Litigation and Arbitration

China employment laws and foreign companies. One tough mudder.
China employment laws and foreign companies. One tough mudder.

The China Labor Bulletin just did a post revealing something my law firm’s China lawyers (especially our China employment lawyers) have sensed/felt for quite a while: China employees increasingly know their rights and have no compunction about doing what they can to enforce them:

While latest national LDAC case data compiles data only up to 2015, local government reports reveal more recent statistics, and tell stories of the rising rights awareness of workers.

A whitepaper on labour disputes from Guangzhou noted the increasing diversity of grievances raised by workers in recent years. Unpaid social insurance, for example, account for over 40% of all arbitration cases over the past three years. Women workers are an increasing portion of all cases, and are taking action against unequal treatment, illegal firings or wage cuts during pregnancy or maternity leave, and discriminatory hiring practices.

Though this article does not specifically address employment cases against foreign companies doing business in China, I would venture to bet that employment disputes between Chinese employees (and expat employees as well) and foreign companies have increased at an even faster pace. We see this in the number of emails we get from both employees (expats mostly) seeking to sue and from employers threatened with lawsuits. In virtually every employment dispute we take on as counsel, however, the parties eventually settle, meaning they never become a part of any Chinese government statistic.

I wrote on this last year for Above The Law, in an article entitled, China Employment Disputes: Settle, Settle, Settle: Attorney Dan Harris says there’s only one way to deal with labor disputes in China. That article started out with the following:

Every few weeks, one of our China lawyers gets an email from a foreign company (virtually always a WFOE) that is in a dispute with one or more of its China-based employees. These foreign companies are usually surprised to find themselves in such a dispute because they are of the view that they did nothing wrong. They too often believe that hiring my law firm will consist of us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then making the case go away.

The only difference today is that we are getting those emails every single week, and usually more than one. But what hasn’t changed is what causes foreign companies to get themselves in this situation, nor what they need to do to get out of them. The two leading causes for the employment disputes we see are a failure to have a well-crafted set of Rules and Regulations combined with maladroitly handled employee terminations. See China Employee Termination: Avoid These Mistakes. We also have seen no slow down in foreign companies getting into big trouble for having “employees” in China without their actually having a China WFOE to serve as the employer. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

Bottom Line: China wants foreign companies doing business in China for financial reasons and those companies that are not fulfilling their China financial duties, be it via taxes or employee payments are at risk.

China litigation
Owed money by a Chinese company? Sometimes you just have to sue.

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.

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.

International litigation and debt collection
It’s a small world after all.

A German lawyer for a German company owed money — lots of money — wrote me last week to discuss retaining my law firm to try to collect on its debt by seizing U..S and Canada real property believed to be held by its Chinese citizen debtor. This lawyer was coming to me because he had liked my quotes in a Vancouver Sun article from last year, entitled, More Chinese cases target property in B.C., say lawyers.*

The headline of this article is 100% correct, but the increase in lawsuits targeting properties in both the United States and Canada is not due to any change in laws; it’s due to the increase in the number of properties held by Chinese nationals in the United States and in Canada. And these lawsuits involving United States and Canadian courts stem at least in part from the trust so many have in the efficacy of our two legal systems.

At least ten years ago, the Tokyo’s Yomiuri Shimbun interviewed me for an article, entitled, “The Americanization of Law,” [the link no longer exists]. The thesis of that article was that American law and American lawyers influence business laws the world over. Call it Americanization or whatever else you want, but the trend towards an overall liberalization of laws is so common as to be almost inexorable. That article focused on how companies in countries with less developed legal systems so often will engage in legal gyrations to get their cases heard by U.S. judges. That article mostly focused on how Russian and Korean companies were using the U.S. courts to sue other Russian and Korean companies and then seize their assets in the United States. This use of United States and Canada courts has not changed.

Anyway, back to the Vancouver Sun article, which has a somewhat similar thesis:

Lawyers say they are seeing a substantial increase in B.C. court cases filed by Chinese companies seeking to seize real estate assets from Chinese immigrants in B.C.

The Chinese plaintiffs are asking B.C. judges to enforce monetary judgments awarded in Chinese courts. These Chinese rulings typically involve people found in China to have defrauded Chinese banks or business partners and then fled to Canada with the money and invested in real estate here.

The rapid rise in the numbers of Chinese cases in Canada and the U.S. — two preferred destinations, according to the Chinese government, for financial fugitives — has also been recognized by Dan Harris, a Seattle lawyer who advises international law firms on strategies for recovering assets from Chinese defendants.

Such cases have been trickling into B.C. courts for several years, including a 2015 B.C. Supreme Court award of $670 million to the Bank of China against money allegedly laundered through buying multiple homes and setting up bank accounts in Richmond.

But, according to Vancouver lawyer Christine Duhaime, a precedent-setting case in June appears to have opened the flood gates.
Duhaime says that after her client, China Citic Bank, won a so-called Mareva injunction from B.C. Supreme Court, prohibiting the sale of four Vancouver-area homes worth $7.2 million, calls from China poured in. The homes belong to a couple who were alleged to have “fled China” with an unpaid $10-million loan.

Duhaime says she understands this is the first case of a Mareva injunction, also called a freezing order, being won by a Chinese bank in North American courts. Such injunctions prevent assets from being sold before a court can rule on whether they should be used to repay a court award.

Based on the case, Duhaime says she has obtained information from China alleging that “billions of dollars” of bank fraud proceeds are invested in B.C. real estate. She said she could not share the documents for reasons of client privilege.

Many years ago, my law firm represented a former Hong Kong police officer who had left Hong Kong maybe thirty years earlier, under a cloud of suspicion for having engaged in large-scale corruption. The City of Hong Kong had somehow learned that this police officer now owned substantial properties in Washington State and in California and it sued him to get that property.

The litigators at my law firm have litigated a large number of similar cases over the years, mostly involving private, not government, litigants. In many of those cases (most?) the plaintiff has chosen the United States as its venue from a whole host of options, including its home country, simply because it believes the United States courts are most effective in rendering judgments and — even more importantly — having the capability to collect on those judgments by seizing assets. Many years ago, we were retained by an American company to enforce its Chinese judgment against a Chinese company in a California court. Its thinking — which was absolutely correct — was that it had spent years trying to collect against this powerful Chinese company, based in what was for China a small town and it would never succeed there. So we were tasked with turning the Chinese judgment into a United States judgment and then seizing product from the Chinese company as it came into the United States and payments to the Chinese company as they left the United States. These sorts of cases are also becoming more common.

What’s so interesting about the Vancouver Sun article though is how it reveals the pent-up demand for lawsuits by Chinese companies against Chinese citizens with property in British Columbia:

“The (Citic) Mareva case absolutely increased the interest in China, and caused a number of banks in China to reach out to us and say ‘We have all these cases. Can we do something in B.C., too?’” Duhaime said. “There is lots of cases coming down the pipe, and there is lots of appetite in China from the government, down to the banks, to come to B.C. to enforce judgments.”

In the Citic case, the defendant, Shibiao Yan, a citizen of China, is now seeking to overturn the Mareva injunction. Yan argues Mareva is a “harsh and exceptional remedy that should only be available in the clearest of cases,” according to B.C. legal filings. Yan’s lawyers did not respond to a request for comment on the case.

Duhaime says as the Citic case continues, her law firm is already working on new cases.

“One of our next projects is a Toronto house we are looking at, worth $100 million,” Duhaime said. “A guy went to a bank in China, defrauded them, got a loan and all the money in one day, and moved to Canada and got a mansion. And no one asked any questions, even though he never worked a day in Canada. It’s all the same type of story, where a foreign national doesn’t have a job, but is living in homes in Canada and owes money to a bank in China.”

Another Canadian lawyer expects these cases to increase as well:

McGowan said that he could not speak specifically about the case. But he told Postmedia that he anticipates a growing wave of legal actions from Chinese citizens seeking to recover debts by targeting B.C. properties.

“What I can say generally is that I’ve seen and I’m anticipating seeing a lot more claims like this,” McGowan said in an interview. “The amount of inflow litigation from China is substantial. I think the Chinese are starting to appreciate there is an opportunity to make recovery on their losses in China … against people who have immigrated to Canada.”

I then seek to explain the reasons for increased interest in pursuing Chinese-owned assets overseas:

Harris, the Seattle lawyer, said he agrees with the Vancouver lawyers “100 per cent” that cases from China are rapidly increasing.

“There is an influx of these cases because they are in some ways so easy to bring in the U.S. and in Canada,” Harris said. “And, more importantly, they are so easy to collect on, unlike in China, where winning a case is one thing but collecting on the judgment is another.”

Harris said his firm is often approached by Canadian and U.S. lawyers seeking to recover assets from companies and people in China. He advises these lawyers to seek out assets owned by the litigation targets outside China and then take action “in other countries with more effective legal systems for collecting on court judgments or arbitration awards.”

But just to clarify. Suing Chinese individuals and companies in the United States or Canada makes terrific sense if they have assets in the United States or in Canada, but it will probably not make sense if they do not. One more thing you should know, however, is that it is very easy to get a judgment in the United States and then take that judgment to Canada and turn it into a Canadian judgment, and vice-versa. So if you are owed money by a Chinese national or a Chinese company that has assets in both Canada and the United States, you probably will be able to get away with suing in just one of the two countries and using your victory in that one to collect on assets in both.

Isn’t international litigation fun?

 

* It turned out that the Chinese citizen did not own any property in the United States or in Canada — or at least any that the German company’s private investigator could find — which is what allows me to mention this matter here. I also changed the facts a bit as further camouflage.

 

China law firm for arbitrationA European company once came to my law firm wanting us to assess an arbitration it wanted to bring in Geneva, Switzerland between its China WFOE (the putative plaintiff) and a Chinese domestic company (the defendant) with which it had contracted. The contract provided for arbitration in Geneva and the European company wanted our China attorneys to assess its chances.

We did not like our client’s chances on many grounds and no arbitration claim was ever filed. One of our reasons for not liking our client’s chances is a somewhat obscure Chinese law that often trips up foreign companies with China WFOEs or China Joint Venture entities. The law is commonly called “the Domestic Rule” and it provides that only “foreign-related” disputes can be arbitrated outside China.

I describe this law as “somewhat” obscure because every good Chinese lawyer who represents Chinese companies with foreign investors knows this law well and knows exactly how to use it to give a big advantage to their Chinese company clients; it is only obscure for foreign lawyers. Check your China Joint Venture Agreement and if it provides for internal company disputes between your company and your Chinese joint venture partner to be resolved via arbitration outside China, you have probably been taken for a ride by a Chinese lawyer who knew exactly what she was doing. And this is pretty much the norm when the foreign party in a China Joint Venture makes the massive mistake of using its joint venture partner’s lawyer to draft the joint venture agreement.

Under Chinese law, for a dispute involving a Chinese company to be viewed as “foreign-related,” it typically must involve at least one of the following:

  • At least one foreign party. Note that China WFOEs and Joint Ventures are usually not considered to be a foreign party. Note though that Hong Kong, Taiwan and Macau entities are generally viewed as foreign parties.
  • The facts or the subject matter that give rise to the lawsuit occurred or exist outside Mainland China.

If you secure a foreign arbitral award against a Chinese company and you do not have a basis for being able to circumvent the Domestic Rule there is a good chance no China court will enforce your arbitration award. If the Chinese company you are pursuing has assets outside China, you may be fine, but if it does not or if you are seeking to change the operations of a China Joint Venture, your arbitration award will probably prove worthless.

The way to avoid this sort of problem is to draft your contracts to provide for disputes to be resolved in China, either in its courts or before one of its domestic arbitral bodies, such as CIETAC. See CIETAC Arbitration: Different But Fair.

China employment lawyerTo understand China’s labor and employment laws, one fundamental premise to understand is that an employer and an employee are not considered equal parties under the law. The law provides the employee with more protections because it’s presumed that the employer is the more powerful party. A lot of employers (Chinese or foreign) do not understand this. Among other things, two important rules that stem from this premise should be noted:

  1. Many China employment laws cannot simply be contracted away.
  2. Employers (NOT employees) bear the burden of many things under China employment laws.

I talked about #1 before, so I will discuss #2 today. To give you an example, let’s consider a hypothetical based on a question our China employment lawyers regularly get asked. A China employer hired an employee about 13 months ago. The employer kept asking the employee to sign a written employment contract and the employee refused to cooperate. The employer thinks it is the employee’s fault for her not having a written contract. Can the employer now terminate the employee?

To be clear, when we receive this type of question from prospective clients, we need to first make sure there is no conflict of interest. And we really can’t even start to answer this question without gathering up more facts. However, for purposes of the discussion here, I am going to assume a lot of things, and just to name a few here:

  • the parties are in a pro-employee jurisdiction;
  • the employee is not the head of the employer’s Human Resources department nor is she otherwise in charge of making sure all employee agreements are duly executed;
  • the employer did not document its efforts in asking the employee to sign a written contract;
  • there is truly no written document between the parties that can be deemed an employment contract for purposes of China’s labor laws;
  • there is no legal ground to terminate the employee.

Before I give my analysis, here is a super quick review of the law: China employers must have written employment contracts with all of their full-time employees. If an employer goes more than one month without having a written employment contract with an employee, the employer will be required to pay the employee double the employee’s monthly wage and immediately execute a written employment contract with the employee. If the employer goes more than one year without having a written employment contract, it will be deemed to have entered into an open-term employment arrangement with that employee and is required to sign a written contract with her to the same effect.

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

First, it did not deliver a notice of its intent to execute a written employment contract within 1 month after the employee’s commencement date. The burden is on the EMPLOYER to remind the employee that the parties need to enter into an employment contract before it is too late. The employee does not have this burden. If all the employer did was to ask her orally, it does not meet the legal requirements. The fact that the employee acted in bad faith by refusing to cooperate (assuming the employer can meet its burden of proof on this) is generally not going to be relevant.

Second, it did not terminate the employment relationship by the end of the first month, but instead retained the employee without a written contract. The employer may argue that it tried and that it had no way to force its employee to sign a legal document. Though true, the employer should have terminated the employee before the one-month period elapsed. And by termination, I mean it should have issued a formal written notice stating the reason why it had to terminate the employee in accordance with Chinese law.

Third, the employer still has no written contract in place for its employee. The employee has been converted to an open-term employee by law because she has been employed for so long without a proper written contract. Once her status has changed to becoming an open-term employee she has essentially become a lifetime employee and the employer must immediately execute an employment contract reflecting the new open-term employment arrangement. Failure to do so will subject the employer to legal and regulatory risks.

Finally, because there has never been an employment contract, the employer has failed to fulfill its obligation to maintain the employee’s employment contract on file for two years after employee departure. This means that even if the employer can find a legally permissible ground to terminate the employee (unilateral termination is probably not a good idea here), the employee’s termination will likely cause problems for the employer. An audit by the labor authorities will turn up this issue and the employer will likely face penalties for this noncompliance.

Bottom line: Oftentimes employers think they have done everything they are supposed to do with their employees but they haven’t. At least not according to China employment laws. And blaming employees for employer shortcomings is virtually never a solution because the Chinese authorities and courts will not side with you. Still think you are in compliance with China’s employment laws? Maybe you need to think again.

 

 

 

 

international Trade lawyersEmboldened by President Trump’s promise of tougher enforcement of U.S. trade laws, a fresh wave of new antidumping and countervailing duty (AD/CVD) petitions were filed in March by domestic U.S. industries seeking relief from imports. The petitions cover five products (silicon metal,  aluminum foil, biodiesel fuel, wire rod, and carton closing staples) from all over the world from Argentina and Australia, to the UAE and UK. And of course, China. These petitions will trigger 25 separate AD/CVD investigations at the Department of Commerce.

However, one of President Trump’s first executive orders was to freeze hiring of any new or replacement federal government employees.  If this hiring freeze continues, the Department of Commerce (DOC) may not have enough manpower to administer all these new AD/CVD cases. The DOC already has about the same number of on-going investigations that must be completed, along with an even bigger number of administrative reviews of all the existing AD/CVD orders that are still in effect. For each case, a DOC case analyst and attorney must draft and issue multiple rounds of questionnaires, review the responses and comments submitted, analyze all the issues raised, calculate AD/CVD margins, and draft decision memoranda.  All these necessary tasks require a certain minimum amount of time to be completed. Without reinforcements, the expanding new case load threatens to stretch the DOC trade remedy team well past a reasonable or manageable work load.

Nine U.S. Senators have already asked President Trump to lift the hiring freeze for trade enforcement personnel at a variety of agencies such as DOC, Customs and Border Protection, USTR, and Department of Justice. They specifically noted that these agencies have been tasked with more extensive trade enforcement responsibilities, but the hiring freeze would have the effect of reducing the resources available for such enforcement.

Since the hiring freeze does not apply to military personnel or those deemed essential to security, maybe President Trump will find trade enforcement is essential to national security or carve out some other exception to allow new hires for the DOC and other trade related agencies.  But if the DOC cannot hire enough personnel to administer cases properly, then perhaps it will develop leaner and meaner ways to handle these new AD/CVD cases. That is the fear of the international trade lawyers at my law firm and elsewhere, and it should be the fear of any company, Chinese or otherwise, that finds itself caught in the crosshairs of an AD/CVD petition.

For example, DOC may now try to decide more cases based on applying total adverse facts available (AFA), after finding the respondent exporter or producer to be non-cooperative because their questionnaire responses are deemed untimely or inadequate. Making this sort of finding will allow the DOC to avoid crunching all the submitted sales and cost data to get AD/CVD margins that often are not that high (particularly for non-Chinese market economy cases). This will give the DOC the highest AD/CVD margins possible with the least amount of work if the exporter/ producer gives up or is given a death blow.

Even if a respondent survives the questionnaire process and avoids a total AFA determination, the DOC now can generate higher AD/CVD margins by applying a new trade law provision which allows it to find a “particular market situation” justifying an upward margin calculation adjustment. This is what Peter Navarro, head of the newly formed National Trade Counsel, recently urged Secretary of Commerce Wilbur Ross to do in an on-going administrative review of Korean OCTG oil drilling pipe. In that case, Navarro and the domestic pipe producers wanted the DOC to make a “particular market situation” finding the Korean pipe producers benefited from subsidies embedded in their purchases of Chinese steel. Navarro relied on a “logical” presumption that the Chinese steel subsidies of 60% found in a prior unrelated case would be passed through to benefit the Korean pipe producers to generate a margin of at least 36%. Navarro’s back of the napkin calculation lacked even a napkin to support the calculation. Respondents in that case complained that Navarro’s email was an unprecedented intervention and an overt suggestion that DOC calculate a politically acceptable but factually unsupportable AD/CVD margin.

U.S. AD/CVD cases have long had a reputation for being more objective and fact/data intensive than those conducted by most other countries. But if political pressure and personnel limitations push DOC to make more arbitrary AFA determinations or politically motivated findings of a “particular market situation” U.S. trade remedy cases will soon lose any advantage of perceived objectivity or credibility. The Department of Commerce already has significant discretion to weigh the record evidence and make judgment calls favoring the domestic industry. But at least those judgment calls have been based on an analysis of specific record evidence. The new “particular market situation” provision appears to give DOC even more discretion to make adjustments based only the thinnest of factual basis. This shift towards a more politically-driven AD/CVD process may result in the Department of Commerce issuing higher margins in the short term, but over the long term, the AD/CVD process risks losing significant credibility. Trade remedy cases, by definition, are intended to be remedial, not punitive. DOC’s AD/CVD process is supposed to determine the “fair” normal value for subject imports. If DOC’s definition of a “fair” export price is not factually or legally based, but is instead arbitrarily determined by politically influenced adjustments, an exporter or US importer has no way to determine whether or how their pricing should be adjusted in order to be deemed “fair” by DOC.

What this means in real life for Chinese companies sending products to the United States, and to those who import products made in China, is that they need to be even more careful not to run afoul of U.S. AD/CVD laws and pricing. And when tagged for any AD/CVD violation, it is more critical than ever that they respond quickly and with as many facts as they can muster, thus making it harder for the DOC to make quick and random and financially deadly decisions.

China lawyersDoes the Chinese company with which you are doing a deal have a United States subsidiary? Does this mere fact make you feel better about doing a deal with its China parent company? Why? Do you not realize that it is likely to be legally irrelevant?

The always excellent, always informative, Hague Law Blog (by Aaron Lukken) wrote about this in the context of service of process in its post, You can’t simply serve a U.S. subsidiary. Aaron starts out by discussing how you need a compelling reason to “pierce the corporate veil” of a subsidiary company to each through and assert claims against its corporate parent since “the whole purpose of a corporation is to be a separate entity, a separate being from its owners, shielding the owners from liability if they didn’t have a part in wrongdoing.”

A couple years ago I was retained as an expert on corporate veil piercing for a case in Korea. As part of my work on that case, I researched the current state of corporate veil piercing and since that time I’ve probably stated something like the following to fellow lawyers at least a dozen times: “You know how difficult it is to pierce a corporate veil, well it’s even more difficult than you think. It seems that courts are now pretty much uniformly of the view that everyone now understands that Limited Liability companies and corporations protect the owners of those entities and corporate veil piercing is now nearly impossible unless there has been real fraud somewhere along the way.” Or to put it in non-legal terms, it ain’t gonna happen.

And yet again and again really smart in-house lawyers seem to ignore this when doing deals with big Chinese companies with U.S. subsidiaries. I cannot even count the times where such a lawyer has told me that they are not terribly worried about being able to pursue the big Chinese company on the other side of their deal because “we can always go after them here in the United States.” Wrong. Wrong. Wrong. Unless the U.S. subsidiary is a party to the contract or a guarantor on the contract, to go after that subsidiary you need to be able to pierce the corporate veil and that ain’t gonna happen. When I tell them this, they then talk about how they still can seize the Chinese companies ownership interest in that U.S. subsidiary as if that is no big deal. But the problem is that is a really big deal and any Chinese company worth its salt has structured its ownership of its U.S. subsidiary through various levels of Hong Kong and Cayman Island and Virgin Island companies. So yes, if you are willing to spend hundreds of thousands of dollars investigating the corporate trail and engaging in discovery on just this one issue, you might succeed. But really?

Our China lawyers see the result of this thinking with contracts between American and Chinese companies that call for disputes to be resolved in a U.S. court. At least once a month, one of our China attorneys will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays. As we have so often written, this will not work:

After we tell the American lawyers how difficult it is to collect on a U.S. judgment against a Chinese company (note that I say difficult and not impossible — it is possible to employ “other methods” to collect on such a judgment), they will sometimes explain that is okay because they can still go after the U.S. subsidiary of the Chinese company with which they have the contract. But as stated above, that is expensive and difficult and may or may not lead to a good result.

Aaron’s post focuses on how service of process on a foreign company’s U.S. subsidiary does not constitute service on the parent company and he uses Chrysler Motors as an example:

Take Chrysler, for example. When you sue Chrysler over a defective Jeep, you’re pretty solid in just serving the Michigan outfit. But if you allege liability on the part of the parent company, Fiat Chrysler Automobiles, N.V. (which we’ll just call FCA here– and I don’t mean the Fellowship of Christian Athletes), serving in Michigan ain’t gonna cut the mustard. You have to go abroad to get FCA on the hook. You can’t just hit Chrysler and assume that FCA is in the case, too.

The corporate veil doesn’t get pierced just because it hangs overseas.

Which means that if you want to serve Chrysler Automobiles N.V. you must do so in the Netherlands, where it is based. Again, it’s because the subsidiary is not the equivalent of the parent and vice-versa and as much as you may wish it otherwise, it ain’t. The same holds true for your China contract.

 

China employer social insuranceChinese law mandates employers provide their employees certain mandatory benefits, including social insurance. China has five types of social insurance: pension, medical, unemployment, maternity and work-related injury insurance. The specific types of social insurance employers must provide and their contribution formulas vary depending on the employer’s location. Many foreign employers in China do not realize that failing to make full payments on required social insurance gives their employees the legal right to unilaterally terminate the employment agreement without providing any prior notice and then turn around and sue the employer for damages.

Just to make things more complicated for China’s employers, China has several forms of social insurance violations. You obviously violate the law if you don’t pay any social insurance at all, but the violations by foreign employers in China I most commonly see are more subtle and complicated than that. We see violations when employers fail to pay social insurance for the entire term of employment. This violation often happens when the employer thinks it need not pay social insurance during an employee’s probation period. We also see violations involving employers failing to pay for all five types of social insurance. And with rising wages in China, we have lately been seeing a rash of employer problems arising from paying social insurance based on a lower salary than is actually being paid, either because the employer failed to update the salary amount or because it intentionally reported a lower salary so as to reduce its employer contribution. These are the sorts of things we constantly look out for in our HR audits.

Employees may consent to the employer claiming a lower salary but that is irrelevant once caught or even once reported by the employee who consented. In a fairly recent case out of Jiangsu Province, the court reinstated the employer’s obligation to pay for all required types of social insurances at full rates the entire time. I am simplifying the facts for this post, but basically the employee’s monthly salary was higher than 7000 RMB, and the employer only contributed social insurance as though the salary had been 2200 RMB. The employee terminated the employment relationship and sued the employer for severance, arguing that he had been forced to leave his job because the employer failed to pay mandatory social insurance. The case went from labor arbitration, to trial, to appeal and then the employer petitioned for re-consideration by the Jiangsu Province High People’s Court. The employer lost every single step of the way (which really should have been no surprise to any experienced China employment lawyer, sorry!) and was required — among other things — to pay the employee for statutory severance.

Each step of the litigation process, the employer made the following three (futile) arguments. One, the employee never objected to the arrangement of the employer misstating the employee’s salary and therefore underpaid the employee’s social insurance. Two, because the employee never voiced any objection to the social insurance payment arrangement, the parties essentially agreed on a different base for social insurance payments. Three, the employer’s failure to contribute the full amount of social insurance was not the same thing as failing to make any contributions at all, so the employee was not entitled to statutory severance. The Jiangsu Province High People’s Court rejected all arguments and explicitly (and rightly) stated that the laws on social insurance are clear and the employer’s failure to contribute the full amounts based on the employee’s actual wages entitled the employee to terminate the employment contract and receive statutory severance pay from his employer.

To reiterate what is becoming a fairly regular theme of my China employment law posts, most China employment laws cannot be contracted away and an employee’s written consent does not change that. An employee’s written acknowledgement that he or she specifically asked for a particular employment arrangement also does not change that.

As a foreign company doing business in China, you are under a microscope and you will be treated differently than domestic Chinese companies. This means that you are both more likely to get caught on employer violations and more likely to get called out and treated harshly when caught. In our experience, if the labor authorities are not pursuing you for non-compliance, your employees almost certainly will either before or certainly after they leave. This brings me to another point. If your employee tells you she is leaving her employment and alleges she has been forced to quit because of employer wrongdoing (or even just provides inconsistent stories about why she is leaving), you should immediately work on resolving those problems (which is exactly what they are) before she takes you to court.

 

Terminating a China-based employeeChina employment law. China employment lawyer. is never easy, but unilateral termination is possible without having to pay severance when the terminated employee has committed a serious breach of the employer rules and regulations (aka employee handbook). For your termination to work, you as the employer need a set of rules and regulations that include a legally enforceable provision on which you can rely. “Enforceable” generally means a reasonable provision that does not violate any Chinese laws.

Let’s take absenteeism as an example. This is a fairly straightforward misconduct and there is nothing in the law prohibiting an employer from disciplining an employee for absenteeism. The question is whether your company rule is reasonable. Suppose your Rules and Regulations provide for immediate termination of any employee absent from work for half a day without good reason. Will such a provision be upheld as enforceable simply because it doesn’t violate any laws? Almost certainly not. As with almost everything regarding China’s employment laws, the answer could depend on the employer’s locale. But most China labor boards and courts will refuse to enforce this provision as too harsh. What about three days of absences without good reason? Would that be enough to allow immediate termination? Probably yes, but we still need to check the local rules and check in with the local labor authorities to confirm local practices. The line between what is considered harsh and what is not is often fuzzy, so it is important the termination provisions in your handbook be both clear and enforceable.

But what if you do not even have a set of Rules and Regulations or your Rules and Regulations are silent on absenteeism and you want to terminate an employee who has been absent from work for 3 consecutive days without any justification? Can you discipline or terminate that employee without having to pay any severance? Again, it will depend on where you are, but in most places, the answer is no. If your Rules and Regulations do not list out the misconduct you want to use as your basis for an employee’s termination, you typically cannot terminate the employee on that basis. This is yet another reason why having a set of Rules and Regulations is so important and why it should be an evolving document. If you are finding your employees engaging in misconduct not addressed in your Rules and Regulations, you should update it to add provisions that address that misconduct.

Speaking of how China’s employment laws can vary so much depending on the locale, Shanghai is an employer-favorable outlier to much of the above. In Shanghai an employer that can show its employee acted in bad faith and thus violated his or her basic duties as an employee can usually terminate an employee without justification based on a particular provision in its Rules and Regulations. Despite this Shanghai difference, you still will be on firmer ground for an employee termination that can be justified by a provision in your Employer Rules and Regulations.