The 19th Session of the 11th National People’s Congress last week revised the criminal code to provide that it is a crime for a company to intentionally withhold the wages of employees. A company that does this is subject to criminal fines and the responsible individuals are subject to imprisonment for up to seven years.

This is obviously a very significant issue and we are not surprised by this law change.

We are frequently contacted by owners of WFOEs in China who are experiencing financial difficulties. Very often the owner/manager reports that the company is behind on paying wages. Our advice always is to deal with the wage issue immediately because local officials will not allow a company to liquidate or restructure when wages are outstanding.

Now, our advice on wages is even more critical.

If you do not pay your wages, there is a good chance that you, as the manager/owner, will be charged with a crime and you could face seven years in a Chinese jail. Note also that this law change has retroactive effect. That is, if you failed to pay employees before the law was passed and that failure to pay continues, you are subject to criminal prosecution.

The new legislation is as follows:

1. Article 276(1) of the Criminal Code is revised to provide that willful withholding of employee wages is a crime. The elements of the crime are as follows:

a. The company has the means with which to pay the wages.

b. The company willfully withholds payment of wages by either refusing to pay or by intentionally transferring assets to escape liability for payment.

c. The situation is serious or the effects are severe.

2. The company is subject to fine. Persons within the company who are directly responsible are subject to fine and imprisonment. Imprisonment is up to three years where the situation is serious and up to 7 years where the effects are severe.

There are several points that are not clear. The most important are:

1. How does a company demonstrate that it does not have the means to pay? A simple statement will not work. In our opinion, the only way to ensure that there is clearly no means to pay is to file for a formal petition in bankruptcy or to go through the complex economic based layoff system prescribed by the Labor Contract Law?

2. Who is directly responsible? For a normal WFOE, this will certainly include the general manager and the Representative Director. It will also likely include accounting or related personnel if they are actually responsible for making the wage payment decision. This almost certainly means this applies to the foreign Representative Director, even if that person is based outside of China and is not involved in day to day decision making.

You cannot rely on these possible defenses to liability. You must take payment of wages seriously. You do not want to be in the position of making a defense after you have been arrested for a serious crime. Chinese employees have become very aggressive about ensuring their foreign employers pay their wages. This weapon will be added to the employee arsenal and we expect the weapon to be used aggressively.

In the past, we always stressed to our clients that if they were not going to pay their Chinese employees, they had better leave China before making that clear as we have been involved in a number of hostage situations involving non-payment of debts. We have also always stressed that their failure to pay those wages will almost certainly mean that their company will never be allowed back into China and many of those connected with the company will likely be barred as well.

We will now be telling them that if they stay in China or seek to return to China at some later date, they run the very real risk of going to the big house for a long time.

What do you think?