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Working out of Seattle and Beijing, Grace is Harris Bricken’s lead attorney on China labor and employment law matters and the author of a book, the China Employment Law Guide.

China employment lawyersThe issues related to China employee probation are usually more complicated than they first appear and though many of our employer clients and potential clients are telling us “we get it now,” our China employer audits consistently find the opposite to be true.

Let’s consider a hypothetical based on an amalgamation of some document-based HR audits we performed for China employers. Employer and Employee enter into an employment contract that does not specify either a probation period nor a term of employment. The contract provides for a monthly base salary amount. For the first six months of employment, Employer pays Employee an amount less than the base salary amount specified in the contract. Employee later resigns and brings a claim against Employer for the six month difference between her reduced rate and the contract amount. Employer argues it does not need to pay because of a provision in its Employer Rules and Regulations stating that all new employees have a six month probation period during which they receive a reduced salary — it even provides a specific salary amount for the probation period. So the basic issue is whether the employer and the employee agreed on a probation period.

They did not.

There was no explicit agreement between the parties regarding the probation period. Under Chinese law, the probation period is not one of the mandatory items that must be included in an employment contract. This essentially means that an employer that wants a probation period to test out a new employee must clearly describe the probation period in the employee’s employment contract. An employer cannot unilaterally impose a probation period on an employee and that means that an employer that wants to pay a reduced rate to a probationary employee must explicitly provide for that in its employment contract.

Note also that because the cited provision in the employer rules and regulations applies to all new employees it could be deemed illegal and unenforceable for a couple of reasons. First off, it fails to exclude certain categories of employees for whom a probation period is not permitted. For example, Chinese law prohibits an employer from setting a probation period for part-time employees. For that reason, if the employer applies this provision to any of its part-time employees, it is in violation of the law. In addition, the term of the probation period should be proportional to the term of the employment. Specifically, for an employment term of more than three months but less than one year, the probation period cannot be more than one month; for an employment term of one year or more but less than three years, the probation period cannot exceed two months. The employer can only use a six-month probation period for 1) an employment term of three years or more or 2) an open-term employment arrangement. Unless the employer always brings on new employees under either of those circumstances, this provision needs to be revised to accord with the law.

Note another mistake made by the employer in the hypothetical above: it fails to clearly specify a term of employment in the contract. What this usually means is that the employer will be “stuck” with the employee indefinitely as the employee becomes an open-term employee, which basically means there is no definitive end date for the employment relationship.

Our China employment lawyers see problems related to probation periods far too often — well over 50 percent of the time for companies that have or seek to use probation periods. To ensure you as a China employer are in full legal compliance, you should check both your employer rules and regulations and your individual employment contracts. If you find they contain a provision similar to the above, you should update your documents now.

 

China employment law firm
Change your mindset for China employment contracts.

If you have or are going to have employees in China, you need a China-centric written employment contract with each of your employees. Around once a month, one of our China employment lawyers will get a company asking us to “translate our existing employment agreements into Chinese for our China office.” Our response to this request is always the same: “Sorry, we cannot do that because the end result will not work at all for China. You need a China specific employment agreement and our translating what you are using (in the United States or the UK or Canada or Australia or Spain or France or wherever) is not going to work.” At all.

I want to be very clear: translating a foreign country employment agreement into Chinese for use in China is a flat out dangerous thing to do. Even if your translation is perfect and it captures everything you want it to say (which seldom happens), an employment agreement not written specifically for China will contain provisions that do not comply with China’s employment laws or are unworkable in your specific locale in China. For these same reasons, our unwillingness to “just translate a contract into Chinese” extends to every contract we do. See Translate Your Contract For China? The Answer is No.

The most common example our China employment lawyers see in foreign employment agreements of something that will not work under China’s employment system and that can be harmful is a provision stating that the employment is at-will. Under an employment at-will system, an employer is said to be able to terminate an employee for good reason, bad reason or no reason at all, but in China, terminating a China employee almost always requires specific cause both allowed under China’s national and local employments laws and under your employer rules and regulations. Putting an at-will employment provision in your employment agreements will not help you but it can hurt you by making your China management team believe they can fire their China employees for any or no reason at all. We have seen many wrongful termination actions brought by employees terminated by managers who believed they could do so at-will.

If you now think that merely eliminating any references to at-will employment will solve the translation problem, you’re dreaming. China’s entire employment law system is very different from those in Western countries and this necessitates very different employment contracts across the board.

Take overtime pay as another example. If your China-based manager is working under the standard working hours system (this usually means 8 hours on a work day and 40 hours in a week), you must pay or otherwise compensate him or her for any overtime incurred. See China Employee Working Hours and The Things You Cannot Skip. If your manager has been approved by the government to work flexible hours, you may be able to avoid paying overtime, but not always. The foreign country managerial contracts we see usually contain a provision making clear there will be no overtime. If one of your China managers sues you for unpaid overtime in China, you should expect this provision will be Exhibit 1.

Many foreign companies have their own policies on how much notice their employees must give when resigning and these sort of notice requirements are often put into their employment agreements. China though has its own very strict notice requirements and an employer that seeks to require resignation notice longer than China’s own minimum requirements is just asking for legal trouble.

We have also found that using a non-China centric employment agreement causes companies to lose sight of what most matters for China. Seniority, for example, is a huge issue for China employees as it is tied to other important employee benefits, such as statutory vacation days, and statutory severance. It is therefore important as a China employer that you deal extensively and clearly with this issue in your China employee contracts. But because this issue is usually not covered or covered very differently in foreign employment agreements, your using your foreign employment contract as your template for your China employment contracts will mean you either fail to address this critical issue or you will do so very badly. Either way, this will end up hurting you if/when you are sued.

This is not to say that what you have in your existing employment contracts is wholly worthless in formulating your China employment contracts because it isn’t. My firm’s China employment lawyers will often like to review our clients’ existing employment contracts before we start drafting their employment contracts for China. We though want to see those contracts not because we intend to translate them or even because we intend to use them as a template for the China contracts. Rather, we want to see them just because they often broadly outline what is important to our client in its employer-employee relationships.

In terms of your own thinking though, it is best for you to start from scratch. China employment laws are that different and that local and so what you know from Barcelona or Boston or Brisbane or Berlin may not matter or may just get you in trouble.

China employment law

Residents of Taiwan, Hong Kong and Macau no longer need a work permit to work in mainland China. The PRC Ministry of Human Resources and Social Security earlier this month issued this notice that will obviously make it easier for residents from these three regions to work in mainland China. This means Taiwan, Hong Kong and Macau citizens will — for employment purposes — be treated (almost) the same as mainland residents.

A few quick highlights:

  1. Residents from these three regions can use their Taiwan/Hong Kong/Macau residence cards and mainland travel permits to seek or take up employment in the PRC. The following will now be deemed to constitute proof of employment in the PRC: a business license, an employment contract, a wage payment voucher and/or a social insurance payment record.
  2. Residents from Taiwan/Hong Kong/Macau can now register for and receive unemployment benefits in mainland China.
  3. Improvements will be made to public employment services, such as policy advising, information on job opportunities, and business incubation in an effort to help Taiwan/Hong Kong/Macau residents who wish to work in mainland China better navigate China’s employment system and gain access to more job-related services.
  4. Local governments are expected to offer more support to local employers and to Taiwan/Hong Kong/Macau residents and to protect the employment rights and interest of these residents so as to create a suitable environment for such residents working in China.
  5. Effective July 28, 2018, residents from these regions no longer need a work permit to work in mainland China. Starting August 23, 2018, applications for such a work permit will not be accepted and if an employer has submitted an application but no permit has yet issued, the relevant authorities will inform the employer that it need no longer pursue its application.
  6. Up until December 31, 2018, still valid work permits still within the validity period can still be used as evidence of employment.

One thing that has not and will not change is that regardless of where you are from, if you are looking to work in China, you should have your employment contracts thoroughly reviewed before you signing them.

China Employment Lawyers

Our China employment lawyers are asked by China employers about pursuing claims against an employee who fails to give sufficient notice of their resignation. Generally speaking, you cannot demand an employee pay damages for an early resignation unless you can show actual damages as a result. Just a quick summary of the relevant law on employee resignations: in accordance with China’s Employment Contract Law, a China employee during his or her employment contract term can generally leave by giving 30 days written notice while an employee on probation can leave with 3 days notice. We usually (but not always) recommend our employer clients not  make it more difficult for their employees to leave than the law mandates. Though it’s not an easy task, it is possible to pursue an employee for failing to abide by legal standard on resignation or a contractual standard, provided the contractual arrangement does not violate applicable law.

Let’s consider a hypothetical. Employer and Employee enter into an employment contract for a fixed term for Employee to work as a front-desk cashier at a hotel. Employee leaves before her employment term is up without providing a reason or a notice of resignation. Employee’s manager tries to get in touch with her, but to no avail. Employer leaves the employee a text message warning her that if she does not return to work or otherwise get in contact with her Employer right away, Employer will take legal action. When Employee is no show, Employer hires a temp to perform her job duties. Employer then brings a labor arbitration claim for damages as a result of Employee’s unauthorized departure. Will Employer prevail?

In the real case on which the above hypothetical is based, the arbitrator noted that pursuant to China’s Employment Contract Law, an employee who violates the law on employment termination notices and causes damages to the employer by having done so shall be liable to the employer for damages. The arbitrator went on to hold that this particular had failed to provide adequate resignation notice as required by law (that is, 30 days’ written notice), had left her work position without authorization, and that her behavior had caused economic losses to her employer. It therefore ordered this employee to pay her employer damages. The employer did not get the amount it was seeking because the arbitrator held that the daily salary the employer claimed it paid to the temp was much higher than workers in similar and even higher positions and it significantly held that damages should be roughly $20 a day, not the $50 a day the employer had sought. To make a long story short, the employer had sought a little over $1300 in damages and it ended up being awarded a little over $200 instead.

This case affirms that it is possible for an employer to pursue an employee for leaving without providing proper notice which causes damages to the employer. However, as is true of so many other claims against an employee, the amount of possible damages are likely to be so low that it will rarely make sense on economic grounds to pursue an employee for leaving early. Of the times a China employer has asked one of our China employment lawyers about pursuing an employee for leaving early, I can recall only one time where we thought it might make sense and that one time involved a very high level employee who the employer believed had left with trade secrets and a plan to compete against his former employer. Bringing the action in that instance would be done as much to send a message to the ex-employee and to other employees as for economic reasons.

Bottom Line: As is true of so much employment litigation and of litigation in general, the decision to pursue a claim needs to be based on more than just the likelihood of success on the merits. If you are going to bring any sort of arbitration claim or lawsuit in China you should first weigh the likelihood of success on the merits and the amount you will be awarded if you prevail and your likelihood of collecting on the one hand against the economic and emotional and opportunity costs on the other hand. In most cases, your best course of action will be to walk away.

 

China employment lawyersWhen our employer clients seek our counsel on new China employee hires, we usually (but not always) advise they use an initial fixed term of three years. We also recommend that before the initial employment term is up, they consider whether to extend the employee’s contract for a second employment term. Because China is not an employment at will jurisdiction and terminating a China employee is generally very difficult, you as the employer should be sure not to take an employee beyond an initial term unless you are certain you wish to continue employing that person. If you choose not to renew an employee for a second term you can terminate the employment but you will have to pay severance based on the employee’s years of service for not renewing the contract. This holds true unless you have a legal/contractual basis for terminating the employee without severance, such as an employee’s serious wrongdoing.

Consider this hypothetical. Employer and Employee enter into an employment contract for an initial fixed term. Both before and shortly after the expiration of the initial term, Employer provides Employee with notices that it wishes to renew the contract and each time Employee fails to sign a new contract. Employee then files a labor arbitration claim, demanding statutory severance for the termination. Will Employee prevail? The short answer is that it depends.

In the real case on which this hypothetical is based, the court (the case went from labor arbitration to the court level) noted that 1) Employer provided convincing evidence, including minutes of conversations between the parties and witness testimony, that showed Employer truly intended to renew Employee’s initial contract and 2) Employee failed to produce any evidence to show Employer’s proposed terms and conditions were worse than the terms and conditions in Employee’s initial contract. The court went on to rule that Employer was not obligated to pay statutory severance upon termination because the applicable law stipulates an employer must pay an employee statutory severance for not renewing a contract, unless the employer has offered the employee the same or better terms and conditions for the renewal and the employee does not agree to renew on such proposed terms.

What are the key takeaways from this? First, you as the employer should start thinking about whether to renew an employee’s contract before that employee’s employment term expires. I cannot tell you how many times our China employment lawyers get called by China employer’s asking us what to do with an employee’s contract that expires tomorrow or expired last week — NOT good. Next, regardless of whether you wish to renew or end the employment, you must provide the employee with a written notice of such intent before the end of the employee’s contract term. If you do not want to continue employing the employee, pay the employee statutory severance and process the employee separation in a timely manner. Avoid putting the employee on another probation to see if maybe things will work out this time. If you want the employee to continue working for you but the employee does not wish to renew (assuming the terms and conditions in the proposed new contract are the same or better than the first contract), document that in writing and process the employee separation. In this situation, you don’t have to pay statutory severance since essentially it is the employee terminating the employment.

If the employee is ambiguous as to what he or she wants, do not have the employee work beyond the last date of his or her contract. In other words, you should not have the employee work without a current written contract. This is because China’s employment laws require an employer use a (current) written employment contract with its employees. Even if you signed a first written contract with that employee but since that contract has expired, you likely will be treated as having no contract at all and subject to all the problems and penalties that go with this.

Under China’s written employment laws, an employee is entitled to an open-term contract after two consecutive fixed-terms. However, in practice, in most places in China, once an employee has been renewed at the end of the initial fixed term, that employee has become an open-term employee, which means he or she must be retained as an employee until his or her mandatory retirement age. Therefore, the first renewal should be treated seriously and no employee should be taken beyond the first term unless you want to see the employee on your team long-term. Like forever long term.

Have employees who are approaching the end of their contract terms? NOW is the time to get on it.

 

 

China employment lawyers
Your China employment documents need to get along

If you have or are going to have employees in China, you need bothwell-written China employment contract with all of your employees (both foreign and domestic) and a set of China-centric Rules and Regulations (often referred to as an employee handbook). An increasing number of China employers have realized how crucial it is to have both of these documents, but many fail to ensure these two documents actually work together. When conducting HR audits our China employment lawyers frequently find conflicts between a company’s employment contracts and its rules and regulations. These sort of language conflicts will nearly always favor the employee in an employment dispute.

Let’s consider this hypothetical. Employer and Employee enter into an employment contract for a fixed term which provides for a guaranteed year-end bonus during the term of employment. But the employer rules and regulations say that resigning employees will not receive a year-end bonus. Employee resigns in the middle of the year and demands Employer pay a prorated bonus based on the actual time Employee worked that year, citing the bonus provision in the employment contract. Employer refuses to pay the bonus, claiming the relevant provision in the Employer rules and regulations should apply. Employee then files a labor arbitration claim. How will the labor arbitrator rule?

In the real case on which this hypothetical is based, the arbitrator noted that the employee’s contract and the employer’s rules and regulations contradicted each other on whether a resigning employee is entitled to the year-end bonus. The arbitrator went on to hold that when there is a discrepancy between an employer’s rules and regulations and the employment contract and the employee requests the contract prevail, the arbitrator or court will grant such a request. Therefore, the arbitrator applied the terms of the employment contract which explicitly stated that the bonus was guaranteed and it ordered Employer pay Employee a prorated bonus based on the time Employee put in for Employer during the year Employee left.

What are the key takeaways from this? First, you as employer need to take the necessary time to make sure your employee contracts are consistent with your employer rules and regulations on all essential issues, such as the terms and conditions for bonuses.

The Bottom line.

  1. If your China company is to have effective HR programs/policies, all of its governing employment documents must both fully comply with all applicable laws (national and local) and they must also be consistent with each other.
  2. This means you should search out and then root out all inconsistencies or conflicts in your employment documents.
  3. Verifying all your employee-related documents fit well together will eliminate employee and management confusion and will go a long way toward preventing problems and disputes down the road.
  4. Use clear, logical, practical and consistent employment documents that tell your management, your China employees, and the Chinese authorities that you are a law-abiding and responsible employer. This sort of signalling pays dividends.

 

China lawyers
Handle ALL China employee resignations with care

China employees during their employment contract term can generally resign by giving 30 days’ written notice. China employees during their probation period generally can leave their employment by giving a mere 3 days’ notice. Under China’s employment law, when an employee voluntarily resigns, the employee’s resignation is deemed to have been a “unilateral termination” initiated by the employee and no statutory severance is owed to the employee. Even when dealing with an employee’s voluntary resignation, it still behooves employers in China to proceed with care. In this post, I discuss a few dos and don’ts China employers should keep in mind when dealing with a resigning employee.

First, do keep clear written records documenting what led to your soon-to-be former employee’s departure. One of the common problems our employment lawyers see in our China employer audits is a failure to maintain good records regarding employee separations of all kinds. It is not unheard of for employees in China who voluntarily resign to eventually flip around and sue for unlawful termination. Because your documentary record could determine the outcome of that employee’s litigation, the best practice is for you to document all employee terminations in writing, no matter how amicable things appear at the time of the employee departure.

Do not handle employee resignations via email. Use hard copies (written documents) because hard copies make for much better evidence than emails. In the experience of our China lawyers, the longer the string of email correspondence relating to an employee’s resignation, the more likely the employee will at some later date sue to revoke the resignation claiming the employer gave the employee reasons to believe it never accepted the resignation. These long email chains also will make it harder for you to prove there were no unresolved issues with the employee. Think of it this way: anything you say in an email chain can and will be used against you in a Chinese court of law.

Do use a China-centric employee resignation form. This employee resignation form will “force” your employee to “come forward” with a clear written reason for his or her resignation. If the reason listed by your resigning employee is unclear or even hints at employer wrongdoing, do seek clarification with your employee and document that in writing and resolve those issues with the employee if possible.

Do resolve all outstanding matters with your departing employee, including and especially any bonus payments. Contrary to popular belief, in many instances and in many locales in China, the employer is required to pay bonuses to resigning employees. For example, many Chinese courts have held that even if the employer has a written policy stating that resigning employees will not receive a year-end bonus, the (former) employee is entitled to a prorated bonus based on the actual time worked in the applicable year. Chinese employees do not hesitate in pursuing legal action to secure some or all of their employee bonus, regardless of the circumstances under which they left. The key is prevention. You should research right now — based on 1) your locale, 2) your employment contracts, 3) your employer rules and regulations — whether your resigning employees are entitled to a bonus or not. And when you figure out your answer, you should also consider modifying what you have if you both did not like your answer and if the applicable laws will allow you to change it. If you are facing an actual employee resignation, you should also review the specific situation and any communications regarding that particular employee, before making your bonus determination.

Regardless of what you conclude regarding the need to pay an employee bonus, do try to secure a written agreement with the departing employee that directly addresses this issue.

Bottom line: Handle all employee resignations with care.

China expat employment contracts lawyers Our China employment lawyers frequently review employment documents for expats working or seeking a job in China. By employment documents, I mean all documents pertaining to the employment relationship, including employment contractsemployer rules and regulations, non-compete agreements, and confidentiality and/or IP protection agreements.

Usually the employment documents have both English and Chinese versions in the same document. Sometimes though, an English-only document is provided and the Chinese company says it did that because the expat does not read Chinese. Not good. You should always request your potential employer give you your employment documents in both Chinese and English because the Chinese portion is almost the only official version. Beyond getting a Chinese version of your employment documents, you should also request both the Chinese and the English language versions be within the same document as this makes things faster and easier for your lawyer to root out inconsistencies between the two languages and that will save you on attorneys fees. It also makes executing and retaining the documents easier since you (and your employer) need sign and hold onto only one document.

It is also important you ensure the English portion of your employment documents track what the Chinese portion says, both so you know exactly that your employment documents say what you want them to say and so you have in your own language a road map you can use going forward. Our China lawyers are always reviewing bilingual Chinese-English contracts and we nearly always need to revise them to get the two languages to line up in their meanings. Not so coincidentally, the language discrepancies we see nearly always favor the employer.

In addition to helping with contract language, our China employment lawyers also help our expat employee clients navigate the negotiation process. We typically start this by helping negotiate the essential terms surrounding their employment, such as their salary, bonus, commission, and vacation days. Once agreement is reached on these key terms, there should be little need for much further negotiation and the employment contract should be a done-deal. Unfortunately, it is not uncommon for Chinese company employers to try to reopen negotiations on previously agreed key terms. When this happen, we usually suggest making a decision whether it makes sense to work at a company that negotiates like this and we also urge they remain firm in their positions.

When the Chinese company employer provides the first draft of the expat employment contract, we review that to make sure it accurately sets out the agreed upon key terms and is fair to the expat employee in all other respects as well. Further negotiations on minor points is invariably needed at this stage and at this point we typically recommend expat employees prepare a written list with any comments, questions, and requests for their potential employer. We suggest the expat email this to the employer so the discussions can be easily tracked. Sticking to just email makes things faster and easier for your lawyer and thereby helps to keep your attorneys fees down. Trust me when I tell you that piecing together negotiations conducted by email and by telephone and by WeChat is not efficient.

For more on how to negotiate with Chinese companies, I suggest you check out this Above the Law article on negotiating with Chinese companies.

 

 

 

 

China Employment LawyersBecause China is not an employment-at-will jurisdiction, mutual termination is usually the safest path for a China employer that has chosen to terminate one of its China employees. In a mutual termination, it is critical the employer gets a termination agreement that resolves all outstanding matters with the relevant employee and that explicitly releases the employer from all employee claims. If used correctly, mutual terminations can be a useful tool when dealing with a China employee. In this post, I discuss a few dos and don’ts you should keep in mind during a mutual termination process.

First, do take control of the discussion and do not turn it into an endless negotiation. Usually the employee will accept a quick payout when you initiate the termination process. But occasionally a disgruntled or difficult employee who has NO intention of settling may want to drag you into an endless discussion regarding termination. For example, our China employment lawyers have seen instances where after reviewing a proposed mutual termination agreement the employee comes back with a few requests for minor modifications to the agreement but then refuses to sign the agreement and also refuses to give a reason for not signing the agreement. Then when the employer follows up, the employee says: “wait a minute, you should pay me an additional month’s salary for not giving me sufficient notice of my termination.” Generally speaking, with a mutual termination, the employer is not obligated to pay an additional month’s salary in lieu of notice so the employer is not required to grant such a request. But suppose the employer is okay with paying a little extra to try to cleanly end the employment relationship and the employee in response to this says “I need more time to review.” At this point (or even before this), you know the employee is not going to accept the mutual termination and you also know the employee is not acting in a reasonable manner. You should not expect the employee to change and you should forget about terminating on mutually agreed terms and you should start thinking about other options. Must you terminate this employee? And if yes, what legal grounds do you have for a unilateral termination?

Our employment lawyers also sometimes have to deal with an employee who is willing to leave but sees his or her termination as a great way to “make” a lot of money. This employee often will ask for more in severance but not specify how much more they want. How should you negotiate with this sort of employee? The short answer is you don’t. Unless you are willing to pay more, the severance amount you initially proposed to the employee should be your only offer. In other words, you as the employer should be prepared to say “take it or leave it” when the moment comes.

But do listen to legitimate concerns or comments from your employee. Taking control is not playing hard ball. The goal of a mutual termination is to end things with the employee in a way that is reasonable and fair to both sides. Even though we craft our employee termination agreements in a clear, concise and reasonable fashion, it is not uncommon for employees to raise legitimate concerns that should be addressed. For example, an employee may want her employer to make the severance payment sooner than the employer has initially proposed. As long as it’s feasible for the employer to pay by the date requested by the employee and as long as this will get the employee to execute the mutual termination agreement right away, the employer should accept. Sometimes the employee may propose some minor revisions to the Chinese text which will make them feel good, for instance, adding a few words to emphasize that the employer initiated the termination process. As long as the employee’s proposed revision does not change the meaning of the terms and is otherwise harmless, you should accept. It is up to you and your China employment attorneys to distinguish between an employee’s genuine, good-faith concerns and stalling or revenge tactics.

Next, do not get bogged down on the reasons for the mutual termination. Employees are human beings and it is hard to predict exactly how they will react to their termination. They may get upset or disappointed or they may be happy to move on with their lives with a generous severance payment. You should avoid “touchy” subjects as much as you can.  For example, if you anticipate the employee will dispute their having performed unsatisfactorily (and most do), don’t mention it. “It was not a good match” often works well in this scenario. Do not indicate to the employee that there may be something she can do to make you change your mind about her termination. To put it another way, do not start the process unless and until you are certain about terminating the employee and unless and until you know pretty much exactly what you are going to tell them.

Much of the time our China employment lawyers rehearse with our employer clients how to handle the termination. It is that important.

 

China employment lawyersOur China employment lawyers conducted more than double the number of employer audits in the last year as in the year before and it would not surprise us a bit if the next year sees a similar increase. Foreign company employers in China continue to face growing heat for all sorts of reasons, including the following: The government in Beijing views its compact with its citizenry as including taking care of employees.

  1. Many local governments view their compact with their citizenry as including taking care of employees.
  2. There is a lot of pressure on both Beijing and on local governments — from both employees and from competitor businesses — to make sure foreign companies are abiding by all of China’s laws, including all of its employment laws.
  3. There is massive pressure on both Beijing and on local governments — from both employees and from competitor businesses — to make sure American companies are abiding by all of China’s laws, including all of its employment laws. If Trump’s next round of tariffs goes into effect, this pressure will only increase.
  4. China’s employment laws and rules just keep getting more complicated, more pro-employee, and more localized. See China Employment Law: Local and Not So Simple.

An HR audit can range from just reviewing documents off-site to having a bilingual Chinese-English employment attorney go to your facility(ies) for an on-site document review and to interview key personnel. Employer audits begin with a document-based review, and nearly always continue with revising (and/or creating brand new) company employment documents and contracts and meeting with Chinese government officials to remedy problems found.

What sorts of foreign companies should undergo such an audit and how often? Pretty much any foreign company with employees and once a year is typical. By any foreign company, I meant to include WFOEs, Rep Offices and Joint Ventures. Rep Offices and Joint Ventures? Absolutely. If anything an audit for these sorts of China entities is more important than for a WFOE.

Let me explain.

An American company has set up a representative office in China. The American company and the rep office then rely heavily on a third party labor dispatch agency such as FESCO or CIIC to employ and manage the employees. This makes sense, since the Rep Office cannot directly employ anyone in China. In this sort of labor agency arrangement, the labor agency is the employer of record and it is the one on the hook for all employment law violations. This, however, does not mean the American company/Rep Office need not be concerned about whether their HR program is in good shape or whether what the labor dispatch agency does is adequate. If anything, our employer audits usually find more problems with third party hiring agencies than with WFOEs. And when you think about it, this should not be all that surprising.

The problem with third party hiring agencies is that they care way more about their own company than about your company. Their goal is to protect themselves, not you. Do their employment contracts include provisions requiring “their” employees  not reveal your trade secrets? Do their employment contracts include provisions preventing “their” employees from going off and competing against you the day after they quit working for your company or get fired? Unless you make sure their employment contracts include such provisions they almost certainly do not. And unless you make sure every new/subsequent employment contract includes such provisions they almost certainly will not.

Another big problem we see with third party agency employment contracts is that they are rarely kept up to date. The problem here is that when a foreign company that uses a labor dispatch company changes its terms of employment with all or some or even one of its third party “employees” it seldom communicates this change to the labor dispatch agency. This means the official employment contract between the third party agency and its employee(s) does not get updated.

The same holds true for the rules and regulations used to set out the employee conduct that will be deemed inappropriate and will therefore be punished? If you are using whatever your third party hiring agency has provided you, do the rules and regulations actually make sense for your business? Are those rules and regulations being modified to reflect changes in your business? Has everyone who does work for you signed the right set of rules and regulations? It is not uncommon for us to find situations where third party employees have signed on to rules and regulations for various different foreign companies that use the third party hiring agency — without ever having signed the rules and regulations of the foreign company for whom the employee is actually doing the work.

Next situation. The foreign company has a joint venture in China. The foreign company’s Chinese joint venture partner supplies all the employment documents. Did you review them before they were signed by the Joint Venture employees or did you just assume that your Joint Venture partner would take care of all that?

I am going to be blunt here. For two very important reasons, you really should carefully your Joint Venture employment contracts. The first and most important reason is that your interests and the interests of your China Joint Venture partner are not the same. Your Joint Venture partner has incentive to hire his or her sons and daughters and cousins and nieces and nephews and to do the same with those to whom he or she owes a financial or moral or social debt (see e.g. guanxi).

The second reason is that Chinese companies are not under nearly the same employment law scrutiny as foreign (especially American) companies and so they typically do not take employment issues as seriously as foreign companies (especially American companies) should. And yet, Joint Venture entities (especially those with an American Joint Venture partner and especially those in certain industries) will be viewed by both the various governments in China and by its own employees as being a foreign company.  When our China employment lawyers conduct HR audits of China Joint Venture entities, we nearly always find a lot more problems than with our HR audits of WFOEs.

First off, the employment documents (to the extent there are any and far too often there are not) are in only Chinese and the foreign partner has either never seen them or does not understand them. It is never pleasant having to tell a client whose Joint Venture has never once made a profit that its Joint Venture has 300 employees, not the 200 it believed. Or that 15 of its employees are, for whatever reason (relatives of the Chinese JV partner?), being paid double what others in the same position in the company are making. Or that all or most of the employees are getting a portion of their salaries in cash so as to reduce required employer social benefit contributions and employer (and employee) taxes. Not only does this mean the JV has unrecorded debt, it also means the American side will face a huge problem if it ever wants to shut down the JV or do some other sort of business in China. This is just the tip of the iceberg in terms of the employment problems Joint Venture HR audits reveal.

Not surprisingly, our China employment lawyers also advocate employer audits as an essential element of the due diligence on any M&A deal. Our employer audits in those situations often find that the employment documents of the company to be acquired — especially the employment contracts and the employer rules and regulations — were prepared a long time ago and are now outdated. It is also quite common to see a situation where the acquired company started in one city and then grew to include a number of additional cities and yet its employment contracts and its rules and regulations were never localized to reflect its multi-city reality. Even in the rare instance when the acquired company’s employment documents are in good order, the new employer almost always wants to introduce some changes — perhaps a new bonus program to encourage certain employees from the acquired company to stay on after the deal. An employer audit helps identify what is in place and what makes sense to change.

So as you can see, China employment audits should not be limited to just WFOEs.