China and Hong Kong legal systems
For commercial law purposes, think of Hong Kong as a different jurisdiction from the Mainland

Sometimes when we write posts we except a slew of emails and comments and get none. Other times we expect none and get a ton. I had no expectations regarding the post I did earlier this year on splitting expat employee pay between the PRC and Hong Kong — China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous but we are still getting emails on that one, mostly from people who got burned by just such a split.

I started that post by noting how our China employment lawyers are seeing increasing instances of expat employees in China having their salaries “split” by their Chinese or foreign company employers. I then mentioned how we “strongly counsel our employer clients against doing this sort of salary splitting and we even more strongly counsel against expat employees accepting such splitting. For one very simple reason: it is illegal and it puts you at great risk.”

I had no idea how common this salary splitting is and how common it is for Chinese companies to insist on how it is perfectly legal. Since that post I alone must have received at least a half dozen emails from expats asking if there might be something different about their employment situation that would lead their potential China employer to insist that their salary splitting was fully legal.
Many of these people who wrote me did so after using my blog post to insist that the salary splitting being proposed was illegal.

In my post I talked about how Chinese companies usually respond when questioned regarding the legality of salary splitting with Hong Kong:

This has also led Chinese companies to come up with some very creative justifications for their illegal actions, in an attempt to quell any expat disquiet about participating in tax fraud. Their first “line of defense” is usually to say “everyone does this and your American lawyers simply don’t know China.” When this doesn’t work, they often propose the expat employee become a director or an officer of the Chinese company’s Hong Kong entity and get paid the $70,000 for doing that. Yeah right. Anyone who knows China law enforcement, especially China tax law enforcement, knows this is never going to fly. See this Forbes article, China’s Tax Authorities Want You.

Now here’s the funniest part: two people who emailed me put my blog post in front of their potential China employers as proof that salary splitting is not legal and their potential China employers responded that we are “just American lawyers and we don’t know China.” Our lead China employment lawyer, Grace Yang, is Chinese and she graduated from Beijing University Law School and I have zero doubt that she 1) knows China employment law ten times better than the Chinese companies trying to cheat their expat employees and that she 2) is going to be a helluva lot more objective on this issue than the Chinese companies that profit from it.

In that post I stated that I saw this salary splitting as designed more to cheat the employee than the Chinese tax authorities:

This sort of non-payment has become so common I am now of the view that many (most?) China company employers that split salary payments do so not so much to engage in fraud as against the Chinese tax authorities, but rather to engage in fraud as against their expat employee. More than half the time when we get an email from an employee seeking our help in getting their $70,000 split fee payment, the employee has been working for her or his China employer for more than a year and that means their China employer saved about $100,000 over the last year (the $70,000 salary plus the approximately $28,000 in employer taxes and benefits it never had to pay) without violating a single law.

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

Then there are the instances where the employer does pay the employee out of country but stops for a while and then stops paying the out of China portion or fires the employee. The employee contacts our China employment lawyers believing he or she can sue his or her employer for damages based on a $100,000 salary. But how can they do this when their employment contract says their salary is $30,000? Are they going to stand up in a Chinese court and say, “excuse me, your honor, I know the contract says only $30,000 and I know my taxes show I have been paying income taxes on only $30,000” but this employer and I were together engaging in tax fraud against the Chinese government and so I just really feel like I am entitled to have this court enforce the oral agreement my employer and I used to defraud the Chinese government. Yeah, right.

All this very much reminds me of how in the old days when foreigners were not allowed to own real property in China they would buy real property in the name of their Chinese citizen girlfriends (it was pretty much always guys) to get around this prohibition. Then, once the girlfriend had the property, she would break up with her foreign boyfriend and keep the property, insisting that it was a gift. The foreigners would then contact my law firm wanting to sue their exes and we would have to tell them how we viewed that as folly because they would need to argue to the Chinese court that they had bought the real estate not as a gift to their girlfriends, but to have their girlfriends illegally hold the property in a sort of trust for them. Yeah, right.

I am more convinced than ever that there are a bunch of Chinese companies out there that are hiring foreigners as employees on these split contracts with the plan to underpay them and then fire them. I say this based on the emails I have received saying essentially this. The following two are representative:
  • “Good article. A friend of mine working for a large Chinese tooling and injection molding company had something similar happen last week. His contract was with a Hong Kong company, but he worked in China under a China business visa.  His employer did not honor his contract (after 10 years of employment) by not paying his 2017 commissions and then terminating him without paying him any of the severance to which he would have been entitled had he been a legitimate China employee.”
  • Pretty much what you described happened to me. I was hired for $118,000 and told that $70,000 would be paid to me from Hong Kong six months at a time. After my first six months I did not get my $35,000 payment and after four months of my complaining about that they fired me, without paying me anything from Hong Kong ever. My written employment agreement said that my pay was $70,000 a year (no mention of money coming from Hong Kong). I went to an employment lawyer in Shanghai and he did not like my case even though I had emails vaguely talking about my “additional salary.” Lesson learned.

Like I said in my last post on this topic, be careful out there. But be careful not just with the Hong Kong scam involving employment contracts, but be careful any time you are doing any sort of deal with a Mainland China company and a Hong Kong company or component gets tossed into the deal. We see this all the time on all sorts of deals (especially licensing and manufacturing transactions) and they always introduce new risks. I will be writing on that fairly soon. In the meantime, check out Hong Kong: Toto, We’re Not in Mainland China anymore.

 

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Photo of Dan Harris Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.