So in the last three months I have received a couple of emails from students in international law schools in China asking me about their job prospects. My responses have been anything but encouraging, to the point that I feel it would be wise for me to publicize my counsel.

China attorney
I fear this is true of this subset of China law schools

Here is somewhat of a merger of the two emails:

I am ________________, a third year student of International law at ______________ University in China. I am a ___________ citizen and I will be graduating next year.

_______________ contacted me for an interview about “Going to school in China” and during our conversation, I mentioned that our university is not helping us find an internship. Moreover, we as foreigners are not allowed to practice law in China. That is why I couldn’t answer him when he asked me about my future plans. I frankly have no idea if my degree will be recognized abroad or where should I be doing my internship. He recommended your blog to me and also suggested I ask you for some advice.

I would be highly obliged if you could advice me on where I should look for an internship and how. Our university wants us to have an internship of minimum two months. I am also studying Chinese language along with my degree here. Our course is taught in English but they also give us Chinese classes. I can say my Chinese is good enough to carry out normal conversations with Chinese people.
It would be really helpful in to find a good job after my graduation if I can find an internship in an international law firm before my graduation.

Really looking forward to your suggestions!

Because one of the students had been referred to me by a China law professor/China lawyer I know, I felt some obligation to do some brief research regarding the situation and I found the following:

  1. There are international law schools (at least one anyway) in China that teach Chinese law to students from all over the world, with English as the language of instruction.
  2. These students believe that upon graduation they will be readily employable by “international law firms” seeking new lawyers knowledgable about Chinese law.
  3. The students who graduate from these law schools cannot sit for the China bar.
  4. As far as I know, the students who graduate from these law schools cannot sit for any bar in the United States either. In fact, near as I can tell (though I certainly may be wrong about this), these students cannot sit for the bar in any country in the world.
  5. If I am right about #4 (and nobody has yet told me I am wrong on this), this means that graduating from one of these law schools does not help you to become a lawyer.
  6. Even if graduates from one of these law schools can sit for the bar in some country somewhere, I can only imagine it will be extremely difficult for any of these graduates to get a good law job. These law schools do not have any reputation anywhere (as far as I know). I am an active and long time China attorney who has the additional benefit of people constantly contacting us because of this blog. Yet I did not even know of the existence of these schools (Again, I am aware of only one such school for certain, but I hear there are others) until only very recently.

What is going on here? Do I have my facts right? People, please help me (and anyone considering one of these China law schools) out here.

China employment lawyersAs the end of the year is fast approaching, regardless of whether you are conducting a year-end employer-employee audit, now is a good time to update and refine your China employee rules and regulations. As this is usually (and should be) a much longer document than your employee contracts, doing this will probably take a fair amount of work. To make this task just a little bit easier, I suggest you focus on the following eight basic things to do to whip your China employee rules and regulations into shape for the new year:

  1. Make sure the Chinese version of your document is in tip-top shape. Far too many companies have a non-lawyer translate their rules and regulations into Chinese and far too many companies therefore have Chinese language rules and regulations that are not appropriately written for a court or other tribunal. Make sure this is not the case for yours and while you are doing so, check it for typos, etc. You should also make sure that your Chinese version lines up with your English version. For example, if your English version says “do not”, and your Chinese says “do,” you know there is something wrong (I see this sort of basic error all the time when conducting employer-employee audits).
  2. If your company’s rules and regulations are in Chinese only, you really should have an English translation done. You as the employer will need to refer to this document when you make most employee decisions and unless all of your employees who will be making these decisions are fluent in written Chinese, you need a well-written version in English as well.
  3. Focus first on the sections of your rules and regulations that matter most to your managing your China employees. This means you can for the most part gloss over any mission statement. Focus instead on sections where any failure to follow that which is written will get you into big trouble. When I am asked by a company to review their rules and regulations to let them know if it will work for China, the first thing I look at is the section on disciplinary actions because it is that section which is so often litigated. If that section is not well-crafted, I immediately know revising the rules and regulations is in order.
  4. If there is a section of your rules and regulations on which your employees are frequently commenting, questioning or voicing their concerns, this is a section you should be reviewing and probably revising.
  5. If you are seeing employee infractions that are not well addressed or addressed at all in your rules and regulations, put something in there for those or fix what is already there. Do this before one of your employees commits this infraction again you find yourself (again) in a situation where you are powerless to do something about it.
  6. Make sure you use the appropriate word/phrase in your rules and regulations to actually accomplish what you are seeking to accomplish. If you want to impose an obligation on your employees, make sure you use the word “must” and as noted above, make sure the Chinese version also says “must.” Saying “employees are expected to do something” does not usually cut it, and yet our China employment lawyers see language like this all the time in rules and regulations. If all you want to do is encourage your employees to do something, fine, but your rules and regulations are almost never the best (or even the right) place to do that. The rules and regulations are called rules and regulations for a reason and they should be used to clearly delineate what your employees must do and must not do and to make clear the repercussions for violations. If your rules and regulations say “DO NOT DO XXX!!!”, and then do not make clear that doing XXX will lead to termination, you likely cannot legally terminate an employee who does XXX no matter how large the font or how many exclamation points you use.
  7. Remove from your rules and regulations anything that no longer complies with China’s ever shifting labor laws. And when I say China labor laws, I mean any applicable national, regional or local law. See China Employment Law: Local and Not So Simple. Just by way of one very common example: if your rules and regulations provide for termination for an infraction that is not a terminable offense where your employees are located, there is a good chance you will engage in ineffective terminations that waste your company a lot of time and money by creating unnecessary employee-employer disputes.
  8. Make sure your rules and regulations clearly spell out incentives, bonuses and benefits and if your rules and regulations say that you will be providing any of these, you really should provide them. Well over half the rules and regulations we review or audit need substantial cleaning up of these provisions and a good portion of the China labor law disputes on which our China labor lawyers are retained involve these sections.

Bottom line: If you have employees in China, resolve to clean up and improve upon your employee rules and regulations by the New Year.

China attorneysIn China to Charge Three Australian Crown Resorts Executives The Wall Street Journal (Wayne Ma) reports that Chinese authorities will be pursuing criminal charges against at least three employees of Crown Resorts Ltd., an Australian gambling company. The article states that three Australians — among 18 people initially detained last month — remained in custody in Shanghai and …. [that one] of the Australians detained was Jason O’Connor, vice president of Crown Resorts’ international VIP operations. The status of the other 15 taken into custody is not clear.

As noted in the article by Peter Humphrey, who himself served time in a Chinese prison for alleged violations involving corporate investigations, “after someone has been charged, ‘the chances of getting them out have diminished by several times,’ said Mr. Humphrey, who maintains his innocence. ‘Whoever laid these charges now has a political stake in making them stick,’ he added.”

The kicker in all this actually comes from a quote by co-blogger Steve Dickinson in this Bloomberg article:

“In the old days, people would insist to me that the only risk was deportation. This is no longer the case,” said Steve Dickinson, a lawyer at Seattle-based Harris Moure, which produces the China Law Blog and has advised companies in the gaming sector. “Foreigners can expect to be treated exactly like Chinese nationals.”

And here’s the thing about the Crown case: the Chinese government had for some time been signaling its intentions:

Under Chinese law, casinos aren’t allowed to promote gambling in China. Organizing a group of more than 10 Chinese nationals to go to casinos overseas also is a crime.

Overseas casino operators sidestep that ban by marketing only their hotels and entertainment in public promotions.

The detainments appeared to be foreshadowed last year in comments made by Hua Jingfeng, deputy chief of China’s Ministry of Public Security.

Mr. Hua told reporters that his department was investigating a “series of cases” involving foreign casinos in China.

“Overseas, a few countries are treating our country as a big marketplace,” Mr. Hua said, adding that he was aware overseas operators were establishing offices in China with the goal of luring citizens abroad to gamble.

Eight months later, Chinese authorities arrested more than a dozen South Korean casino managers and a number of local agents allegedly for the practice.

Why should you not look away from this post if you are doing business in China? Because it is vitally important to you and to your company that you understand that China will arrest and imprison foreigners and that it has only become increasingly willing to do so.

In a post we wrote back in 2014, China’s Anti-Corruption Drive. What Next? we mused about China’s then nascent anti-corruption drive what it all might mean, and we noted the following:

  • China is serious about corruption and it is starting with the pharmaceutical industry because corruption is so entrenched there. China is going after both domestic and foreign companies, but we are just hearing more about the foreign companies. This is just part of China’s desire to reduce corruption because the Chinese people are really sick of it.
  • Nobody really knows where and when the Chinese government will strike next when it comes to corruption. We all just know that it is striking a lot more often than it used to and striking against a much more varied list of companies (the smaller foreign companies that have gotten hit have for the most part managed to stay out of the news).
  • If you are a foreign company doing business in China in an industry the government deems important or politically sensitive, you should be extra worried/cautious.

And here’s the latest rumor we are getting: China is going to start criminally pursuing those who earn income in China with  independent contractors in China and no company in China and who pay no employer or income taxes in China. For what this situation looks like, please check out my Forbes article, China’s Tax Authorities Want You (written before we started hearing of criminal implications).

So whatever you do, please don’t look away. Better yet, have a full-on audit done of your company to ensure there is nothing lurking there.

For more on the Crown Resorts case and the lessons to be learned from it for anyone doing business in China, check out Doing Something China Doesn’t Like? Don’t Go There and How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think.

China employment lawyerIn yesterday’s post, China Employee Terminations and The New Two Child Policy, I discussed how the laws vary in China regarding whether an employer can terminate an employee for having violated China’s family planning laws. In this post, I address whether an employee’s violating China’s family planning laws allows the employer to refuse to provide the extra protections normally provided employees during pregnancy, such as no overtime or an adjustment of workload?

As is nearly always the case with any China labor law issues, the answer varies by locale, but generally speaking, a pregnant/nursing employee who violates China’s family planning laws should be treated the same as other pregnant/nursing employees while on the job. However, other benefits after childbirth, such as paid maternity leave can generally be withheld from an employee who has violated the family planning laws, though this too varies by location.

I should emphasize how important it is not to try to remove an employee’s legal protections by having them sign a contract that purports to do so. A fairly recent case out of Shanghai (a fairly employer friendly city) makes this clear.

In this case, an employee entered into an employment contract with her Employer on her first day: March 1. This employee was required to fill out an employee form before she officially started. As she was not married at that time, she checked the box for “single” on the form. The Contract expressly provided that if any information provided by the employee was untrue, the employer would have the right to void the contract and unilaterally terminate the employee. The employer’s handbook contained similar provisions and also required its employees update the employer within 10 days if any personal information, such as marital status had changed. The Employee became pregnant a few days after her first day and started going to checkups but she never informed her employer about her pregnancy until October.

The Employee married in May and her employer approved her marriage leave. A couple of months before her expected due date, the employee provided her employer with a doctor’s note saying she would need to go on maternity leave because she would need to rest before her scheduled C-section. The employee requested paid maternity leave, but her employer immediately terminated her because she had “deceived” them by not providing accurate information about her personal situation. The employer then brought a labor arbitration claim against the employee seeking to declare her employment contract void. The employee filed counterclaims demanding her salary during her sick leave and maternity leave, as well as double statutory severance for unlawful termination and reinstatement of her position.

The employer lost on most of the claims and was ordered to pay the employee her salary during her sick days and during her maternity leave and also to pay for her social insurance until the last day of her extended maternity leave. The court acknowledged that the employee should have updated her employer on her marital/pregnancy status sooner, however, nothing she had done justified her unilateral termination. The labor arbitration committee did not discuss the employee’s claim for double statutory severance for unlawful termination and because the employee withdrew her claim for reinstatement of her position and did not argue for unlawful termination severance at the court level the court did not discuss those claims either.

The court stated in its first sentence of its decision that “employees’ legal interests are protected by law” and female workers “giving birth is a natural and legal right and must be accorded full protection.” Though this case was decided before China’s new two-child policy and though some of the legal aspects of this case have changed, what has not changed is that it is simply not possible to remove most worker protections via contract. Most importantly, what also has not changed is the importance that you as a China employer should know and follow all of the relevant laws and regulations and rules (national, regional, and local down to your specific district within your city) before terminating or even penalizing one of your employees.

China employment lawyerIn China’s new two-child era, couples are allowed (even encouraged) to have two kids, but no more, unless an exception applies.

Can an employer in China unilaterally terminate an employee who is having more than two kids or otherwise violates the relevant laws on family planning and population control? This is an easy question to answer regarding employees of state-owned enterprises and government agencies. Employees at such organizations are subject to more stringent regulations because they are government employees and they can be unilaterally terminated for having more than two children (still, the legality will depend on the local regulations).

The question that most concerns China employment lawyers and China employers alike is what can privately owned companies do in this situation. As is so often the case when it comes to China employment law, the answer(s) is localized and complicated. For example, Shenzhen generally prohibits employers from unilaterally terminating an employee for violating family planning laws, but it also gives its employers some leeway by allowing them to deal with this issue in their employment contracts, collective contracts and/or their employer rules and regulations. But since the basis for my statement regarding the rules in Shenzhen are based on seminar minutes from a Shenzhen Human Resources and Social Security Bureau meeting minute, the legal authority for even this in Shenzhen is somewhat unclear.

It is also important for any employer in China to understand that because female employees are a special class for whom Chinese laws provide extra protections, unilaterally terminating a pregnant employee is almost always going to be more difficult and problematic than it may first appear under the written laws and regulations. For this reason, when our employer-clients seek our counsel on unilaterally terminating a pregnant employee we nearly always seek out alternatives, including usually a mutual termination with an appropriate Chinese language settlement agreement. See China Employee Termination: Avoid These Mistakes.

A related question is whether an employer can put in its rules and regulations that violating relevant family planning laws warrants employee termination. As noted above, such a provision may hold water in Shenzhen, but not necessarily elsewhere in China. Many cities in China are of the view that because the employee who has violated China’s family planning laws will be or already is facing fines imposed by the authorities overseeing family planning and population, it would be too harsh to also allow the employee to be unilaterally terminated for the same thing, no matter what is in the employer’s rules and regulations and no matter how “flawless” the termination. Beijing used to split on this question, with some of its labor bureaus believing that employers may rely on their rules and regulations to fire an employee for violating China’s family planning laws, while others held the opposite position. Around the time of International Women’s Day in 2015, Beijing’s Second Intermediate Court made clear its position in a press conference: employers cannot unilaterally terminate employees for violating China’s family planning laws. An employer may discipline such an employee (but not terminate her), provided there is an applicable provision in the employee rules and regulations. In other words, if you have no such rules in place, you do not even get to discipline the employee. However, whether this Court pronouncement settles the issue even for Beijing is still unclear.

In a follow-up post, I will discuss what China employers can and cannot do regarding various other protections (overtime, workload adjustments, etc.) normally provided to pregnant employees, when one of their employees violates China’s family planning law.

China lawyersIn yesterday’s Quick Question Friday, China Law Answers, Part XXXV, I posed what is probably the single most common question our China lawyers get from our fellow lawyers: “What should we put in our dispute resolution provision in the contract we are drafting with a China company.” And then I very briefly explained how there is no one fits all answer and that the right dispute resolution clause should be determined based on a totality of the circumstances. I also promised to expound on that answer today, and so here goes, part I of how to draft the right dispute resolution clause for your particular situation.

The dispute resolution provision you put into your China contract may be the most important provision in the contract. If you put in a dispute resolution provision that makes sense, your Chinese company counter-party with whom you are contracting will be afraid to breach the contract. Conversely, if you put into the contract a dispute resolution provision that will not work, you are signaling to your Chinese company counter-party that it can breach its contract with you with impunity. Yes, it really is that important.

In fact, whenever I am asked to review a contract between a US company and a China company, the first provision I look at is the dispute resolution clause. Far too often when I am asked to review such a contract, it is by a new client who did not use one of the China attorneys at my law firm to draft the contract and I am now being asked to review the contract because something has gone wrong and the new client wants to know what it can do.  I review the dispute resolution clause first to see if there is even any point in determining the strength or the weakness of the US company’s claims against the Chinese company. If the contract calls for litigation in the United States, before a US Court and the Chinese company has no assets in the United States, the quality of the case just went way down.

China does not enforce US court judgments. It just doesn’t. Since China will not enforce any judgment that you receive from the US court, your winning in the US court will likely be meaningless.  Getting a US judgment against a Chinese company with assets only in China is of no use.  Getting a US judgment against a Chinese company that has assets in the United States or in some other country that will enforce a US judgment (Korea and Canada spring immediately to mind) might have some value. This means though that if you have an existing contract that requires disputes between you and your Chinese counter-party be resolved in a US court, you probably have a contract that does not work and you should be seriously considering trying to negotiate a new contract.

Way back in 2006, in Enforcing Foreign Judgments In China — Let’s Sue Twice, we wrote about how a typical phone call goes when someone calls us for help enforcing their US judgment in China:

Caller:  I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?

Me:  Is it a default judgment here in the United States?

Caller:  Yes.

Me:  Chinese courts do not enforce United States’ judgments and they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your U.S. lawyer before you sued here in the United States?

Caller:  [long silence] …. Yes.  He told me getting a judgment here couldn’t hurt?

Me:  Did your lawyer charge you to get it?

Caller:  Yeah.  I had to pay him and I had to pay all sorts of people to get that company served in China.

Me:  Sorry.

So much of the time in your China contracts, it will make sense to draft a dispute resolution clause with your Chinese counter-party that calls for disputes to be resolved by a Chinese court (or sometimes by arbitration in China or outside of China).

In the next post in this series, I will discuss the pros and cons of using arbitration outside China (foreign aribitration) to resolve your contract disputes.

Importing cannabis products from ChinaLate last month, U.S. Customs and Border Protection initiated an action before the U.S. Court of International Trade (“CIT”) to recover civil penalties and unpaid taxes amounting to almost half a million dollars from two companies that imported cigarette rolling papers, mini hookahs, smoking pipes, and pipe screens from China. U.S. Customs alleged that Green Planet, Inc. and Token Group LLC, both located at the same address in Riverside, California, had imported various smoking products from China without including the correct amount of duties owed on the import entry declarations filed with Customs.

According to U.S. Customs, between June 2010 and February 2013, Green Planet made four entries (with an entered value of $407,308.71) and Token Group made five entries (with an entered value of $1,412,456.73) of imported products from China, but failed to pay Customs over $200,000 in applicable duties that should have been declared at the time of entry. U.S. Customs alleged that Green Planet and Token Group filed import entry declarations that contained material false statements and/or omissions and their failure to exercise reasonable care in submitting information to Customs constituted negligence in violation of 19 U.S.C §1592(a).

After the entries had been made, Green Planet and Token Group or their surety companies paid Customs almost all of the outstanding duties that should have been paid. Though Green Planet and Token Group together now owed less than $30,000 in outstanding duties, Customs still decided to seek penalties of $432,975.86 against them for their having negligently filed material false statements on their Customs entry declarations. For negligent filing of entry declarations, Customs is entitled to collect civil penalties equal to twice the lawful duty amount that should have been collected at the time of entry.

It is not clear why Green Planet and Token Group did not pay the duties owed on their imported Chinese rolling papers and smoking products. Perhaps they sought to cheat Customs and purposefully tried to avoid paying lawful duties. Or perhaps they had a legitimate basis to claim the products should have been declared under a duty free tariff heading. Numerous cannabis and smoking related products have ambiguous or uncertain classification, particularly as new products are developing. Regardless of their intent, Green Planet’s and Token Group’s failure to properly file true and accurate Customs entry declarations was deemed to be negligence warranting the initiation of a Customs penalty action.

This case demonstrates how U.S. Customs will pursue penalty actions regardless of how small the amount of duties owed. I mention this because we often hear otherwise from our customs clients, many of whom wrongly believe that there is some minimum safe haven out there. There is no minimum amount Customs considers necessary to pursue a penalty action against importers and because the penalty is double the amount that should have been collected at the time of entry, underreporting can be very very costly. If you are an importer and make any material false statement or omission on your entry declaration, you are at risk of a substantial Customs penalty action.

If you catch your mistake on your customs entry declaration before Customs initiates a penalty action, you can make a prior disclosure to Customs of your error. This will help mitigate potential penalty actions, and could limit your exposure just to the amount of outstanding duties owed.

Importers need to take care to ensure their import declarations are filed accurately. Although customs brokers file Customs entry documents on behalf of importers, they are only agents of the importers and it is you as the importer who bear ultimate responsibility for any Customs entry declaration. In fast developing industries (like cannabis), importers need to be especially mindful of the customs reporting challenges to make sure their imported products are correctly declared to Customs so as to avoid penalties.

Bottom Line: Get your customs declarations right the first time.

China employer auditWith the end of the year fast approaching, many of our clients are starting to contact us to help them conduct their various year end reviews/audits, one of the most important of which is the employer-employee audit. The following are some of the basic things you should have on your employer-employee review list:

  1. Employment contracts. Do you have a written contract with every single one of your employees, including part-time employees? Are all of your employment contracts current?
  2. Employer rules and regulations (aka employee handbook). Do you have a set of rules and regulations? More importantly, does what you have work for China? Has it been made available to all your employees? Have your employees signed a receipt proving they actually received it?
  3. Dispatched employees. Are you in compliance with the labor dispatch laws? Do you have more dispatched workers than the statutory maximum? Are you using dispatched workers for positions that should be filled by a regular employee? Are you using dispatched workers when you could directly hire them as your own employees?
  4. Female employees, especially those who are pregnant or nursing. Are you providing the labor protections and conditions required under relevant laws? Are you providing maternity leave in accordance with the law?
  5. Working time, rest and vacation days. Have you made arrangements so your employees can take their vacation days? Are you making sure your employees who are designated to work under the standard working hours system do not exceed their standard working time? Are you making sure that  whenever it is necessary to incur overtime, the employees follow your internal procedure and you pay the employees for their overtime? Are you current on the alternate working hours system renewal? Are you giving your employees on these systems enough rest and due consideration to their health?
  6. Employee compensation. Are you meeting the minimum wage requirements? Note that several provinces and cities, including Shanghai, Jiangsu, Chongqing recently raised their minimum wage standards. Are you paying your employees on time? When you withhold payment from an employee, do you explain the reasons to the employee and document the situation so you will be able to show your action was reasonable and lawful?
  7. Social insurance contributions. Are you making all mandatory social insurance contributions? In places where employers are required to make contributions for expats, are you paying into the expats’ social insurance accounts or have you otherwise made arrangements in the employee’s contract (provided it’s permissible in your locale)? The good news is that China is going to modify the base for social insurance contributions, which will ease the burden on employers. The bad news is that many of the companies we review are not in compliance with applicable rules on this.
  8. Employee non-competes. Do you have signed employee non-competes from all of your employees who might harm you by competing with you? What about non-solicitation agreements?
  9. Employee terminations. Are you handling all of your employee terminations according to law? Do you document your employee terminations? Do you timely transfer your terminated employees’ files and social insurance accounts?

Bottom line: If you are not in compliance with the Chinese labor laws, get in compliance as soon as you can. China is only getting tougher on employer violations.

 

China product development contracts
Image from Jordanhill School. http://bit.ly/2eEY4ZL

I am coming off two straight days of speeches before and meetings with start-up hardware technology companies here in Shenzhen. Yesterday, in Hardware Co-Development in China I wrote about how our China lawyers far too often see situations where a foreign developer of a hardware or internet of things product loses that product to the Chinese manufacturer after having spent years in co-developing that product with the Chinese manufacturer.

The foreign designer and the Chinese factory will work together for months or years to develop a commercially viable product and then when the prototype is finally finished, the question then becomes who actually owns the prototype: the foreign developer that came up with the idea or the China factory. The foreign developer says it owns the product while the Chinese factory says it owns it. Who does legally own it? Way more often than not, the Chinese factory does.

How does all this come about? The standard scenario goes something like the following. A foreign product designer comes to China and works with a Chinese factory to commercialize an innovative hardware or IoT product design. In a cooperative co-development setting, the foreign party and the Chinese factory work together to create the prototype of the commercial version of the new product. All the work is done on a purchase order basis, with no written contract or other documentation.

At the end of the development cycle, the Chinese factory announces to the foreign developer that the prototypes are completed. The factory retains the prototypes in anticipation of moving to the manufacturing phase. However when the parties move to the manufacturing phase, it is normal for something to go wrong. This can happen in two ways. First, the Chinese factory surprises the foreign designer by substantially increasing the projected unit price for the product or it announces that it cannot meet the quantity or delivery date requirements for the product. Second, the factory consistently manufactures product with substantial product defect/quality control issues.

Facing these problems, the foreign party confronts the Chinese factory and announces that it is going to take the prototypes and have them manufactured by another factory. The Chinese manufacturer replies: “you cannot do that. We own all the IP contained in the product. We agree that we will manufacture the product for you exclusively for as long as you are willing to order on our terms. But you cannot take that prototype anywhere else. Only our company has the right to manufacture that product. And, if you are not successful in making substantial sales, we will cut you off and market the product ourselves.”

The real problem with this scenario is that in most cases the factory is absolutely correct about the legal situation concerning the intellectual property in the new product. Stated simply, absent a written contract to the contrary, it is generally true in this setting that the factory DOES own the intellectual property in the product.

This sad result for the foreign company — this situation where the foreign company loses all that it has been focused on for the last many months or years — is due to the failure of the foreign designer to properly document the co-development process. If properly documented, this unfortunate result can be avoided.

In my next post, I will explain how to avoid losing your hardware/IoT product.

 

China employee probationChinese labor law permits employers to set a probation period to evaluate their employees’ suitability and make a (more or less) informed decision about whether to retain an employee for the long term or even for a life-term. Foreign employers are often confused about employee probation in China and the following are six common myths regarding China employee probation.

Myth 1: The employer doesn’t have to contribute to the employee’s social insurance account until after the employee has completed his or her probation period to the employer’s satisfaction. Your obligation to pay mandatory social insurance starts as soon as the employee begins working for you.

Myth 2: The employer need not sign a written employment agreement with an employee on probation until the end of the probation period. The probation period is deemed to be part of the employment period so you must have a written employment contract with all employees, even those on probation. It’s preferable to have the signing “ceremony” on an employee’s first day, but in no event should you wait beyond 30 days after your employee’s commencement date.

Myth 3: The employer can use a simple “probation period contract” instead of a formal employment contract, because who needs the formalities at this stage? Even if this arrangement does not otherwise violate any Chinese labor laws, this idea is usually not practical. You will need a formal employment contract eventually and you might as well have one at the very outset.

Myth 4: The employer can extend for another probation period if it is not sure about whether to retain this employee beyond the probation period. Be careful here. Some places do not allow for extending the probation period and the employee’s written consent does not matter. Some places may allow it but the combined length of the probation period cannot exceed the statutory maximum.

Myth 5: The probation period is an employment-at-will period so the employer can unilaterally terminate an employee on probations without cause. You can only terminate an employee when one of the statutory conditions for termination is present. You may unilaterally terminate an employee that does not satisfy your conditions of employment without having to pay severance. But you must be able to prove that the employee failed to meet your standards. A well-documented discharge with detailed explanation for why the employee does not meet your expectations will significantly reduce your risks of later being sued for wrongful termination.

Myth 6: An employer that lets an employee go before the expiration of his or her probation period can set a new probation period if it decides to hire the employee back. Setting a new probation period for the same employee runs afoul of the Chinese labor laws. Though China court decisions on this issue are somewhat inconsistent, we nearly always recommend using only one probation period for the same employee.

Bottom line: Do not use employee probation periods unless and until you know the laws.