I should have waited a couple of days.
The day before yesterday, I did a post on foreign employees getting sued in China by their ex-employees, entitled, “Wanna Get Sued In China? Your Ex-Employees Can Help.” Today, Corporate Counsel Magazine came out with a related article, in which I am quoted. The article is entitled, “Companies Considering Layoffs in China Must Coordinate With Government.” It is written by Anthony Lin, an attorney and Chief Asia Correspondent at Incisive Media. The article does a great job describing the topsy-turvy labor situation in China these days.
The article starts out by setting the stage regarding the Chinese government’s somewhat contradictory messages:
Beijing is doing what it can to stanch the loss of jobs by downplaying some aspects of the new labor law and emphasizing others. Even before the economic downturn hit, companies complained that they would have to get rid of employees because the statute’s social welfare provisions were a burden. Now that the government seems eager to preserve jobs at all costs, businesses are being excused from complying with some of these requirements.
On the other hand, a provision in the new law that covers layoffs has been strengthened. While the provision says that companies must notify local governments about large-scale job cuts, some officials now claim the right to approve layoffs, too. Many foreign companies operating in China don’t have to worry about this because they outsource their work to local suppliers (whose compliance with the law varies widely). But some multinationals with direct employees in China have conducted substantial layoffs, apparently with behind-the-scenes counsel from government officials. According to Asia-based employment lawyers, these companies were advised to have their employees sign termination agreements that circumvent the labor law almost completely.
It then nicely summarizes China’s “new” labor contract law:
The new law contains several social welfare provisions, including requirements that employers make larger contributions to pension and insurance funds. More controversially, it requires employment contracts for a much greater proportion of workers. These contracts must spell out exact job descriptions and pay, including overtime. Workers with over ten years’ experience are also entitled to employment agreements of no fixed term. In the event of legal termination, contract employees are entitled to one month’s severance for each year of employment, up to 12 months.
It then details the issues foreign companies are presently facing in China with respect to their workers. Do they follow the law to the letter or do they go along with the winks and nods they are getting from (mostly local) government officials who seem to be stressing job preservation above strict adherence to the law?
I chime in on this debate:
“This idea that nothing else matters except jobs is definitely out there,” says Daniel Harris, a partner at Harris Bricken in Seattle who also authors the China Law Blog.
Other government officials are more subtle about dismissing the labor law’s requirements. Harris says that one of his clients, a food processing company operating in Shandong, discussed the statute with a local bureaucrat. According to Harris, “The official basically told [my client] not to worry about it.” Harris advised his client to ignore the official, which the company did.
The head of Baker & McKenzie’s (check out this link!) China employment practice concurred with my advise:
Andreas Lauffs, the head of the China employment practice at Baker & McKenzie, agrees that foreign companies shouldn’t take advantage of reprieves even if they’re offered. “Multinationals always need to follow the law,” says Lauffs.
The article then notes what is probably the chief difference between US and China labor laws: employment in China is NOT at will, as it is in the U.S. For more on this difference between US and China labor laws, check out “China’s Labor Laws: The Cultural Disconnect Goes Both Ways.”
The article then does a nice job of getting down to the brass tacks and explaining what is generally going on in China right now regarding foreign company layoffs and what foreign companies need to do if they want to layoff employees and yet stay in good graces with the government. The conclusion is the same as that which I put forth in my premature post the other day. If you are going to layoff workers in China, you should negotiate their severances and you should make sure each and every laid off worker signs a contract (in Chinese, obviously) setting forth the terms of their termination and blocking them from pursuing litigation against you.
The first step for multinationals that want to shrink their Chinese workforce is to consult with the local office of the Ministry of Human Resources and Social Security. [Susan] Munro[an attorney at O’Melveny & Myers] says ministry officials have been suggesting alternatives like wage cuts or reduced hours. They’ve also pushed for the delay of layoffs, hoping that companies’ fortunes will shift. “They know that a lot can change in two months,” Munro says.
Companies that really need to cut workers can generally do so, but the key is to get employees to agree to their own dismissal. “The only way out is individual mutual termination agreements,” says Lauffs. In these pacts, employees consent to being laid off in exchange for their contractual severance compensation and a small amount of extra money, perhaps a few weeks’ pay. Getting employees to agree to such deals avoids triggering the layoff provision of the labor law, says Lauffs, even if the number of employees eased out is far more than 20.
It then notes how employees are favored in disputes with their ex-employees (with whom it does not have a termination agreement). Our experience says that if a Chinese ex-employee ends up pursuing legal (or governmental) remedies against its American employer, the American employer is going to lose virtually every time. Arguments like the following have virtually no chance of prevailing:
1. This person was an independent contractor, not an employee.
2. This person was a terrible employee.
3. This person and my company had an agreement that the position would be for only two months.
4. We specifically told this person never to work overtime.
5. This person’s high salary was based on our agreement that he/she would not get paid for overtime.
6. This person’s high salary was based on our agreement that we would not make pension payments.
My sense (and it is just a sense because we have not heard about or been involved in enough cases to be able to base anything on empirical data) is that because the US employer will lose just about every time, the best strategy is nearly always to negotiate an agreement with your soon to be ex-employees if at all possible. The fact that this article seems to conclude that this is what the large multinationals have been doing lends further credence to this.