China employment lawHow to deal with pregnant or nursing employees has to be one of the most frequently asked questions we get from China employers. The most important thing to know is that Chinese labor law prohibits employers from unilaterally terminating a pregnant or nursing employee.

Many believe you can terminate any China employee, including a pregnant or nursing employee, simply by paying one month’s salary for every year the employee has worked for the company. This is not true. Termination without cause constitutes unlawful termination and will lead to adverse consequences for the employer. Another myth is that you can never terminate a pregnant or nursing employee. An employer can terminate a pregnant or nursing employee without having to pay severance for the employee’s material breach of the employer’s rules and regulations. However, the rules and regulations provision you use to justify the termination must be legal and your termination under that provision must be reasonable.

For example, though an employer rules and regulations provision prohibiting stealing is unquestionably legal, whether you can fire a pregnant (or non-pregnant) employee for stealing things from your company can be tricky. In the past, Chinese courts used to uphold employers’ decisions to let an employee go when the amount of the theft was really low. But over the years, we have seen a shift in court decisions that put more focus on the reasonableness of the employer’s termination decision. So if your action is not proportionate to the infraction, the chances of it being upheld by a Chinese court are not high. We would counsel our clients not to terminate an employee for stealing ten dollars worth of office supplies.

It is also against the law to have an employee who is more than seven months pregnant or who is nursing work overtime or take night shifts. If your pregnant employee misses a half-day of work to go to her pregnancy checkup, it is not considered an absence of work under Chinese employment laws. So if you have her work late that day to make up the lost time, it’s likely it will be considered working beyond normal hours, and that’s overtime. If your pregnant employee submits a document from a health institution saying that her health no longer permits her to perform her usual job duties, you cannot demote her; you instead need to adjust her workload or her job duties to suit her existing situation. Generally speaking, you cannot as an employer dictate that you will recognize only certain doctors’ notes from only certain hospitals. So again, be careful with what you put in your employer rules and regulations.

You must also provide at least one hour per day during normal working hours for employees who breastfeed their babies and you must do this until the baby turns one.

China amended its Law on Population and Family Planning, making it official that couples are encouraged to have two kids. The table below provides some basic information on the new maternity/paternity leave regulations in Beijing, Shanghai and Guangdong:

Maternity leave Paternity leave
Beijing 128 days + 1-3 months 15 days
Shanghai 128 days 10 days
Guangdong 178 days 15 days

As is true of just about everything related to China’s labor laws, its laws on pregnant and nursing employees are complicated and local. And as is true of most of China’s labor laws they get even more complicated when it comes to expats, where the local rules and practices are even more likely to be at odds with the national guidance.

Bottom Line: Pregnant and nursing employees in China have all sorts of particularized rights. So as a China employer you should be doubly careful in terminating a pregnant or nursing employee or even in changing their job schedules or duties. You should know both the national and the local rules and talk with your local labor authorities before making pretty much any move.


China lawyersI am riveted by what has been happening in China to “representatives” of Crown Resorts Limited. And every day my fascination increases. Today I read an article in World Casino Directoy entitled Crown Resorts Limited previously warned to stop enticing Chinese VIP gamblers.

Now before I talk more about that article or more about Crown Resorts China problems, let me make the following perfectly clear:

1. Everything I know about Crown Resorts I am getting from the media. None of my firm’s China lawyers have ever represented that company nor do we have any inside information about it.

2. I have no idea whether what I am reading in the media about Crown Resort or its China problems is true or not and probably not all of it is true. But for purposes of this post, I will assume that it is.

According to what I have been reading, 18 Crown Resort representatives in China have been detained by Shanghai police for alleged gambling-related crimes following several months of investigations as part of an operation dubbed “Duanlian”, which translates as “to break the chain.” For my first post (earlier on in my fascination with this case, check out How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think.

Now I learn from a Bloomberg News article, entitled, China Warned Crown, Others About Marketing to Gamblers Last Year. In that article, Bloomberg states that “Chinese authorities warned Crown Resorts Ltd. last year to halt its efforts to attract high rollers from the mainland to gamble overseas, according to a person familiar with the government’s move to detain 18 of the Melbourne-based company’s employees.


Bloomberg notes that Crown Resorts got this warning back in 2015 following the arrests of employees from South Korean casino operators Paradise Group and Grand Korea Leisure Company Limited.


Bloomberg then states that “[a]fter receiving the caution, senior executives from Crown Resorts Limited reportedly began making shorter business trips to China instead of spending long periods in the country. Chinese officials also supposedly observed that the company had shifted its marketing activities to focus more on resorts instead of casinos although local police felt that neither of these moves had amounted to a material change in the operator’s activities.”


If the above is true, one should ask whether Crown really believed that shorter trips by its people to China would solve the problem? And if they did, why on earth did they?

Once again, if you are doing anything that involves China and is viewed as illegal by China, don’t go to China. And again, for more on this check out my prior post on this here.


China WFOEs and Joint Ventures and JV
China WFOEs and JVs: Still tough navigating

On October 1, China changed its system for government control over foreign investment. The change was accomplished by revising the statutes concerning wholly foreign owned entities (WFOEs), equity joint ventures and contractual joint ventures and by promulgating a new basic regulation governing registration of foreign invested entities (FIEs).

The big change under China’s new system is that government regulation of foreign invested entities will move from a system that requires MOFCOM (China’s Ministry of Commerce) approval to one that will now just require simple registration with MOFCOM. This change will be implemented through the issuance of a National Negative List. For FIEs that are not restricted or regulated under the National Negative List, MOFCOM requires online registration through a national website employing a standard set of documents. This registration will apply to initial formation of the FIE and to most changes in FIE structure, such as changes in management, ownership and registered capital.

The following essential elements of this new system have already been implemented:

  • Final regulations for management of the new registration system were officially promulgated.
  • The national website for online filing became operational.
  • MOFCOM announced that the 2015 version of the already released Catalogue of Foreign Investment will be treated as the National Negative List. The status of the existing negative lists from the Shanghai and other Free Trade Zones is unclear.

All future Foreign Invested Entities (FIEs) formed in China will now follow the following five-step procedure:

Step 1. Obtain name reservation from the local administration of industry and commerce (AIC).

Step 2. If not restricted by the National Negative List, register online with MOFCOM. Provided the registration is accurate and complete, the regulations require MOFCOM to issue a registration notice within three days. Though the new regulations allow for registration with MOFCOM after issuance of the AIC business license, all of the AIC agencies with which we have spoken have told us that they will require MOFCOM registration prior to issuance of the AIC business license.

Step 3. Register your FIE with the local AIC. Since the local AIC may impose special procedures for FIEs, it is not yet known what impact of the change on this step will have overall. The most likely result at the outset is that each district will impose its own rules. Some districts may impose rules to make things easier. And some districts may impose rules that increase the time and documentation effort required at this stage. Though this result would be contrary to the spirit of the new laws, such a result would be consistent with past local government practice in China.

Step 4. Each local AIC will require compliance with other regulatory requirements such as environmental impact statements, building construction safety reports, neighborhood impact reports, energy usage reports, local employment impact reports, reports required for access to local special benefit programs, land usage and price analysis reports, and similar. The list of required studies and reports can get shockingly long and must be determined on a local AIC to local AIC basis. Dealing with these requirements typically requires a major amount of time and effort and expertise in forming a FIE in China.

Step 5. After receipt of a business license, comply with AIC, tax agency, regulatory agency and banking registration procedures. These requirements may be local, provincial or national, depending on the nature of the FIE business. Compliance with all these requirements is required before the FIE can formally begin business. Such compliance typically adds at least a month to the formation process.

Some China attorneys see the change in China’s FIE laws as a move to “open up” China to increased foreign investment. At this point, and for the following reasons, we do not foresee much change:

  • The basic structure of foreign investment does not change. Foreign invested entities are still essentially confined to the former categories of WFOE and Joint Ventures (JVs). Foreigner persons are still prohibited from directly investing in Chinese owned entities. See The China Stock Option Scam.
  • There is no change in the industries open to foreign investment. Many analysts hoped that China’s  new National Negative List would be simple, short and unrestrictive, but it is identical to the current Catalogue of Foreign Investment, which is complex, long and highly restrictive. The vast areas of the Chinese economy that have been off limits to foreign investment remain off limits. There has been no “opening up” and there is no indication that there will be any opening up. What you see now is what you get. See On Doing Investment Research In China As A WFOE. Not Legal.
  • There is no significant reduction in the time required to register a foreign owned entity. The only change in the current registration process is the elimination of MOFCOM approval; registration is still required. This means that the MOFCOM stage of the registration process will, at best, be reduced from one month to three weeks. This is a minimal impact. Under the old system, MOFCOM approval was virtually never a substantial source of WFOE or JV formation delays. The delays nearly always were at steps 4 and 5 described above and the new system has no impact on those two steps. Moreover, under the new system, step 3 (AIC registration) may become an additional source of delay.

So the net effect is that China’s new FIE rules do not provide for any major change in the structure of the PRC system of management of foreign investment. There has been no opening up and the time and effort required to form a FIE is not likely to substantially change.

So what has changed for registering WFOEs and Joint Ventures in China? I will discuss that in my next post.

China lawyersAccording to the media, Chinese authorities have detained a number of Australians from Crown Resorts for gambling-related offenses and have launched a criminal investigation into their actions. According to the Australian Financial Review, It appears that 18 Crown Resort staff have been detained, including three Australians, “as other foreign casino operators…scramble to safeguard their China-based staff.” The Crown staff were detained in a series of overnight raids “in an apparent crackdown on illegal marketing by offshore casinos.”

This news is relevant many companies doing business in or with China. I say this because our firm constantly hears from companies that have personnel in China that market some product or service (oftentimes an internet service) from China that is illegal in China. I repeat: many foreign companies have sales people and executives in China who market products or services in China that are illegal in China, with offshore and foreign casinos just one example.

To be clear, we have no knowledge regarding Crown Resort outside what we read in the mainstream media.

There are many things illegal in China (either completely or just for foreign companies) that are widely legal elsewhere, with the following just those that quickly pop into my head:

  • Gambling
  • Certain types of education services
  • Certain types of internet services
  • Certain types of communication services
  • Many publishing services

Many foreign companies get around China’s laws prohibiting their business by operating all or a large portion of their business outside China. But if you have people working for you (either as employees or otherwise) in China or if you are marketing to China, your people may be at risk for getting “detained” in China. I know I am being vague here, but for many reasons that is deliberate, so sorry.

Our China lawyers are constantly being asked to provide legal risk assessments to companies that may be skirting the edge in China (yes I know I am again being vague here). One of their most common questions is “should I go to China.” Our most common answer — by far — is no, because we simply cannot quantify the risks of their getting detained, nor really can anyone. As attorneys, we are going to be extremely cautious because the last thing we want is for us to give carte blanche to someone going to China and then having that person detained.

We tend to be a bit more positive about our clients going to Hong Kong, but even for going there we are not willing to unequivocally say yes. The below is a brief excerpt from one of many memoranda we have written on the issue of going to Hong Kong in the above (vague again, I know) sort of situation:

This memorandum addresses the risks of _Mr. __________’s going to Hong Kong. Our conclusion is that we see __________’s going to Hong Kong as a low risk endeavor.

If _________ were to travel to China, there is a risk his presence would be reported to the police. If this happens, an arrest could occur. Though it is not possible to quantify this risk, the risk is not low. There is always a very slight chance of spillover risk from the PRC to Hong Kong. However it is important to note that to date, the Hong Kong authorities have not cooperated in China’s _______ crackdown and we have not seen anything to indicate that they will. Though we are not prepared to say that Mr. ________’s going to Hong Kong is wholly without risk, we do not believe the Hong Kong authorities are following the situation with _______ in the PRC and we do not believe that they would do anything to _______ in Hong Kong even if they were to become aware of _________’s situation in the PRC. We also do not believe the PRC would seek Hong Kong’s help against someone from a company like _______. So again, we do not see much risk in Mr. _________’s going to Hong Kong at this time.

We often are asked to give similar legal risk assessments for clients involved in legal disputes with Chinese companies and our advice in those situations is usually (but definitely not always) short and simple: it would be better if you can delay going to China until you have resolved your dispute.

The thing that gets to me about all of this though is how so many companies either have no clue about their risks or willfully choose to ignore them. One of our China lawyers loves to tell of how he met an expat bragging in a bar about his China business and when our lawyer told him that what he was doing was flat out illegal, the response was that the Chinese government didn’t care and actually wanted this sort of business in China, the written laws be damned. And everyone else at that table joined in on this sentiment. Just a few years later this person was arrested and convicted and served not insubstantial time in a Chinese prison.

The area where we see this most often and the area where there is far too little concern is taxes. China is cracking down hard on foreign companies that make money from China (especially those foreign companies that have “independent contractors in China) and do not pay their taxes in China. If you want to operate this way, at least recognize your risks and act accordingly. See China’s Tax Authorities are After You, an article I wrote for Forbes Magazine on how China is stepping up its tax collection efforts, especially as against foreign companies with China-based “employees” but no China company. Most foreign companies though are either blissfully unaware of those risks or downplay them.

If you or your company are doing anything remotely marginal in China, step back a minute (really for at least a few hours) and ask yourself whether what you are doing or about to do is really worth it. I know this sounds simple, almost trite, but far too often hard-charging businesspeople fail to ask this question.

I love telling a story about a long-time client and friend. This person’s business empire stretches across at least four continents and his net worth has to be well north of twenty million dollars. Many years ago he mentioned that he would be going to Iraq the next week to finalize the negotiations on some big construction deal. When he told me this, I immediately told him of how I had met a businessperson who went to Iraq and never came back. I basically asked my friend why with the entire world available to him (and with three kids) he was even considering going to Iraq. He poo-pooed my concerns but then called me back the next day to say that he had given my advice more thought and he had cancelled his plans.

I am not telling you to be afraid of the world, nor am I telling you not to take risks. I am just saying that before you jump, familiarize yourself with where you will be landing.

For more on what can happen to you in China legal difficulties there, check out the following:

Bottom Line: Pause and think before you act and pause and think before you go.

What are your thoughts?

China IP webinar for China lawyersOn October 18, I will be putting on a webinar, Doing Business in China: Structuring Your Deal and Protecting Intellectual Property. This webinar is aimed mostly at lawyers and it is eligible for CLE credits.

It is being put on by Commercial Law Advisors and they describe it as follows:

Who Should Attend? Corporate counsel, in-house counsel, attorneys advising companies or organizations, intellectual property attorneys.

Companies often cannot afford not to do business in China. Whether producing goods there or selling to the Chinese market, companies that engage in business with Chinese partners need up-to-date legal advice on how to protect their technology and other intellectual property (IP) interests from being counterfeited, pirated, or otherwise misappropriated. As IP theft is one of the top issues facing businesses operating in China, there are substantial risks companies must identify and address proactively to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your client’s valuable IP interests.

Please join Dan Harris as he explores the nuts and bolts of constructing a good business deal with a Chinese partner, what your agreements should include, and how to manage the Chinese IP rights framework to minimize your client’s IP-related risks.

This webinar will cover:

How to choose a good Chinese partner
Identifying the IP assets that need protection
How to structure your deal
Drafting your deal papers
Drafting China employee contracts to protect your IP
IP registrations: What you should know about trademarks, patents, copyrights, and licensing agreements

China Law Blog readers who use promo code cw16dbc will receive $35 off. Go here to register.

I hope to “see” you there.


Softwood lumber disputeI recently spoke on the U.S. Canada softwood lumber dispute at an American Chamber of Commerce in Canada event. I was subbing for my colleague Bill Perry who could not make it because he was in China. My talk focused on the history of the dispute, its key issues, and most importantly, what will likely happen if new AD/CVD petitions are filed and investigations initiated. This post builds off my presentation and it focuses on how China will affect the next round of the US-Canada Lumber wars, expected to start this week.

For the past ten years, the United States and Canada have abided by a 2006 agreement that regulated Canadian lumber imports into the United States with a system of export fees and quotas triggered by specified average US market price points. That 2006 Softwood Lumber Agreement is set to expire this week and with that expiration, a coalition of U.S. lumber producers is expected to immediately file a fifth round of antidumping (AD) and countervailing duty (CVD) petitions seeking US government investigations to determine whether Canadian lumber is unfairly dumped or subsidized and is injuring the U.S. domestic lumber industry.

Many of the issues in this fifth round of the US-Canada Lumber trade war likely will be the same or very similar to issues raised in the previous four rounds. US lumber producers will likely allege that Canadian lumber producers benefit from a wide array of government grants, loan guarantees, tax preference schemes and other subsidies provided by the Canadian federal and provincial governments. The US lumber producers will contend that these subsidies give Canadian lumber an unfair competitive edge.

The primary issue remains whether Canadian lumber is unfairly subsidized by the Canadian system of “stumpage rates,” which is the price paid for the right to harvest lumber from provincial land. Since most Canadian forests are on “crown” land controlled by the Canadian provinces, Canadian stumpage rates are primarily set by each province. Since most US lumber is harvested from privately owned land, US stumpage rates are primarily market determined through competitive auctions. US lumbers producers are unhappy with the benefits Canadian lumber producers allegedly receive from the provincial stumpage system.

This next round of lumber dispute will likely be more than just a simple replay of previous lumber investigations since there have been a significant developments since the last round was settled in 2006. Two China-related developments in particular could have significant impact.

First, China has been the most targeted country for US CVD investigations; the US Department of Commerce (“DOC”) has conducted about forty CVD investigations against China since 2008. In many of these CVD cases against China, the DOC calculated very high subsidy margins, often based on aggressive interpretations of CVD laws and regulations. The CVD investigation practices developed by the DOC in these Chinese cases will likely be applied in the next Canadian lumber CVD investigation. The DOC will no doubt conduct its CVD investigation against Canadian lumber mindful of how it might affect on-going and future Chinese CVD cases. Unlike past Canadian lumber CVD determinations where CVD margins never exceeded 20%, the DOC could very well calculate a much higher than expected CVD rate in Lumber V.

The other significant post-2006 China-related change is the growth Canadian lumber exports to China. In 2006, 82% of Canadian softwood lumber exports went to the United States. By 2011, the United States received only 53% of Canadian softwood lumber exports. China in particular became a significant market for Canadian lumber, much of which was from British Columbia.

In addition to developing alternative export markets (like China), a number of Canadian lumber producers have developed alternative production options by acquiring US lumber mills. As of 2015, major Canadian lumber producers (such as West Fraser, Canfor, and Interfor) now own more sawmills in the United States than in Canada, and they are now also among the top ten largest U.S. lumber producers.

Canadian lumber producers that now have the option to ship their lumber within the US from their US sawmills and to export their Canadian lumber to China are going to be well-positioned to withstand settlement terms demanded of them by the US lumber industry. At a minimum, the new cadre of Canadian lumber producers with China and/or internal US options will almost certainly make it harder for Canadian lumber producers to unify around a common negotiating position against their US counterparts.

China’s influence on even Canada-US timber relations will no doubt be felt.



China employment lawyersEarlier this year, in China’s Two Children Policy: What China Employers Should Know, I wrote how Beijing was in the process of amending its population and family regulations in response to the amended National Law on the same topic. For how China’s employment laws are both national and local, check out China Employment Law: Local and Not So Simple. Beijing has come out with its amendments and this post discusses their most salient points for Beijing employers.

Under its amended regulations, Beijing now requires a minimum of 128 days maternity leave (this is 30 days longer than the statutory minimum before the amendment). The special leave for a spouse whose wife gives birth is now 15 days (8 days longer than before). This is the same as in Guangdong Province but 5 days longer than in Shanghai. The new regulations delete the special leave provision for late childbirth.

Beijing’s new maternity and family leave regulations also provide that upon the female worker’s request and the employer’s consent, the maternity leave can be extended for another one to three months. This makes it possible for a female employee in Beijing to get up to 7.25months of paid leave for childbirth, regardless of whether it is her first or second child. Under a strict interpretation of the Beijing maternity leave amendments, however, if the employer does not give its consent, the female worker cannot unilaterally make her leave longer than 128 days, or about 4.25 months.

However, as is typical of so many China employment laws and regulations, the rules on extending maternity leave are less than clear. In particular, it is not clear whether Beijing employers are free to say “no” to all employees seeking to extend their maternity leave or whether they must grant maternity leave extensions to employees with “good reasons” for not being able to return to work after the standard 128-day maternity leave. Given Beijing’s longstanding pro-employee approach our China employment lawyers are instructing our Beijing clients to have us review all the relevant facts relating to the employee’s request for extended maternity leave and, most importantly, check with the local labor authorities before saying no. And do not forget that just like everywhere else in China, Beijing employers are generally prohibited from terminating an employee during his or her paternity/maternity or to reduce that employee’s wages in any way.


China employment lawsThe PRC Ministry of Human Resources and Social Security recently released a set of rules regarding providing public notice of China employer labor violations (《重大劳动保障违法行为社会公布办法》). The goal of these new rules is obvious: it is intended to deter employers from violating China’s labor and employment laws and regulations. These rules are set to take effect on January 1, 2017 and will apply to all China employers, domestic and foreign. The following rulings/decisions on employer violations of China’s labor laws may become public:

  • Failing to pay “substantial” employee remuneration
  • Failing to pay an employee’s social insurance and the circumstances are “serious”
  • Violating the laws on working time or rest or vacation and the circumstances are “serious”
  • Violating the special rules on protecting female workers and underage workers and the circumstances are “serious”
  • Violating the child labor laws
  • Causing significantly bad social consequences due to violations of labor laws
  • Other serious illegal conduct

Neither “substantial” or “serious” are anywhere defined.

When publishing these labor law decisions, the following information will be released to the public (with exceptions for national security, trade secrets or individual privacy):

  • The employer’s full name, integrated social credit code/registration number, and address
  • The name of the legal representative or the person-in-charge
  • The main facts of the violation
  • The decision made by the authorities

The above information will be published on the labor authorities’ portal as well as in major newspapers, magazines and TV and other media each quarter at the city/county level and twice a year at the provincial and national level. This information will go into the employer’s credit file on integrity and legal compliance and may be shared with other governmental departments. The employer can file a petition with the relevant labor authorities if it does not agree with what has been published and the authorities will render a decision within 15 working days and notify the employer. If the published information has been modified or withdrawn according to law, the relevant authorities will modify the published content within 10 working days.

The rules are not very detailed, which comes as no surprise. China’s local human resources and social security bureaus will be responsible for implementing these rules and they presumably will have considerable discretion in how they do so. Note though that they don’t get to “cherry pick” what to publish: if a violation meets the applicable standard, it will be published.

Beginning January 1, 2017, if a China employer commits a serious violation of Chinese labor and employment laws, it may be made public by the labor authorities. Make sure you are in compliance and you stay in compliance. And if you do not know whether you are in compliance, figure it out. NOW.

To say we are concerned for our clients for whom we do not conduct regular employer/employee audits is an understatement. It is getting progressively more difficult for foreign companies doing business in China to compete with domestic companies on hiring Chinese workers and a foreign company that gets public excoriated for employer misconduct will no doubt find it even more difficult and expensive to find good workers. We see far too many foreign companies doing business in China with little to no clue about its employment laws. Some still believe China today is the same as China a decade ago, where unhappy employees could be “bought off” with a month or two of wages because they knew they could (and they did) easily move on to another job.

Those days are over and we fear foreign employers will be disproportionately singled out for public approbation.

As we have been pointing out pretty much since we started this blog, going after foreign companies in China is simply good politics. It always has been and it always will be. Read Machiavelli.  Read Sun Tzu.  Read Animal Farm.  Read 1984. Just look at what pretty much every country in the world does.

And going after foreigners virtually always picks up during economic slowdowns, for generally political reasons. Just look at the U.S. election.

Many years ago, in a Wall Street Journal entitled, “China’s Slowdown and You,” Dan Harris, one of the China lawyers at my firm, asserted, among other things, the following on doing business in China during a slowdown:

  • The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
  • China’s prioritization of its citizens’ contentment means China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Way back in 2006, in a post entitled, URGENT ALERT: Register Your Company In China NOW, we issued our first “urgent alert,” noting a crackdown on unregistered companies doing business in China and stressing how foreign companies are never going to be treated like domestic companies:

Long ago, when I was a young lawyer, I wrote an article entitled, “Four Essential Principles of Emerging Market Success,” positing that a failure to abide by the law in the country in which you do business is the surest way to lose your business without any basis for complaint:

In many emerging market countries, local businesses take advantage of corruption to avoid complying with laws. This may work for the locals, but it won’t work for you. The easiest way for a local rival to drive you out is for you to do something illegal. Neither you nor your government will have good grounds to complain if your rival gets your business closed down due to your illegal activity. It might even be your own partner who reports you so he can assume full ownership and control of your business.

The strength of my views on this has only increased as my firm has been contacted far too many times by companies driven out of countries for having engaged in illegal conduct no different from thousands of other foreign companies in the same country.  These companies assume they have legal redress, but in reality they almost never do. So long as the law of the country in which the company was operating allows for closures and/or penalties (and in every such situation my firm has encountered, it has), the company is essentially out of luck.

There was a time where most foreign business was illegal in China, particularly as a Wholly Foreign Owned Enterprise (WFOE).  Those days are pretty much over now and the Chinese government knows it.  If you came into China as a representative office (rep office) back when that was the only way, and your “registered office” is engaged in business activities that are improper for such an office, the time is now to get that right also.

If your local people in China are telling you this is not how Chinese business is conducted, you need to remind them you are not Chinese and the government will treat you differently.  Also remember that your employee’s knowledge that you operating illegally in China gives them tremendous leverage.

Then in 2007, we wrote of this same disparate treatment issue back in the context of China’s environmental laws, in a post entitled, “China Warns Foreign Companies On Pollution“:

China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your Chinese domestic competitors are getting away with something does not in any way mean you will be allowed to do so.

Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.

Lastly, going after foreign companies is politically popular.

We ended that post with the following:

Bottom Line: Obey the law, particularly the environmental laws. It is good business.

Certainly the same is now true with respect to China’s employment laws.

Similarly, in China Fines Unilever For Mentioning Price Increase. What That Means For YOU, we noted how foreign companies doing business in China cannot expect to be treated like Chinese domestic companies:

As long time readers of this blog know, one of our consistent themes has always been that foreign companies in China should not expect to be treated the same as Chinese domestic companies, no matter what the laws may say. The reality (not just in China) is that it is usually good politics to go after foreign companies and it is usually bad politics to go after domestic companies. The reality also is that when a large number of citizens have a particular problem, it is very good politics for the government to show that it is trying to solve it.

Don’t end up on social media for violating Chinese labor laws: the costs will be high. For more on how to handle the employer-employee relationship in China, check out the following:

Just get it right!

China corporate litigation
China company litigation: think tough shot, not slam dunk.

Our China lawyers have been getting an influx of cases from investors and their lawyers wanting our help in suing Chinese companies in U.S. courts for corporate governance violations. Nearly every time their plan is to sue the Chinese company for having violated their “minority shareholder rights” or for breaching fiduciary duties owed to them as fellow investors.

First, as we discussed in The China Stock Option Scam, it is not possible under Chinese law for a Chinese domestic company (as opposed to a WFOE or a Joint Venture) to have foreign shareholders. Second, even if — as is often the case — we are not dealing with a true case of foreigners purportedly owning shares in a Chinese company, the duty owed to the foreigners is going to be based on Chinese corporate governance laws, not those of the United States. When we tell our potential clients (and even their lawyers) this, their response is usually to say something like, “but our contract calls for disputes to be resolved in a U.S. Court. We thought we had a slam dunk.”

So what? A contract provision calling for disputes to be resolved in one country’s court should and does have little to no influence on the law that court will apply to the case. Most importantly, it is difficult to imagine a thoughtful American judge applying U.S. corporate governance law to a transaction that took place wholly in Mainland China and that involves Chinese entities.

I thought of these corporate governance cases today after reading a really nice analysis (by Dorsey lawyers Lanier Saperstein and Jeremy Schlosser) of the Second Circuit’s recent decision in the big Vitamin C Antitrust Litigation, holding that U.S. courts must “defer to a foreign government’s interpretation of its own laws.” In their analysis, these lawyers opine that this decision should hardly be a surprise and yet note how it will likely have far-reaching implications:

That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.

The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.

Without going into the Vitamin C case facts and the Second Circuit’s legal ruling, I will just say that if any lawyer still believes that a U.S. court will apply U.S. law in sorting out a China-related corporate dispute, they are just wrong. If you are going to do a transaction in China that involves your getting equity or even profit-sharing from a China-based entity, China law is going to apply to any subsequent dispute you might have against that China-based entity. And this will be true regardless of whether or not your contract (or something else) entitles you to bring your dispute in a U.S. court.

So if you are going to do a deal involving getting equity in or profits from a Chinese company, you should at least know that China’s corporate governance laws put more value on the contracts you sign and less on  shareholder protection laws than the United States or Europe. What this means is that unless your contract explicitly provides you with protections, you probably have no protections. What this means in real life is that most of the time when American or European lawyers come to us with a China corporate case they are calling a “slam dunk,” it is anything but.

See also: China Contracts: Why Choice of Foreign Law is so Often a Bad Idea.

China employment lawyer

China’s labor laws allow an employer and an employee may enter into a non-compete agreement or agree on a set of non-compete provisions (usually in the employment agreement or a confidentiality agreement) that prohibits the employee from competing with the employer for up to two years after the employment term.

     Who can be subject to a non-compete?

China employee non-compete agreements are generally limited to senior management, senior technicians and other personnel who have a confidentiality obligation. “Senior management” usually means a person in a senior management position with access to the company’s confidential information. A “senior technician” usually means someone engaged in technology research and development, and who has fairly comprehensive access to the company’s technological information. Whether an employee falls under the category of “other personnel who have a confidentiality obligation” is determined on a case-by-case basis by considering all relevant facts, including the following:

  • The employee’s compensation
  • The employee’s job title
  • The employee’s responsibilities
  • The likelihood of the employee’s gaining access to and making use of the confidential information
  • Whether the employee also signed a confidentiality agreement with the employer
  • Whether the employee is suffering a financial hardship in his or her post-employment period and the extent of that hardship

     Non-compete period

The PRC Labor Contract Law limits the non-compete period to no more than two years. The two-year period starts to run from the time the employment contract ends or gets terminated. Some local rules set forth a permissible period longer than this two-year statutory maximum, but the Labor Contract Law must be followed here. As our regular readers know, we are always stressing the need to comply with the national, the provincial and the local laws and this is especially true with labor laws. See China Employment Law: Local and Not So Simple. It is important, however to distinguish between a situation where there is no national guidance or the national law is ambiguous or not detailed and a situation where there is a clear national law and the local rules clearly conflict with the applicable national law. In the latter case, the national law typically prevails. We virtually never say this, but it is almost always best to leave to your China lawyer the task of figuring out how to harmonize two or more laws.

     Non-compete Compensation

In exchange for an employee’s promise to uphold a non-compete requirement, the employer is required to pay economic compensation to the employee. An employer’s failure to pay the non-compete compensation means the employee can stop abiding by the non-compete provisions.

Under the Judicial Interpretation IV of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Labor Dispute Cases (“Judicial Interpretation IV”), the amount set forth in an agreement between an employer and an employee regarding post-employment compensation for a non-compete provision will prevail. If the agreement is silent on the amount of post-employment compensation for the non-compete provision, the employer must pay the employee 30% of the employee’s average monthly salary in the twelve months before termination, or the local minimum wage, whichever is higher.

Notwithstanding the issuance of Judicial Interpretation IV, we are still finding local differences regarding the required amount for non-compete compensation.

One question is whether a non-compete compensation provision will be upheld if the agreed-upon amount is less than the local minimum wage. We have seen a trend among Chinese courts in major cities to strictly enforce contractual non-competes even when the agreed-upon non-compete compensation is extremely low. However, for avoidance of doubt and to avoid triggering the default rule, we advice our clients to specify non-compete compensation greater than the local minimum wage.

     Contract damages provision

An employee non-compete agreement is one of the few instances where a China employer is legally allowed to impose a penalty on an employee. This is done via a specific contract damages provision. By agreeing to such a provision, an employee agrees to pay a specific damage amount if he or she fails to comply with the non-compete provision.

The standard is simple: the contract damages must be a good-faith estimate of the employer’s damages in advance. If a PRC court or other arbitral body considers your contract damages amount too high and thus too harsh on your employee (an argument virtually every employee will make), it will reduce this amount or perhaps even eliminate it entirely. For the difficulties inherent in coming up with an appropriate contract damages amount, check out China Contract Damages: More Art Than Science.

An employee cannot simply pay contract damages to get out of his or her non-compete obligations. The employer may demand its employee continue to perform his or her non-compete obligations (provided it is still within the non-compete period) even if the employee has paid contract damages for violating the non-compete agreement.

     Geographic scope

The standard here is quite simple: the geographic scope must be “reasonable.” In determining what constitutes a reasonable geographic scope for a non-compete, the Chinese courts will consider all facts, including the employer’s business scope, the employer’s size, the employer’s industry, and the employee’s position.

It usually makes sense to make your geographic scope as expansive as you deem appropriate because Chinese courts do not usually strike down a non-compete provision simply because its geographic scope is too broad. They will usually instead employ what is sometimes called the “blue-pencil doctrine” to reduce the geographic scope of the agreement, but leave it intact. On the flip side, it is nearly impossible to expand the scope of a non-compete in court. This means that you want your non-compete agreement to tilt towards the broad side, but not be so broad that a court throws up its hands and strikes the whole thing.

Early termination

Once the non-compete period has begun, employers cannot terminate a non-compete agreement without being subjected to a penalty. Pursuant to Judicial Interpretation IV, employers that unilaterally terminate a non-compete agreement during the non-compete period must pay the employee three additional months of non-compete compensation for the early termination.

Keep in mind also that if you fail to make compensation payments for three months or longer, the employee has the right to unilaterally terminate the non-compete, provided the employee has performed his or her non-compete obligation and is not the cause for the employer’s failure to make payments. So if you want your non-compete agreement to remain in force, you should be sure to pay on it.