China HR AuditsEarlier this year I wrote about Beijing’s new labor laws, called the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes (关于审理劳动争议案件法律适用问题的解答)(“the Responses”). These new laws focus mostly on adjudicating labor disputes more fairly, effectively and consistently. My previous post focused on the new rules on reinstating employees to their old jobs when an employer’s termination decision has been deemed unlawful. A super brief summary is that an employer that unlawfully terminates an employee must reinstate that employee to his or her previous position unless one of a limited number of circumstances exists that render the original employment contract no longer able to be performed. As I noted, one of the “defenses” the employer may raise is that the employee has started working for another employer and it therefore would not make sense to grant the employee reinstatement.

The new rules set out in the Responses were not an attempt by Beijing to make itself an employer-friendly jurisdiction, but rather, to increase uniformity in the law across the different courts within the municipality of Beijing. Nonetheless our China employment lawyers have been seeing employer-friendly interpretations that seem to be bringing Beijing one step closer to Shanghai, which is the most employer-friendly among China’s major expat cities. One example is Article 13 of the Responses, which provides that an employer may terminate an employee who seriously violates labor disciplines or professional ethics, even if the employer’s rules and regulations and employment contracts are silent on the specific employee misconduct. The Responses refer to paragraph 2 of Article 3 of the PRC Labor Law which mandates employees shall comply with labor disciplines and professional ethics. The Responses state that an employee’s serious violation of this requirement will allow the employer to terminate that employee based on paragraph 2 of Article 3 of the PRC Labor Law.

This means employers need worry just a little bit less about listing every single possible punishable offense in their rules and regulations. However, what constitutes a “serious violation” of labor disciplines or professional ethics is unclear and will be determined on a case-by-case basis. What has not changed in Beijing (or even Shanghai for that matter), is that an employer’s termination decision must be reasonable and the employer must prove the reasonableness of the employee’s termination to prevail in a labor dispute. In other words, Beijing is becoming more like Shanghai with respect to employee terminations but it is NOT like the United States which mostly allows for employee terminations at will.

Beijing employers still must proceed with extreme caution in terminating anyone and mutual terminations with settlement agreements and claim releases are still usually the safest route for employers to take. We still routinely see China employers’ unilateral termination decisions stricken because of defects in either their rules and regulations or in how they implemented those rules and regulations. We constantly perform HR audits of foreign companies doing business in China and more than nine out of ten of these companies are clearly not doing enough to withstand an employee termination dispute.

I will be writing more about Beijing’s Responses in later posts so please stay tuned.

 

 

notarization, appostille, consularizePretty much every week, our China lawyers get emails or phone calls from someone (probably half the time a fellow lawyer) seeking assistance with making a document legal for some sort of use somewhere in the world. Maybe 40 percent of the time, the request relates to a need to authenticate an official Chinese document or government record so it can be used in a United States court or government filing or U.S. transaction. Maybe another 40 percent of the time, it’s essentially the opposite: the person needs a U.S. document authenticated so it will work for a Chinese court or a Chinese government filing or China transaction.

Much of the time, the party reaching out to us expects a quick answer that will allow them to do what they need to do, at little to no cost or for us to do it for a couple hundred dollars. Pretty much without exception though, we have to burst that bubble by explaining how these things can be quite complicated and time consuming and, hence, expensive. The reason being that what is actually required varies in pretty much every instance, depending on the exact reason the authentication is needed and if they wish us to provide them with legal counsel we will need to do the following:

  1. Research exactly what will be required. This typically involves our reviewing the law and talking with the appropriate government official (especially if it is China).
  2. Oftentimes, we must arrange with a notary in a specific city to notarize a document and many times we also must deal with the appropriate Secretary of State (or comparable) for an appostille or comparable and with the appropriate consulate or embassy or court for the consularization or legalization. Accomplishing these things can be incredibly time consuming as they often involve multiple letters and phone calls, and even occasionally flights when things get delayed.
  3. Translations are also often required.

Just saying….

 

China joint venture lawyer
Negotiating the Chinese joint venture maze

We have recently been getting an onslaught of foreign companies (mostly North American and European) looking to do joint ventures in China. China joint ventures tend to be cyclical, rising when the business climate in China is for any reason difficult, and falling when it gets easier. It would seem we are in yet another Chinese joint venture up cycle.

One of the first things we always seek to do when contacted by a company seeking legal assistance on their China joint venture deal is to try to figure out what they want our role as lawyers to be, so we can provide them a good fee estimate. there are three basic things lawyers typically do when providing representation on a China joint venture deal: 1) provide counsel regarding the joint venture agreement; 2) provide counsel regarding the joint venture entity formation; and 3) do the actual work involved in forming the joint venture entity itself.
In our initial communications with potential and actual joint venture clients, we seek to discern what our role will be on all three of these things, especially the third one: how much involvement our firm’s lawyers will have in forming the China joint venture. If the Chinese side (or its lawyers) are experienced with how to form a joint venture, it usually behooves our client to let the China side handle that aspect of the transaction, with our role being to simply oversee that process to make sure it goes smoothly. The below email is from one of our lawyers to a new client that just retained us to provide it legal counsel regarding its China joint venture deal. I am running that email today because it provides a good overview on some of the common issues that arise in China joint venture transactions, while also nicely setting out the different roles your China attorney might play in such a deal.
It appears you want me to review documents, with the actual work forming the entity and setting up the factory to be done by your JV partner.
I briefly reviewed briefly the JV contract. The document is written in a common law style, but it is clear and complete. Are you certain you want to operate in China in JV structure? Are you certain the proposed amount of capital will be sufficient to set up and begin operations for a manufacturing venture? Are you certain you are willing to contribute ownership of your intellectual property to the JV company? Are you certain you would prefer to transfer ownership of your IP to the JV company, rather than just license your IP to that entity? Are you certain you are willing to earn income from this project solely from distribution of profits from the JV company? Are you certain you are willing to give full control over this project to the Chinese side? Your JV contract assumes you can exercise some form of control through the board of directors, but this is an illusion.
If your answer to all of the above is yes, then my review of the documents would be extremely limited. If your answer to any of the above is no or that in light of my questions you are not clear on how you wish to proceed or simply that you need more information, then I would provide for a normal review, outlining the issues. However, if you already understand and are ready to move forward on the basis of this contract, there is no need for this step.
Finally, note that forming a foreign invested enterprise in Shenzhen is a difficult process. Though your partner will be dealing with the Chinese side, much of the process and much of the delay involves obtaining information and authenticated documents from your company and very few Chinese companies (or even Chinese lawyers) have experience in that process. You should discuss with your partner how you will handle that side of the formation process. Note also that setting up a factory in Shenzhen involves all sorts of required documentation and is a complicated and time consuming procedure. However, if your Chinese JV partner has all of the above under control, none of this should raise any issues. You should, however, ascertain whether they understand the JV formation process. In our experience, most Chinese “partners” do not understand this process, which can cause confusion and delay and added expense down the road.
As always, if you have any questions, please do not hesitate.
For more on China joint ventures, check out the following:

 

China employment lawyers
Don’t pay twice for your employee’s vacation

Employers in China are constantly getting sued over employee vacation days. The very short version of the general rule is that any employee who works continuously for one year is entitled to statutory annual paid leave (a/k/a paid vacation days). This is not news to China-based foreign employers as their parent companies all have vacation policies. However, what is not so well known is the legal requirement that they make arrangements for the employees to be able to enjoy their statutory vacation days. What this means is that employers in China must stay on top of how their employees take (or not take) their vacation days and, more importantly, they must pay their employees for unused vacation days, unless they can prove the relevant employee has voluntarily given up such vacation days. But the tricky part ain’t over.

Foreign employers in China far too often assume their employees cannot prevail on claims for payment for unused vacation days if they have waited too long. But this is only sort of correct. As with pretty much everything else involving China employment law, how the statute of limitations is calculated varies. Some courts treat compensation for unused vacation days as normal wages and apply the longer statute of limitations and give employees until one year after their employment is terminated to sue for all such compensation. Some courts treat it as a pure penalty payable by the employer and apply the shorter statute of limitations, which may bar a portion of the unused vacation pay the employee is claiming to get. Some courts completely ignore the issue of statute of limitations and this usually means an employer that cannot produce evidence to show its employee actually took the vacation days at issue will need to pay for any “unused” vacation days, no matter how long ago.

Our China employment lawyers advice our clients not to focus on how a particular Chinese court in a specific city will apply the statute of limitations on any given day, especially since courts in different districts in the same city have been known to use different standards. Rather, we tell them to focus on working to prevent the problem. From day one, your HR department should be keeping track of how each of your employees takes his or her vacation days. If there are lingering issues or claims, clean them up right away. Get your employees to execute an agreement (in Chinese!) making clear the employee acknowledges having been paid in full for any unused vacation days.

Though employees in China should plan their own vacation days and do have the freedom to give them up, it is not a good strategy for an employer to leave it to their employees to track and/or accumulate their vacation days without checking. When employees sue for vacation time years after that time was accrued, you want to have good evidence that no payment is owed.

antidumping duties against ChinaEarlier this month I wrote about it was not clear whether the U.S. antidumping order on garlic from China helped domestic garlic producers. One of the unusual consequences of this garlic antidumping order was that the California garlic producers had worked out an arrangement that allowed Chinese garlic to be imported from one “fair” supplier (Harmoni), while blocking the vast majority of all other Chinese garlic sourced from “unfair” suppliers.

The latest Department of Commerce (DOC) annual administrative review threatened to destroy that cozy arrangement between the California garlic growers and Harmoni because a couple of New Mexico garlic growers had filed a request seeking DOC review of Harmoni. The DOC had accepted the New Mexico growers’ review request and had initiated a review of Harmoni. Harmoni did not respond to the DOC’s questionnaires, so DOC issued a preliminary determination finding Harmoni would be subject to a 376% dumping rate. But the DOC was still considering arguments that the New Mexico garlic grower’s review request for Harmoni was invalid and should not have been accepted by DOC in the first place.

Last week, the DOC issued its final determination for this garlic review, and concluded that the review request filed by the New Mexico garlic growers was not legitimate and therefore its review for Harmoni and its 375% dumping rate would be rescinded. As a result, Harmoni is able to maintain its zero dumping rate and continue supplying California garlic growers with Chinese garlic.

The DOC rejected the New Mexico garlic growers’ review request because new information submitted after the preliminary determination called into question the credibility of their assertion that they were actually domestic garlic producers. For example, contrary to specific statements made on behalf of the New Mexico garlic growers, the DOC pointed to the record information showing Chinese garlic growers were in fact extensively involved in planning the New Mexico growers’ review request and had both directly and indirectly compensated the New Mexico growers and the U.S. attorney for participating in this review. One of the two New Mexico garlic growers dropped his support for the Harmoni review request and then submitted a bombshell statement admitting that his small garlic farm in New Mexico did not really compete with Chinese garlic. “Our stated moral high ground – ‘leveling the playing field,’ etc., etc. – inevitably came with a ‘wink, wink’ whenever we talked about it.” DOC concluded that “material misrepresentations” by the New Mexico garlic growers had tainted all their statements and information submitted by them and so it could not rely on any of the garlic production information demonstrating the New Mexico garlic growers were in fact domestic producers.

So in the end, the California garlic growers got the DOC decision they wanted, which was to keep Harmoni out of the DOC review process. This allows Harmoni, to continue reaping the benefits from being the only remaining Chinese garlic company with a zero dumping rate. This also allows the California garlic growers to remain protected by incredibly high dumping rates that block most “unfair” Chinese garlic from sold in the United States, while still giving them direct access to cheaper Chinese garlic from the sole “fair” Chinese garlic supplier — Harmoni. In the end though, U.S. consumers bear the cost of protecting the handful of California fresh garlic producers still surviving.

I’m sure there will be other attempts to break down the antidumping barriers that block most Chinese garlic from the U.S. market and keep U.S. garlic prices the highest in the world. Perhaps garlic growers in Minnesota or some other state will file another review request targeting Harmoni.

Someone should.

China WFOE A while back (I am being intentionally vague here to avoid identifying anyone) a U.S. client company contacted me about shutting down its China WFOE and/or terminating all of its roughly 20 China employees in one fell swoop. The U.S. company had discovered rampant corruption among its employees and its CEO wanted all of this to be done “by tomorrow.” I am not kidding!

My response (modified to hide any identifiers and ` into one email) was as follows, with the client identified below as “Company A.”

I spoke with Grace Yang (our lead China employment lawyer) and with Steve Dickinson (our lead China corporate lawyer) and both agree that there is no way we can provide you with anything even approaching sound advice by tomorrow.

You essentially have two choices. One, you slink away in the middle of the night and neither Company A nor anyone who China might ever identify as having been associated with Company A ever goes to China again and Company A never conducts any business with China again. If (as I pretty much know will be the case) this does not appeal to you, then you must provide prior notice to the government because what you are proposing to do almost certainly constitutes what China calls a “mass layoff.” We will need to confirm with the authorities that such notice will be required because the definition of mass layoff varies depending on the local labor bureau. But we are virtually certain it will be.

Once we know exactly the layoff situation with which we are dealing, we can work with you to figure out the best, the fastest, and the cheapest way to accomplish it. If you have any employees who are pregnant or any employees for whom this will present a significant financial hardship, this will get even more complicated.

In addition to the employee issues, you also will need to work with the government in shutting down the WFOE itself and that can be an even longer and more drawn out process than dealing with the employment issues. We typically bring in accountants to assist with WFOE closures because taxes are so central to this. We have worked with a couple of very good accounting firms in ___________[Chinese city] and we would want to bring one of them in for this closure. This is going to take a substantial amount of legal work on our part, gathering up the facts, researching the law, and meeting with government officials.

What I can tell you at this point is that how we handle this will very much depend on the facts. It will depend on the size of the WFOE (my client contact did not even know how many employees the company had in its China WFOE]. The reason for the layoff. The types of employees you have: some may need to be differently than others. The location. The economy in your location. The labor bureau office. Your company’s history. Your company’s plans for the future, including not just China but other countries. I could go on and on and I’m sure Grace and Steve can and would add many more things to this list once we get going on this. We have seen these sorts of terminations/shutdowns done right and we have seen these terminations/shutdowns done wrong and usually when they are done wrong really bad things happen, like people being held hostage in China or seized by the government when they go over there a few years later. When they are done right, they take a lot of thought and a lot of varied expertise and, most importantly, a lot of time.

If what you are proposing is a mass layoff — and we are virtually certain it is — there are certain procedures that must be followed, and those procedures vary by district, by city and by province. If it is a mass layoff, almost everything will likely need to be made public and the language used in the public notice thus becomes absolutely critical. The last thing you want is for your terminations to become this week’s big issue for labor activists. We will need to meet with the employee/union representatives or all of the employees to discuss severance. What can go wrong there? Well, one of the last times I was in Beijing, the talk of the town was an investment banker who went to meet with employees in a situation not all dissimilar to this, but without a plan. He was literally beaten to death. That’s obviously a rarity, but it does show the need to have a well thought out plan in place before doing anything.

The labor authorities will get involved and they have tremendous power to correct anything they think wrong with the WFOE’s mass layoff proposal. And the last thing you want to do is start out too harsh and thus anger them from the get-go. On the flip side, if we can win over the local labor authorities with a good plan, we can likely get them to assist in the whole process.

The above is mostly just the labor issues. Closing down the WFOE will have its own issues, mostly relating to first clearing up the labor issues, and any debt and tax issues. The tax issues tend to be worst of all because once a company starts closing, taxes start coming out of the woodwork. That is why we also will almost certainly want to bring in a high level yet local tax accountant. Oh and employees almost always file a claim against the WFOE regardless of how good a severance package they get; they nearly always think they deserve more. Which is why it will almost certainly be worth it for you to pay each of them enough to get each and every one of them to sign a settlement agreement in addition to everything else. I understand why you do not want to pay most of your employees anything right now, but it will probably end up making financial sense to do so.

Our China lawyers continued working with this company on a strategy and as time went on, their anger subsided and they chose not to shut down or layoff all of their China employees. But for anyone out there thinking of shutting down their WFOE or laying off all or nearly all of your China employees and needing some ultra-quick advice, the above should do, with the usual proviso that China’s laws on this sort of thing are always changing and always hyper-local.

China trade casesPresident Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977.  These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around  75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms.  And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin.  Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

China employment lawyers
China employment law tips

If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up-front is much less expensive than the alternative. These eight tips will help you stay on the right track.

1. Write employment contracts that spell out every aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will employment is foreign to the Chinese and American companies often get themselves into legal trouble when they fail to adequately understand this significant difference between the two countries. As an employer in China, you must have written employment contracts with all full-time employees.

Employers that don’t implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment agreements, which essentially means that the labor relationship has no definitive end date.

If an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, the employer will be required to pay double the employee’s monthly wage.

If an employer lets more than a year go by without implementing a written employment contract, the employee will be considered to have entered into an open-term employment contract with the employer. Such a contract usually means the employer must retain the employee until his or her retirement age. After an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is operating under an open-term contract.

2. Make sure all mandatory provisions are included in your employment contracts. China’s Labor Contract Law requires employment contracts to 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 specific term/duration of the employment contract (and any probation period)
  • Salary
  • A description of the work to be done by the employee
  • Location of the workplace
  • Working hours
  • Rest and leave time
  • Social insurance
  • Applicable labor protections, labor conditions and protection against occupational hazards
  • Other terms required by relevant laws and regulations

In addition to the required items, employers should include provisions describing any additional benefits they will provide to particular employees.

3. Clearly spell out the term of the employment contract and probation period. A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish 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 plan, the probation period cannot be longer than six months. Each employee can have only one probation period.

Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to provide a six-month probation period (the longest permitted under Chinese law). Though it is fairly easy to terminate an employee during this probation period, it not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.

Keep in mind that, in most cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether you should convert the employee to a lifetime employee.

As with most aspects of employment law in China, the general rule is just that; it is not the right option for everyone 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. Most municipalities enforce an eight-hour workday and 40-hour workweek, 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 somewhat similar to the salaried employee system in the United States. It applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than 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.

For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local labor bureau and the approval is valid for only a limited time. You must submit a renewal application before the expiration of the term specified in the government’s approval letter.

Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.

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

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

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

Employers are required to make arrangements for employees to use their 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 does not allow an employee to take annual leave may be forced to pay that employee 300% of his or her daily wages for each unused vacation day. Chinese employees are very familiar with this law and they virtually always pursue the 300% owed to them (and more) when they leave a job.

6. Understand what you’re getting into before paying for a 13th month. Paying a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.

Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in your employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from a lower individual income tax burden.

7. Factor in social insurance and housing fund payments. As an employer in China, 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 employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Some employers mistakenly pay for expat employees’ social insurance when they don’t have to, and others neglect to pay for their expat employees’ social insurance when they are required to do so. Both errors can be very costly.

8. Make Chinese your employment contract’s governing language. We recommend specifying in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. Single-controlling-language contracts can help eliminate costly disputes related to differences in the two “official” languages. Such disagreements are practically inevitable with dual-language contracts. It also makes the terms of the contract clearer for both you and your employees. For the benefit of our clients who cannot read Chinese, our China employment lawyers virtually also create an unofficial English-language version as well.

China employment lawWhen it comes to your China employment law matter, you should keep the following three important precepts always in mind:

  1. China’s employment laws and its legal system favor employees over employers. As in most countries, the employer is presumed to be the more powerful party, so the law provides the employee with many protections. Among other things, this means that in most employer-employee disputes, the employer (not the employee) will bear the burden of proving what actually happened, and if the employer cannot prove it (usually with written documentation in Chinese) the employee will prevail.
  2. China’s employment laws cannot usually be modified by contract.
  3. China employment law is very local. What you can or cannot do in Shenzhen could be different from what you can or cannot do in Beijing. Before making any important employment move, you should check the rules for China, the rules for your province, the rules for your city and, in most cases, you should discuss with your local labor and employment authorities as well. Failing to do this is what causes foreign employers problems. See also China Employment Law: Simple Questions and Complex Answers.

This post is about how the second rule impacts China employee vacation days — an often-litigated employment law issue in China.

Let’s consider a hypothetical based on a question our China employment lawyers are often asked. A China employer’s Rules and Regulations provide that its employees are entitled to the statutory minimum number of vacation days and no carry-over of vacation time is allowed. Let’s further assume that the Rules and Regulations state that the employees have the responsibility to make sure they take all their vacation days within the relevant calendar year and they are expected to keep track of their vacation days. Lastly, the Rules and Regulations provide that if the employee fails to take all or part of his or her vacation time, the employee will be deemed to have given up all unused vacation days and cannot claim any compensation for such days. A disgruntled employee then sues the employer for 300% pay for all of her unused vacation days. The employer’s response is to refer to its Rules and Regulations and the fact that this particular employee signed an acknowledgment of receipt form acknowledging receipt of these Rules and Regulations and refuses to pay the employee anything on the basis that she knowingly and voluntarily forfeited all her unused vacation days.

The employer then asks one of our China lawyers what it should do.

When I or another of our China lawyers gets this type of question, the first thing we do is gather up more facts. What city is it? What does the employment contract actually say? Is it in Chinese (which makes it a lot harder for the employee to deny knowing what he or she signed) and a lot easier for the court to know what it says. What do the Rules and Regulations actually say and is that in Chinese as well? Most importantly, what is actually going on with this employee and this employee’s anger with her employer and what actually happened regarding vacation time. Many times the best way to resolve a loaded employee-employer dispute like this is to get both parties to step away, calm down and compromise, realizing that full-on expensive litigation is not in anyone’s best interest.

For purposes of the discussion here, however, I am going to assume a number of things, like the following:

  • The employer Rules and Regulations were lawfully implemented. In other words, the employer followed all applicable national, state and local laws with respect to its implementation. This means it gave its employees prior notice of the Rules and Regulations and it gave them an opportunity to comment on them.
  • The employer never made any arrangements for the employee to take her vacation time or if it did, it does not have contemporaneous written proof of this;
  • The employer never obtained a written request from the employee expressly stating that she would not take those days for personal reasons (i.e., reasons not related to the employer).

Before I give my analysis, let me first give you our loyal readers a super quick review of the applicable China law on vacation time: All China employers are required to provide their employees with paid vacation days based on each employee’s total years of service. Employers are also legally obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of her normal wages for each unused vacation day.

So, what has the employer in my hypothetical above done wrong? The below is an non-exhaustive list:

First, the employer’s vacation policy in its Rules and Regulations is probably illegal because it shifts the employer’s obligation to the employee. I say “probably” because the law on this, like so many other China employment laws is very localized. The law says the employer must ensure all employees take their legally entitled vacation time and if that is not possible, the employer must pay the employee in lieu of the vacation days. Many jurisdictions in China very strictly interpret this law. The Western mindset that if you don’t exercise your legal rights, you waive or lose them does not comport with the legal reality here. It does not matter that the employee signed off on the receipt of the employer’s Rules and Regulations. The employee did not waive her rights to vacation time.

Even if the employer’s policy on vacation time were legal (which is not going to be the case just about everywhere in China), the employer (not the employees) should stay on top of tracking their employees’ vacation time. The employer’s failure to keep track of this particular employee’s vacation time, standing alone, would probably be enough for the employee to prevail in any litigated or arbitrated dispute. A laid-back management style does not work for China.

Second, the employer never obtained the employee’s written request expressly stating she would not take those vacation days for personal reasons. Of course, very few employees would go along with a voluntary forfeiture of their mandatory vacation days. If an employer is going to argue that one of its employees voluntarily relinquished her vacation days, the employer must be able to produce relevant evidence of this because the employer bears the burden of proving this. And without something in writing from the employee showing that she herself expressly requested that she be able to give up her vacation time, the employer is going to lose, and the employer’s Rules and Regulations and the employee’s signed acknowledgment of receipt form are not going to change this result.

Finally, suppose the employment relationship in the above hypothetical has been formally terminated and the employee has sued. The employer really should have dealt with this vacation issue before it got sued. China employees are getting increasingly serious about enforcing their legal rights under Chinese labor laws and this makes it essential that employers seek to resolve all outstanding issues between them and their employees before  termination. Otherwise, there is a good chance the employee will bring a claim for whatever issues are outstanding, including unused vacation time. A well-crafted termination/separation agreement will ensure that the employee will not and cannot come back seeking payment for unused vacation time (or whatever) and that if she does, the court will rule against the employee because the parties have a legally binding and enforceable agreement covering the issue.

Bottom line: Employers too often believe they have China-centric and legally binding Rules and Regulations when they don’t. They often also think they have great evidence against their employee(s) when they don’t. Employers often blame their employees for not doing everything the employers are supposed to do under China employment laws and this will mean the employer will almost certainly lose in any dispute regarding the contested issue. Still think you are in compliance with China’s employment laws? Maybe you should think again.

China employee probation
China employee probation: like a maze.

Employee probation periods has to be one of the most misunderstood issues in China employment law. Westerners just assume their probationary employees are at will employees who can be fired at any time, for good reason or for no reason at all. Wrong. The probation period is PART of the normal employment term and therefore pretty much all protections afforded to regular employees also apply to employees on probation as well. This period should really not even be called “probation” because it really isn’t. It was five and ten years ago, but no longer and your failure to realize this will be at your peril. Trust me.

Our China employment lawyers often are faced with situations like this: Employer hires an employee on January 1st with a two-month probation period. Employer then contacts us in late February to say it will be terminating the employee before the employee’s probation period runs out so it can avoid paying statutory severance. The employer’s reason for the termination is that the employee is “just not all that good” and they believe they “can do better.” The employee neither failed to follow employer directions nor did he or she fail to possess the qualifications required for his or her position. In other words, the employer has NO legal basis for terminating the employee. So with the probation period now coming to an end, can the employer go ahead with its planned unilateral termination without having to pay severance? Probably not.

The employer is shocked when we tell them that if they go ahead with the unilateral termination, they will be at risk of being sued for an unlawful termination. China is not an employment-at-will jurisdiction and the probation period is not an exception to this general rule. An employee termination during the probation period requires a legally permissible ground and except for the limited number of grounds permitted under the law, an employee on probation cannot be unilaterally terminated. If this sounds familiar, it should. Because if you replace the italicized parts with “during the employment term” you get the most fundamental rule of China’s employment law: a China employee cannot be unilaterally terminated without cause.

So under what grounds can an employer terminate an employee on probation?

Article 39 of the PRC Labor Contract Law provides that an employee on probation may be terminated with no severance for one of the following six reasons:

  1. The employee is proven to have failed to satisfy the conditions of employment during the probation period;
  2. The employee materially breaches labor disciplines or the employer’s rules and regulations;
  3. The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer;
  4. The employee has established an employment relationship with another employer which materially affects the completion of her tasks with the employer, or she refuses to terminate such employment relationship with the other employer, after she is required to do so by the employer;
  5. The employee uses deception or coercion, or takes advantage of the employer’s difficulties to cause the employer to conclude the contract, or to make an amendment thereto, that is contrary to that party’s true intent;
  6. The employee has criminal liability imposed in accordance with the law.

Under Articles 40(1) and 40(2) of the Labor Contract Law, an employee on probation may also be terminated if:

  1. He or she has fallen ill or sustained a non-work related injury and, at the end of the medical treatment period, can neither engage in the original work nor in other work arranged by the employer;
  2. He or she is incompetent and remains incompetent after training or assignment to another post.

That’s IT. No law allows an employer to terminate an employee on probation for whatever reason the employer wishes (or for no reason at all) simply because the employee is on probation.

In addition, Article 21 of China’s Labor Contract Law clearly states that when an employer terminates an employee during the probation period, the employer must provide the employee with reason(s) for such termination. It is critical that the employer convincingly document its terminations in writing — in Chinese. If the documentation setting forth the grounds for termination is not convincing, you will be giving your terminated employee incentive to challenge the termination and a good chance of prevailing against you in a labor arbitration proceeding. This is especially true when the employer is a WFOE because let’s face it, China is always going to favor a Chinese employee over a foreign-owned entity.

The most common ground for terminating an employee on probation is the first ground under Article 39; the employer can prove the employee on probation does not satisfy the conditions of employment. Note the wording though in Article 39. The employer must be able to prove that its employee failed to satisfy the employer’s conditions of employment. For the employer to be able to prove this, it must have specified such conditions/requirements in writing and it must communicate those conditions to the employee beforehand. Though some courts will consider the general requirements in an employee’s specific industry as conditions of employment, most courts will not. What this means is that the smart employer has a clear writing setting out its probationary employee’s conditions of employment and if a termination becomes necessary, another clear writing documenting exactly how the employee failed to meet those conditions.

What then is the difference between a probation period and a normal employment term? Not much, actually. If an employer can prove any of the above grounds for termination exits, it can terminate the employee during the probation period without having to pay severance. Or the employer can wait until the end of its initial fixed term and not renew the contract but pay severance to the employee.

What then should you as an employer in China do? The best way to proceed is usually to specify the employment requirements in your employment contracts or in a separate agreement/document (in Chinese!) and preserve good evidence of how your employee fails to meet those requirements. If you as an employer want to be able to fully take advantage of the probation period, you should set out the conditions of employment in writing and provide those to the employee for review and sign off before the employment relationship commences. And then, as discussed above, if you find yourself wanting to terminate that probationary employee, you should give the employee a reason beyond telling them that “you are fired because you are still on probation.”

Few WFOEs seem to understand these rules and even fewer seem to get them right. Many try to manage their China-based employees from afar in a foreign (especially U.S.) style that does not work for China, without China-centric employment contracts or China-centric employer rules and regulations. These WFOE employers consistently fail to maintain records of employee behaviors/performances in a way they can later use in their favor in an employment dispute.

China employment cases are rife with examples of foreign employers that lost and lost big because they did not understand employee probation periods. Chinese employees know this and they are quick to sue when terminated during their probation period.

In a fairly recent case in Shanghai (which is actually more pro-employer than most cities in China), a foreign employer sought to have the court overturn a labor arbitration ruling finding the employee had been wrongfully terminated during the probation period. The employer argued that the employee was emotional at work, had on many occasions read magazines unrelated to work, and did not possess the professional skills expected for the job. The employer also argued the employee failed to pass his evaluations during the probation period. The Second Intermediate People’s Court rejected the employer’s arguments, noting that the employer failed to put forth any real evidence to prove an evaluation of this employee had actually occurred and it ordered the employer to pay damages to its former employee for unlawful termination of the employment contract.

Because employers in China must prove the grounds of termination even during a probation period and because there is no legal basis for unilateral termination the safest way for an employer to terminate its probationary employees is via a mutual termination agreement. This usually involves the employer giving the terminated employee a small severance payment in exchange for the employee’s voluntary departure. This mutual termination agreement should be in Chinese and it should include provisions making clear that the terminated employee is releasing the employer from any future claims. If the employee refuses to agree to such an agreement (this almost never happens), the employer essentially has the following two courses of action:

  1. Inform the employee that he or she is being terminated, and then sit back and wait for a potential labor arbitration, or
  2. Continue to employ the employee throughout the employment specified in the employee’s contract.

Can you extend the probation period? As is true of so much of China employment law, that depends on the locale. But this is not something you want to get wrong because in some locales, extending the probation period is just about the worst thing you can do. And keep in mind that even if your extending the probation period is legal, you as the employer still must prove cause for any eventual unilateral termination.

Bottom line: China probationary periods are neither what they used to be nor what they seem to be.  If you are unsure whether you are using your China employee probation periods correctly, now is the time to find out.