of intent for employment will be eliminated, reducing by about half the documentation you will need to submit.

Foreigners will be divided into three categories: A high level talent, B professional personnel, and C foreigners who are nontechnical or service workers hired on a temporary/seasonal basis. A score system will be adopted that will take into account various criteria for each foreign applicant, such as salary, educational background, experience, and length of service. The goal is to encourage foreigners in the first category (A levels), exert control over the second category (B levels), and strictly restrict the last category (C levels).

A “green channel” will be available to A high level foreign talent. These high level foreigners will no longer need to submit any hard copies of the documents required to apply for a foreigner work permit notice or for a visa application before entering into China. The review and approval period for these foreigners will also be considerably shorter than for foreigners at the other two levels.

How will all of this play out in practice? We shall see and we shall keep you posted.

For more on foreign employees in China, check out the following:

China lawyers

China is awash in money these days and plenty of Chinese companies have plenty of it. What Chinese companies really need is good technology. However, they do not want to pay for that technology. Their goal is to “assimilate” foreign technology with minimal expense. One of the techniques they use to accomplish this is the fake investment scheme.

Here’s how it often works. A foreign (usually a U.S., Canadian, European or Australian) company develops an innovative technology. To implement the technology, the foreign company contacts a Chinese manufacturer. with the goal of entering into a product development relationship. The Chinese manufacturer will take the basic technical idea and ultimately produce a prototype for commercial manufacture.

There is a catch. The Chinese company is interested in the project not so much because it wants to become a low margin manufacturer of a product for the benefit of a foreign company, but because it wants to use the technology to develop and manufacture its own line of products. See Your China Factory as your Toughest Competitor.

This can be true of a Chinese manufacturer that already makes directly competing products. It can also be true of a Chinese manufacturer looking to enter into a new line of business that uses new, cutting edge technology not currently available in China. This second type of manufacturer is the most dangerous, since their direct interest in assimilating the foreign technology is not obvious.

To assimilate the technology, the Chinese manufacturer must convince the foreign company to hand over its technology with no limitations. But how can the Chinese company convince the foreign company that no protection of its technology is required? The Chinese manufacturer makes the following investment pitch:

We really like your new concept. In fact, we like it so much we want to invest in your company. We are not interested in short term profits. What interests us are the profits at the end from an IPO. To accomplish this, we will make an initial series of investments in your company and then we will take the lead in managing your IPO to take place after your company starts  marketing the product(s) we will develop together.

The next and critical step then follows. The Chinese company then says something like the following:

Our company will become one of the owners of your U.S. entity. And since will be co-owners of the technology underlying your product, there is no reason for you to protect the technology from us. There is no reason to enter into an NNN agreement or a Product Development Agreement. We will work product development together. In fact, our Chinese entity will not even require payment from you. We will do the product development without charge to ensure that the product is brought to market as quickly as possible. We do not want legal or financial hurdles to get in the way of the IPO that will make us all wealthy.

So the foreign company provides its technical information to the Chinese manufacturer it now sees as its partner and benefactor and, as promised, the Chinese manufacturer develops a successful prototype. But, then the Chinese company lowers the boom. It is now time to enter into a formal manufacturing agreement for the product, but In reviewing the manufacturing agreement, the foreign company is shocked to see that it states that the Chinese manufacturer owns the rights to the intellectual property in the product. The Chinese company agrees to make the product exclusively for the foreign company, but under highly restrictive conditions. For more on how this “shift” in IP ownership can happen, check out China and The Internet of Things and How to Destroy Your Own Company.

When questioned on this IP legerdemain, the Chinese company will announce something like the following:

1. The Chinese company did all the work developing the product and it also incurred all of the expense. Absent a written agreement to the contrary, the Chinese company owns the IP in the product. Since there is no such agreement, the matter is settled.

2. Oh, and by the way, sorry guys but we won’t be able to make that investment in your U.S. entity. We really wanted to make the investment, but the Chinese government must approve all foreign investments from China and it will not approve this one. We were not able to obtain approval and you of course would not want us to make an illegal investment. [#sorrynotsorry]

By using this “fake investment” technique, the Chinese manufacturer has legally acquired the technology while paying little or nothing for it and there is nothing the foreign company can do. The Chinese company did both conduct and fund the development so under Chinese law it does indeed own the technology. And it is true that foreign investment from Chinese companies must be approved by the Chinese government. So what is there to say?

Our China lawyers have also often seen the fake investment proposal used in other technology transfer settings not involving manufacturing. One way this is done is that a Chinese entity will want to acquire technology in the software sector normally protected by copyright and a license. The technique is similar. The Chinese company wants the underlying technology but does not want to be restricted by a license or a copyright. So the Chinese company offers to invest a large sum in the foreign company and as part of its grand plan, it will propose to set up a company in China that will eventually be owned by the foreign company. It will then arrange for the software technology to be released to the Chinese entity without restriction: Why should the foreign company spend time and money licensing its software to this Chinese company that it will eventually own a part of in any event. Oh, and this Chinese company will surely be doing an IPO very soon anyway.

In this scheme, there are various delays in getting approval for both the investment in the foreign company and in providing for foreign ownership in the Chinese entity. After two or three years of delay, and after the Chinese company has extracted all of the technology/information it requires, it apologize for being unable to secure Chinese government approval to invest in the foreign entity and for not being able to give the foreign company any ownership in the  Chinese entity because foreign investment in Chinese domestic companies is prohibited. See The China Stock Option Scam.

The Chinese company then says goodbye, and that is it. The result is that the Chinese company has acquired the foreign technology virtually free of cost and there is usually nothing the foreign company can do.

China lawyers. China contract risks.Ten years ago, our China lawyers would get two to three contracts a year where our client was selling products to China. These days, we may get about that many every month. And just as Chinese companies selling products became adept at using contracts that minimized or even eliminated any of their risks, Chinese companies (particularly China’s biggest companies) have become amazingly adept at convincing the foreign selling companies to enter into contracts that are incredibly risky to the foreign company.

The below is a slightly revised email to which I was cc’ed, explaining to one of our clients its product selling risks under contracts proposed to it by various SOEs. This particular client — as is very common of our American manufacturing clients — was very concerned about the product liablity risks its China WFOE would be facing, when its more mundane selling risks should actually have been its biggest worry.

I am running this email for three primary reasons. One, to show what some of the primary risks can be when selling to China. Two, to show how China’s largest companies are so tough in their contracting. And three, just to emphasize the need to think through your risks in any China deal.

Here is the email from one of our China attorneys to an American manufacturing client whose WFOE sells parts to China SOEs:

1. At the outset of your doing this deal, you should consider your real risks here, not your theoretical risks.

a. Your PRC WFOE is a limited liability company. Whatever happens to that entity, no matter how bad, the odds are incredibly slim that liability from that PRC entity will ever be imposed on the shareholders of that company. The first step in protecting yourself is therefore to operate the PRC WFOE on a very lean basis. Do not acquire excessive cash or assets. Repatriate the WFOEs profits as quickly as possible. Rent rather than own. Use debt rather than capital where possible. This is what Chinese companies do to mitigate their risk and this makes sense for your China WFOE.

b. As your local staff has probably explained, it is very rare for Chinese SOEs (State Owned Entities) to sue their suppliers for large damages in the case of a quality problem. It is also rare for Chinese courts to award large amounts of damages in product liability cases. So at least based on historic practices, the risk of a major products liability judgment against your Chinese WFOE is low, but not zero.

c. On the other hand, as you have already experienced, it is very common for PRC SOEs to not pay their bills. Typically, the SOEs use their rules and contracts in a two step process. First, they force their parts supplier to provide a substantial amount of product on credit. They do this slowly, but over a two or three year period they lure the supplier into complacency. Second, the SOE then uses the alleged violation of one of their rules or contracts to justify their refusing to pay you for the products they acquired on credit. I know of no ___________ product suppliers who have been bankrupted in China based on products liability claims, but I know of plenty that have gone under either due to non-payment for product delivered or due to the imposition of charges for late delivery or trivial defect claims, or both. Once you are bankrupt, you have no way to dispute the claims and justifications for non-payment/imposition of charges. Like all ________ manufacturers, the Chinese SOEs are quite ruthless in this way. They don’t seem to care if they bankrupt their suppliers. They assume there is a replacement ready to take over.

2. We therefore need to determine your real risks and then address those real risks in order of priority. As I see it, your real risks are as follows:

a. Basic Business Terms: Price, quantity, delivery date, method of shipment: none of this is clearly set out in the contracts being proposed to you by your buyers, and all of the assumptions radically favor your buyers.

b. Payment: You are being required to provide substantial amounts of product on credit. This is never good in China, as the recent decision, as is evidenced by ____________’s  recent decision to withhold payment to you.

c. Price: Many of your buyers want to hold you to the requirement that they receive the “best price,” rather than a system where they stick to your published price or the specific price agreement with them. We should fight against this.

d. Unclear Acceptance and QC Procedure: These contracts are unclear on the acceptance and QC procedures upon delivery and this lack of clarity allows for infinite delay in payment. We need to change this.

e. Unclear and Unreasonable Demands for Off Site After-Sales Service: These contracts are written as to give the buyers essentially unlimited free after-sales service. That is not acceptable.

f. Unreasonable and Unclear Late Delivery Penalties: These contracts set forth unreasonable and unclear penalties for late delivery and they mandate that you deliver early and on credit to an SOE manufacturer controlled warehousing facility. We need to stretch out and clarify your delivery times and late delivery penalties.

The above are your real risks. Though product liability and product recall damages are also a real risk, they are a low risk for China. The greater risk in China is that this kind of claim will justify non-payment as described in 2.a. above. I also note that 2.f. late delivery claims can be significant in China. The threat of suing you on such claims could be easily used to compel you to take costly measures for delivery (air freight/express courier) or for out of sequence manufacturing that damages your relations with other customers. This sort of thing is very common in China — we had one company who came to us for a “contract adjustment” after having to spend millions of dollars in air shipping auto parts so as not breach its supply contract. You should treat the provisions on late deliveries as one of your biggest  risks.

3. You are in a position where you need to address your China risks head on. There is be no way to avoid the risks with a workaround such as sales agency or third party manufacturer sales. Your first step for dealing with your risks is to identify and prioritize your real risks. If you cannot acceptably mitigate these real risks, you will need to evaluate your overall risk of operating in China and decide whether or not it makes sense to continue doing so. As I stated in my earlier email, Chinese entities usually mitigate these risks by minimizing product sales on credit and by minimizing assets available for seizure to pay litigation damages.

Let’s talk tomorrow about the above.

China stock optionsThe China lawyers at my firm have been experiencing a big uptick in the number of companies and individuals contacting us after having been offered stock in a Chinese company as an alternative to payment in cash. This swapping of stock for pay is a relatively new phenomenon, so I want to explain how it works and, most importantly, why it cannot work for foreigners.

This is how this stock scam typically goes down. The Chinese company — usually in the tech sector — is in desperate need of the expensive skills or knowledge of a foreign person or entity. The Chinese company states: “we need your services, but we are a start up.” So, instead of paying hard cash, the Chinese company offers founders’ stock or employee stock options in their Chinese entity. Just as is the case with Silicon Valley founders stock/stock options, the idea here is that the Chinese entity will go public (“do an IPO”) and the stock it is giving will then provide a windfall benefit to the foreigners to whom they have given the founders stock or the stock options.

Unfortunately, this is all an illusion for the simple reason that no foreign person can own stock in a Chinese domestic company not already listed on a stock market. So any such option or stock transfer is void from the start. Foreigners are not permitted to be shareholders of Chinese domestic companies, nor does China recognize the concept of nominee shareholders.

Even though the offering of stock in Chinese companies is a fraud, we are still seeing many foreign individuals and companies taken in by such offers, most commonly in the fintech sector. Whatever the sector though, the Chinese company will use the “standard” Silicon Valley approach of offering a stock option package as a key benefit in the employment package. By offering stock options, the Chinese company can pay less and secure greater loyalty, while still exploiting the skills/extracting the knowledge of foreign individuals in developing an innovative software or other high tech product.

This exploitation/extraction period typically lasts one to three years, at which point the Chinese company tells the foreign individual, “sorry, the Chinese government has now informed us that we cannot issue stock options to you.” Sometimes, to better hide the scheme, the Chinese company will propose a series of fantasy work arounds, such as elaborate nominee schemes illegal under Chinese law. These proposals often convince the foreign person to waste another year or two with the Chinese company. But, in the end, the result is always the same. The Chinese company defaults on its promise to provide the foreign individual with stock in the company and the foreign individual is left high and dry. Since the founders stock/stock option scheme was void from the start, there is nothing the foreigners can do to enforce their rights in China, since they never had any such rights.

A similar scam is often perpetrated on foreign entities. The foreign entity has a technical service of great value to the Chinese company. The Chinese company then says: “We really need your services, but we are growing so fast these days that we simply do not have the free cash to pay you in cash for that. However, since we are growing so fast, it is certain we will soon do an IPO on the Shanghai stock exchange. So, instead of our paying you in cash, we will agree to pay in you in stock options. Our stock will provide you with far more monetary value than the paltry fee we would pay you for your services and by working with us, you will gain entry into the lucrative Chinese market and highly profitable work for Chinese companies will follow.”

This scam results in the same sad result as the employee stock option scam. First, as with employee stock options, a foreigner cannot own stock in the Chinese entity, so the option is void from the start. Second, the private Chinese entity never does an IPO on the Shanghai market, so the whole concept was an illusion. Third, the only thing the foreign entity achieved was to identify itself as an easy mark, which means there was no future profitable work available in China. Finally, the foreign company does not figure out the scam until after it has already transferred its service or valuable information to the Chinese entity.

There are a couple of elegant variants Chinese entities use to implement the Chinese stock scam. In the rare case where a private Chinese company actually completes an IPO, the listing is on a foreign exchange: usually either Hong Kong or the United States or London, where due to Chinese law requirements the actual listing entity is not the Chinese company for which stock options or stock were purportedly given. Instead, the listing entity is some form of subsidiary or other affiliate of the Chinese company, so that when the IPO takes place, the holder of the scam option or stock in the Chinese company can be told: “your stock option (or stock) is with the Chinese parent; you do not have an option with the affiliate actually listed. Sorry.”

Private companies in China are effectively locked out of China’s domestic IPO market. On the other hand, such companies have become attractive targets for private equity financing. But the story here is the same. The private equity financing occurs in China, resulting in a big payout to existing shareholders of the Chinese entity. The foreign stock option holder looks for an equivalent benefit. The Chinese entity then responds: this was a private equity deal, not an IPO. You did not own any stock at the time of the private financing, so you are not entitled to any benefit.

Bottom Line: Foreign individuals and companies should not accept promises of stock options or stock in a Chinese company in place of employment compensation or payment for services. Any Chinese company that makes the offer of payment in stock is either ignorant of the requirements of Chinese law or intentionally committing fraud. Either way, foreign individuals and companies should refuse to work with any Chinese company that makes this kind of stock offer. We have seen many of these deals. None have ever worked out well, and it will not work out well for you.

Hiring a foreigner in China usually requires all of the following be true:

Foreign Employees in China

  • The candidate is in good health and over the age of 18
  • The candidate possesses the skills and work experience required for the job
  • The candidate has no criminal record
  • The candidate has a specified employer
  • The candidate holds a valid passport or any other valid travel document in lieu of passport

Note though that the local rules need to be consulted and, like everything else regarding China employment law, they can vary by locale. For example, some municipalities require a different number of years work experience. And there are almost always exceptions to the general rules. For example, even though most places impose an upper limit on the candidate’s age, many allow exceptions for candidate that satisfy certain other conditions. Adding to the confusion and the difficulty in getting things right, in some places many (sometimes most or all) of the local rules and exceptions are not available to the public and the only way to know what you as an employer can or cannot do is to “hash it out” by talking with the relevant authorities. In other words, if you really want to hire an employee who does not satisfy the requirements listed above, you should absolutely not give up.

Employers generally need to follow the following steps to bring on a foreigner as an employee. First, the employer must obtain an employment license from the local labor authorities and then secure a work visa invitation confirmation letter from the relevant foreign affairs office. With that letter, the employee may then apply for a work visa at the Chinese Embassy in the employee’s home country. Upon arrival in China, the employee must obtain (1) an alien employment permit from the relevant labor authorities and (2) an alien residence permit from the relevant public security department. Note that these permits need to be updated periodically.

A company that employs a foreigner must do so via a written employment contract and that employment contract should accord with applicable national, provincial and local laws and regulations. For example, most places require the contract term for a foreign employee not exceed 5 years. I know this sounds obvious, but do not have your foreign employee start working before he or she has secured the proper visa. Wait until you have all the necessary paperwork in place, NOT just after you have a signed employment contract. Before too quickly can cause your employee to be fined, lose his or her job, or even to be deported. The employer can be hit with a much larger fine and be ordered to bear all costs in connection with removing the illegal worker. Serial violators can even lose their ability to hire foreigners under any circumstance.

Beginning in 2014, China started drafting a regulation called the Provisions on the Administration of Foreigners Working in China, which is intended to focus on attracting more foreign talents into China. The goal is to replace the current Provisions on the Employment of Foreigners in China, which was promulgated by the Ministry of Human Resources and Social Security in 1995 and recently amended in 2011. Note the interesting change of words from “employment” to “working.” This is intentional and was done to deal with how foreign self-employed individual can legally work in China, not just be employed. The rule is not universal in China on this issue. There is nothing in Chinese law specifically prohibiting a foreigner from conducting business as a self-employed individual (except for residents from Hong Kong, Taiwan and Macau, who are explicitly permitted to do so). However, some places, such as Beijing, explicitly prohibit a foreigner from doing so and registering such a business in those places is impossible. I will not be holding my breath waiting for this new set of regulations to come out, but when and if it does, we will — of course — let you know.

For more on the hiring of foreign employees in China, check out the following:

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys are often asked some version of the following question:

I’m making a low-budget independent movie set in China. Can I just take my cast and crew to Xi’an on tourist visas and film a movie without bothering with permits?

Our answer:

It is illegal for foreigners to engage in film production in China by themselves. Full stop. Guerrilla filmmaking may have a certain romantic appeal, but things get a lot less romantic when viewed through the bars of a prison cell. Or when you lose all your footage and equipment and have to pay a substantial fine. Maybe you’ll get away with it, but is it really worth putting you, your cast, and your crew in harm’s way? Independent films may be inherently risky, but that’s because most of them lose money, not because making the movie is dangerous. Unless you’re making a movie with Werner Herzog in the Amazon. (When Klaus Kinski is in the mix, all bets are off.)

Note also that although changes have been proposed to the laws and regulations governing film production in China, those changes will not change anything about foreigners seeking to film in China.

The eight keys for navigating China's employment laws
Eight keys for navigating China’s employment laws

It is far cheaper in the long run to avoid China employment law problems than to have to deal with one that has arisen. If you follow the following eight rules, your chances of having a China employment problem will markedly decrease.

1.  Use written employment contracts. China’s employment system is a contract employment system. This makes it a very different system from the United States, where U.S., employers can terminate employees pretty much at any time and for any reason. The U.S. system is called employment at will. China is most assuredly not an at-will employment jurisdiction, and American companies often get themselves in legal trouble in China for failing to realize this. As a China employer, you must have written employment contracts with all of your full-time employees.

China employers without a written employment contract are exposing themselves to penalties, administrative fines and the risk of being deemed to have entered into an open-term employment contract with their employees, which essentially means no definitive end date to the labor relationship.

If an employer goes more than a month (note that this period is shorter in some municipalities) without having a written employment contract with an employee, the employer will be required to pay its employee double the employees’ monthly wage. In addition to having to paying double the employee’s monthly wage, the employer must immediately execute a written employment contract with the employee.

If an employer goes more than a year without having a written employment contract with an employee, the employee lacking the written employment contract will be deemed to have entered into an open-term employment contract with his or her employer. Such a contract generally means the employer must retain the employee until his or her retirement age. As explained below, once an employee has completed his or her probation period, it is very difficult to terminate the employee during the term of the employment contract. It is even more difficult to terminate an employee on an open-term contract.

2. Put the mandatory provisions in your China employment contracts. China’s Labor Contract Law mandates that employment contracts contain the following provisions:

  • Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
  • The explicit term/duration of the employment contract (and any probation period)
  • A description of the work the employee will be performing
  • The place of work
  • The working hours
  • Rest and leave time
  • Salary
  • Social insurance
  • Applicable labor protections and labor conditions and protection against occupational hazards
  • Other matters required by relevant laws and regulations

Many locales also require employers put additional provisions in the contract, and in addition to what is mandated by law, employers generally should be sure to include provisions describing any additional benefits they provide to particular employees,

3. Be clear with the term of your employment contracts and your probation periods. It often makes sense to include in your employment contract with any new employee a probation period to give the employer (mostly) and the employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. The general rule is that for employment terms of more than three months but less than one year, you may set a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months and for employment terms of more than three years or for an open-term employment arrangement, the probation period cannot be longer than six months. You may use only one probation period for the same employee.

Since it is difficult to terminate an employee who has completed his or her probation period, we usually recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee.

This approach also makes sense because in most places in China the employee will automatically be converted into an employee with an open contract term when you re-hire the employee pursuant to a second fixed term contract. Terminating an employee on an open term contract is much more difficult than terminating one on a fixed term. Having a long probation period will delay the onset of the open term period so you can take advantage of this period to determine whether you should convert the employee to a lifetime employee.

But just like pretty much everything having to do with China employment law, the general rule is just that; it is not the right way to go in every circumstance since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.

4. Know China’s working hour rules. In China, most municipalities enforce an 8-hour work day and 40-hour work week, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is akin to the U.S. salaried employee system and applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined in local rules. The flexible working hours system can benefit employers needing greater employee hour flexibility, without having to pay overtime every time one of their employees works outside the basic hours. Under the comprehensive working hours system, employers may have their employees work beyond eight hours a day or 40 hours a week without having to pay overtime wages, however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

But with very limited exceptions, before a China employer can implement either a flexible working hours system or a comprehensive working hours system, it must secure prior approval from the local labor bureau and such approval does not last indefinitely: you need to submit an application for renewal before the expiration of the term specified in the government approval letter.

Regardless of which working hours system you as a China employer choose to implement, the safest approach (to avoid having to pay overtime) is not to have any employee work on Chinese national holidays, if at all possible.

5. Know China’s rest time and vacation rules. Every employee will have two rest days, typically Saturday and Sunday.

Employees who have worked continuously for one year are entitled to paid annual leave. The statutory vacation period, based on the employee’s total years of service (with anyone, not just for you), is as follows:

  • More than 1 and less than 10 years service: 5 days vacation
  • More than 10 and less than 20 years service: 10 days vacation
  • More than 20 years service: 15 days vacation

Employers are required to make arrangements for employees to take vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who fails to allow an employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation day. And trust us when we tell you that Chinese employees are well aware of this law and they virtually always seek the 300% owed to them (and more) when they leave your employment.

6. Get clear on your salaries. Your written employment contract must set forth a salary. One issue to consider is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This 13th month of salary is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month of salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.

It also makes sense for you to determine early on whether you are going to pay this extra month because many a foreign company doing business in China has felt compelled to add this 13th month only after calculating their expenditures based on a 12 month system. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may want a lower salary structure with an annual bonus which is usually paid in the early part of the following year. This will add no cost to you, but your China employee can benefit from the preferential tax treatment on his or her annual bonus, which means less individual income tax burden for the employee.

7. Get clear on social insurance and housing fund payments. As a China employer, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your China employees. The exact type of social insurance you must pay depends on the local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Do not make the common mistake of paying for your expat employees’ social insurance when you do not have to do so or the equally common mistake of failing to pay for your expat employees’ social insurance when you are required to do so, as both mistakes can be very costly.

8. Use Chinese as your employment contract’s governing language. We recommend making clear in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. The advantage of a one-language contract is that it eliminates costly disputes between the two “official” languages which happens pretty much every time with dual language contracts. Equally importantly, it makes things clearer for both you and your employees. Nonetheless, even though the English language portion is not an official version, we still draft our China employment contracts in English as well so that our clients who do not read Chinese can figure out what it says both when we draft it and in the future.

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys are far too often are asked the following, usually with the following sort of lead-in:

The owner of this Chinese company has become like a brother to me. Whenever I go to China, we go out to dinner together and then drinking. He even invited me to his daughter’s wedding. Do I really need a contract with his company?

Our answer: yes.

And if we really need to explain why, then you have not been reading this blog and you either just have to trust on this or go back and read it.

China employment lawAs a China employer, you should you have a written employment contract with your part-time employees, even though Chinese labor laws do not require it, for the reasons set forth below.

First, the rules in your locale (e.g., Shanghai) may require you to have a written contract if your part-time employee requests one, so you may as well be prepared. Being able to present a contract to your potential hiree shows you are prepared and know how things work in China. If your employee becomes convinced that you (a foreign employee) don’t know how Chinese employment laws work, you could be setting yourself up for future problems. Chinese employees file more grievances against foreign employers than their Chinese counterparts, especially against those they perceive as not understanding China.

Second, a written contract can be used to make your part-time employee’s work responsibilities and obligations clear. Performance issues are more likely to arise when your employee is unclear on what he or she has been hired to do.

Third, written contracts are the best way for you to protect your confidential information, trade secrets and intellectual property from exposure by your employee, part-time or otherwise. A written contract and an enforceable damages clause written to deter your part-time employee from stealing your IP, trade secrets or confidential information can go a long way towards preventing your employee from taking these things to his or her next employer.

But if it’s not done right, a written employment contract can actually backfire. For example, under China’s Labor Contract Law, a part-time employee can work no more than four hours a day and no more than 24 hours in a week and most municipalities enforce this. So if your contract with one of your part-time employees provides that he or she must work 35 hours a week, you are at risk of converting that employee to a full-time employee. And that now full-time employee could sue you for all the unpaid social insurance benefits you were supposed to pay but never did and the labor bureau almost certainly will also fine you for having failed to make mandatory social insurance contributions. Or even worse, it can suddenly become incredibly difficult or even impossible for you to terminate your employee because not only did your bad contract convert your employee to a full-time worker but it also was an open-term contract. See China Employment Contracts: Ten Things To Consider.

If you have any part-time employees or if you plan to hire any part-time employees, you also probably should add a section to your rules and regulations regarding such employees. The reason for this is simple: China-based employers must provide all of its employees with a copy of the employer rules and regulations and all of its employee will be subject to these rules and regulations. If you don’t make clear that certain company benefits are not available to your part-time employees, you are setting up your part-time employees to believe and then to argue that they are entitled to those benefits because your rules and regulations essentially say that they are. You also should make sure that your rules and regulations do not opt your part-time employees out of any mandatory benefits to which they are entitled, such as work-related injury insurance. You should be sure to follow all of the formalities and make all of the filings required by your local labor authorities. Do not forget: Many China labor laws are local, and the laws on part-time employees are certainly no different.

Bottom line: Part-time employees have their own special issues in China and you ignore them at your peril.

Negotiating with Chinese CompaniesIn this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style and how they relate to negotiating with Chinese companies. Pye concludes that most Sino-American negotiations are initiated in a way that helps the Chinese side achieve its preferred strategies and tactics. My first post, Contract Preliminaries and Courtship Rituals, looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. In this post we will see what Pye has to say about the Chinese tendency to prefer agreements on generalities.

Pye observes that Chinese culture traditionally shuns legal considerations and instead stresses ethical and moralistic principles. By contrast, Westerners are thought to be highly legalistic. The Chinese tend to reject the typical Western notion that agreement is best sought by focusing on specific details and concrete matters while avoiding discussions of generalities or rhetoric. The Chinese prefer to agree on general principles before dealing with details. They can, Pye says, be tenacious in holding to their principles but surprisingly flexible about details. The Chinese focus is on the “spirit” of the deal. Agreement on principles usually takes the form of letters of intent or protocols, the purpose of which often mystifies the Westerner. The Chinese attach great importance to symbols and symbolic matters. Symbols such as the spirit of the agreement have a reality for the Chinese and there is a distinct Chinese bias in favor of the publicity or “face” these symbols can generate.

The Chinese, Pye says, conceive of their business relationships in longer and more continuous terms than Westerners. They expect an agreement to set the stage for a growing relationship in which it will be proper for the Chinese to make increasing demands. A proclivity for seemingly unending negotiations can even make the Chinese insensitive to the possibility that “canceling” contracts may cause trouble in the relationship with the foreign party. From the Chinese perspective, nothing about a contract is ever final. Westerners usually think a contract will provide for a given period of fixed and predictable behavior but the Chinese look for continuous bargaining and regard this bargaining itself as suggesting an enduring relationship. For Westerners there can be a great deal of give and take before agreement is reached, but afterwards the expectation is that neither party should lean on the other to seek further advantages. For the Chinese, the very achievement of a formalized agreement, like the initial agreement on principles, means that the parties now understand one other well enough that each can expect further favors. They will therefore not hesitate to suggest changes immediately on the heels of an agreement. They tend not to treat the signing of a contract as signaling a completed agreement.

Pye advances several explanations for the Chinese tendency to seek early agreement on general principles. First, he says, it is easier to extract concessions when details are to be worked out later on. Second, agreement on principles can easily be turned into agreement on goals. This can in turn support a later insistence that all discussion of concrete issues must support these goals. Finally, Pye says, agreement on general principles can be used later to substantiate tactical claims of bad faith.

More on tactics in the next post in this series.

One final point: Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard the Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.