China employer audits China employment lawyers

As I have previously written, no (foreign) employer is too small for China’s regulators and in some respects the smaller you are, the more you need one. I say this because when a company with 5,000 employees has a problem with five employees, it’s not that big a deal, but when a five-employee company has a problem with two employees, it can be such a big and costly problem as to cost the company its China business. To be a well-protected employer in China, you need a well-written China employment contract and a China-centric set of Rules and Regulations, no matter your company size.

China’s employment laws are strict and protective of employees at all companies, especially those that are foreign-owned. If you as an employer fail to follow all mandatory employment laws, your employee will pursue you regardless of your size. Our China employment lawyers constantly get questions from China employers after they have been reported and/or sued by an employee China employee — mostly Chinese but increasingly non-Chinese as well.

The below is an amalgamation of the sorts of emails we frequently receive:

I cannot believe that I just got served with a lawsuit by one of my former Chinese employees. We are a small business and we pay all our taxes and we have always treated all of our employees right, including this one. We paid her really well and we were never late with her wages and we even gave her extra vacation days. We also paid all of her mandatory employee benefits and a few optional ones as well. We always did our best with her. And then she quit, completely voluntarily, and yet she is now suing and claiming we owe her double her monthly wages for not having a written employment contract with her? As you can see, her demand is totally unreasonable.

We then have to explain that with no written employment contract the employer stands virtually no chance in this arbitration.

It is not uncommon for foreign employers in China to state that they have done or are “doing their best” with respect to treating their employees well and following China’s complicated (and localized) employment laws. The problem is that neither the Chinese government nor its courts nor arbitral bodies care how hard you try. Your other law-abiding actions are not a mitigating factor in determining the penalty you will need to pay for having failed to enter into a written contract with your employees or for whatever other violation you may have committed.

The burden is on you as the employer to ensure you have a proper written employment contract fully executed by the parties. The best practice is to have your new employee sit down and sign a hard copy of the employment contract on her first day and you then retain an original copy of the fully executed contract for your records.

Consider this hypothetical. Employer asks Employee to sign a hard copy of the employment contract during the on-boarding process. Employee says: I will need some time to review this and I will take it home to read and I will return a signed copy. Employer says okay, but the Employee never returns a signed copy. Employer never makes an effort to “track down” that contract. Employee sues months or years later seeking a penalty from the employer for failing to use a written employment contract. Under this scenario, the Employer will be liable to Employee for failing to execute a written employment contract. If this sort of scenario sounds unlikely to you, let me just tell you that nearly every time we audit a company’s employment situation we find some percentage of employees working without signed contracts.

Now same facts as above, but Employee returns a signed copy with a fake signature. What will happen? Based on real cases with similar facts, Employer will probably be held liable for an employer penalty because there is no written employment contract bearing Employee’s actual signature, unless Employer has convincing evidence Employee faked the signature to “cheat the system” (which is a high evidentiary bar to meet).

If you are not sure you have current written employment contracts for all your employees, now would be a good time to check on this and fix it.

China Employment Law Female EmployeesAs today is International Women’s Day, this would be a good time for a quick overview on China employment laws that directly relate to female employees. Since there are so many national and regional and even local laws and regulations regarding female employees in China, this post necessarily seeks only to hit the high notes.

First, do not forget to give your female employees half a day off as International Women’s Day is their holiday (or follow the applicable holiday policy in your employer rules and regulations if it’s more generous than the law)!

Second, let me emphasize that female workers are always a big issue in China (not just today), primarily because they are accorded many additional special protections under China law. If you have been following my posts here or if you have a copy of my book (The China Employment Law Guide), you probably already know that employees who are pregnant, nursing or on maternity leave receive special protections exceeding those in many other countries. However, it is important to also note that these are not the only protected subgroups of female employees; they are simply the most often mentioned because the issues relating to them are the most common and because it is on these issues that foreign employers so often find themselves in trouble. For example, China’s laws also provide special protections for female employees during their menstrual periods. Many localities in China require employers provide a short (usually 1 to 2 days) paid leave to employees suffering from serious menstrual issues or to those with very heavy flows during their periods, so long as the employee provides a doctor’s note proving her condition.

Terminating a China employee is generally very difficult because China is not an employment-at-will jurisdiction and terminating a female employee is often even more difficult, especially if the female employee has a special status such as pregnancy. Subject to limited exceptions, employers in China are prohibited from unilaterally terminating an employee who is pregnant, nursing or on maternity leave. One common myth is that female employees in such special status can never be fired. This is wrong as these employees may be unilaterally terminated without severance for the employee’s failure to satisfy the employer’s conditions of employment during a probation period or if based on employee misconduct or wrongdoing. Alternatively, such an employee may be terminated if the employer and the employee agree to mutually terminate the employment relationship. See Terminating a China Employee: Why Mutual Termination is so Often the Key.

I will next month be putting on a webcast on April 18 on Employment Law for Female Workers in China. Do not miss it!

China expat employment contracts
China expat employment contracts: make ’em real

If you are an expat working or seeking a job in China, your China employment contract really matters. Let me be clear. Your final executed China employment contract really really matters and if you plan to travel all the way to China to take a new job there, or even just take a new job there, you should do all of the following

  • Have your proposed employment contract checked by a China employment lawyer to make sure it fully protects you and includes EVERYTHING you need or want to be included. Oh, and please do this before you sign it, not after.
  • Make sure the final version of your contract is the same version as your approved version and make sure gets fully executed by both parties: On the employer side, this means it should have the signature of your employer’s legal representative and your employer’s company chop or seal;
  • Hold on to one original of the fully executed employment contract for your records. Please.

In China, it is fairly common for employers to deliver an offer letter to a potential employee stating the employer’s intent to enter into an employment relationship with that employee. When delivered to an expat, this offer letter is virtually always in English. Most expats check this document carefully but far too many stop there, believing their acceptance of this offer letter fully “covers” them. It doesn’t and if this is all you have, you pretty much have nothing at all. Others, realizing this, ask for a full-on contract but then get that in just Chinese and then just assume it includes everything set out in their offer letter. If you are someone who believes that, you obviously have not been reading this blog long enough. This assumption goes astray pretty much every time for one of two reasons: (1) the final employment contract does not include everything from the signed offer letter, or (2) the Chinese in the contract does not match the English in the offer letter (or even in the contract itself). And let me tell you, when there is this disconnect it favors the employer 99.9% of the time.

You would be surprised (or maybe not) how often we see the following when it comes to China expat employment contracts:

  • The expat’s employment agreement never was executed. This may work in your favor in that you may (but not always!) be able to collect damages as a result of the employer’s failure to enter into a written employment contract. On the other hand, it can also work against you in that none of the benefits you negotiated with the employer are in writing.
  • The expat’s final executed contract contained NOTHING to which the parties agreed in their negotiations. This may happen for a couple of reasons. First, the employer has to submit a completely different form to the local labor authorities to secure a work visa for the expat and the employer does not bother to explain this to the expat when he or she signs such submitted form. The employer never got the expat to execute the “real” contract, perhaps because they were sloppy or disorganized or the people in charge of it did not care. Second, the employer intentionally cheated the expat by having the expat sign a completely one-sided contract (favoring the employer, of course) even though the parties had agreed on a different set of terms. There may be other reasons, but in our experience, these two are by far the most common.
  • The expat agreed to sign a fake contract knowing the real deal was not on paper. In this situation, the paper was for “official purposes only,” but not necessarily for securing a work visa. For example, it may have been intended to show the tax authorities that the expat is making a much lower amount than orally agreed. This is done to lower everyone’s tax burden and the plan is for the employer to make up the difference in cash or by some other illegal means.

Now imagine you get into a dispute with your employer regarding your salary or your bonus and there is no enforceable written agreement of any kind that supports your claim. You should assume (though even this to a certain extent can depend on your locale) that you will be held to a higher standard because you are a high-level expat, not an “ordinary” Chinese employee and the odds are overwhelming that you will lose.

And though you’ve probably heard this dozens of times, but when your Chinese counterpart assures you “mei wen ti” (no problem), there usually will be plenty of problems and it will be you who will be the recipient of them. Rest assured, if your China employer tells you it is no problem that you have a fake agreement, there you WILL have a problem.

Last but not least, if you do have a well-crafted employment contract that has been executed by both you and your employer, you should make sure any amendments to that contract are done by signed and chopped writings as well; not verbally or by WeChat or email.

Bottom line: Check your offer letter. Check your proposed employment contract. And check your final, to-be-executed employment contract, and make sure it gets fully executed.

China employment lawyersLast week, in Terminating a China Employee: Why Mutual Termination is so Often the Key, I wrote of how getting your China employee to agree to a mutual termination (with a settlement agreement) greatly minimizes employer risk. But sometimes, a mutual termination is not possible. Though China is not an employment-at-will jurisdiction, its laws do permit employers to unilaterally terminate a China employee that has committed a serious breach of the employer’s rules and regulations.

If you are going to unilaterally terminate an employee for violating your rules and regulations, it is important your rules and regulations have written provisions explicitly justifying the termination. And just moving a list of forbidden behaviors from your oversees employee handbook to your China employer rules and regulations rarely cuts it.

Suppose your employee does X and you think X is terrible and you now want to terminate that employee. You check your rules and regulations and X is listed as a basis for termination and so you terminate the employee. The employee then sues you for unlawful termination.

Let me digress a minute to discuss something our China lawyers are getting more often these days, especially on the employment law front. As China’s laws get more complicated, our China attorneys are getting more calls from companies contacting that have been sued or are being threatened with lawsuits. They are calling for our help because they “did exactly what we told them to do on China Law Blog,” and so they believe we can easily win these lawsuits for them. Sadly, they are nearly always mistaken. They failed to realize that the information we provide on this blog is information; it is not legal advice specific to their situation and it is the “specific to your situation” part that matters most. On the employment front, the applicable laws will vary depending on the size of your company, the type of employees at issue, the exact language (in Chinese) in your employment contracts and in your rules and regulations, your location, and potentially a hundred other things as well. See China Employment Law: Local and Not So Simple. Our goal with this blog is NOT to tell you exactly how to do things in your specific situation, but rather to alert you to various key issues so you can know when you need to seek out proper help for dealing with them.

This advice is particularly true with China contracts and legal documents, including your employer rules and regulations. My law firm has been drafting China contracts for so long that we — and I am not kidding about this — have at least twice been contacted by companies given one of our contracts by “friends” and now want us to help them deal with their Chinese counterpart that has “breached” the contract. Interestingly, in both instances, the contracts were so far off the mark for what these two companies needed that we declined to help them as we thought it would be pointless. In China Contract Templates: the Cons and the Cons, we wrote about why any contract not tailored to your specific situation is a really bad idea:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction, then we will, of course, use an agreement from a previous transaction as a model. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can, in turn, be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

As you note, our clients also need at least one of our China lawyers involved in dealing with the Chinese response. Did the Chinese side change the Chinese and not the English as they so often do? Did they redline in a way that the changes to the Chinese portion are even apparent? More important is whether their changes are the normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” I do not see how anyone without a deep understanding of Chinese law and Chinese business could even begin to deal with these sorts things.

In drafting our contracts, we do of course usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always completely unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From our having written thousands of China agreements we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components, we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Say there are ten critical issues for their contract. Each selection of an option affects all of the other options, often in ways we have previously encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

It is also true that in-house counsel cannot write an agreement that can serve as a basis for what our client wants us to craft. Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. Any company with an in-house lawyer who combines all three does not need to come to us for a contract and they don’t. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

Whether your employee termination was lawful is incredibly fact specific. Among other things, it depends on what the employee did. It also depends on exactly what your rules and regulations say (in Chinese) and how they say it. It also depends on where you are located as it is critical that your rules and regulations fully accord with the reality on the ground in your specific locale in China. If the rule on which you relied in terminating this employee is not reasonable for your locale, your termination likely will be deemed to have been unlawful. For example, your rules and regulations may say that your employees cannot date a supervisor and anyone who does so will be subject to immediate dismissal. This rule is unenforceable in most of China because China’s labor authorities and courts do not want employers restricting their employee’s freedom to date and marry. So even if your rules and regulations prohibit inter-office dating, your terminating an employee for dating probably will mean you will need to pay your employee damages and also immediately reinstate him or her.

We often see employers list grounds for termination in their rules and regulations that do not work in most China. For example, employers in China typically can only govern their employees’ behavior during work time. So though you as an employer can in most locales prohibit your employees from being a “WeChat merchant” during normal working hours, you typically cannot prohibit your employees from doing that in their spare time. Unless what an employee does in his or her personal time leads to criminal liability you typically cannot unilaterally terminate them for what happens outside the office.

Consider this hypothetical. You as an employer host an after-hours holiday party to celebrate the Chinese New Year. One of your employees attends after getting off work that day. This employee gets into an altercation with a supervisor and hits the supervisor. Your employee and your supervisor go to the police station and your supervisor decides not to press charges and no administrative or criminal charges are ever brought against your employee. You then fire the employee because you think what he did “checks the box” in your rules and regulations prohibiting any fighting at work.

How will this be resolved? In a real case in Beijing with similar facts, the employer lost. The court held that the holiday party did not count as work time and because the employee was never criminally charged the employer had no legal basis for the unilateral termination.

Bottom line: Without well-crafted rules and regulations that work for your specific business and your specific locale it is usually impossible to justify a unilateral employee termination.

China employment lawyer
For more on China employment law, go to Amazon and get my book!

As I have previously written, mutual termination is usually the safest path to take when you have chosen to terminate one of your China employees. This is because anything other than a mutual termination is fraught with risks because China is not an employment-at-will jurisdiction. Even unilaterally terminating an employee who has engaged in misconduct can be difficult. And things get even more difficult if the employee you wish to terminate has a special status (e.g., pregnancy). Though you generally can unilaterally terminate an employee for good cause (for example, the employee has committed a serious breach of your rules and regulations), grounds for termination of Chinese employees are highly circumscribed and that is what makes mutual terminations so appealing.

Consider the following situations:

  • Your employee did something terrible, but you don’t have a set of China-centric rules and regulations, so you basically have no written basis to terminate your employee;
  • Your employee did something bad, but not terrible enough to trigger termination under your own rules and regulations. Maybe it was her first offense and your document provides for “three strikes;”
  • Your employee did something bad and it was not her first time, but you have no good proof she did all those things in the past;
  • Your employee never signed an acknowledgment form confirming she received a copy of your rules and regulations.

Under any of the above circumstances, it is usually best not to pursue a unilateral termination, but instead, seek to work out a mutual termination. The below hypothetical should prove helpful.

Suppose you have an employee who makes a mistake at work without causing significant damage. Nonetheless, you think this mistake causes you to want to terminate the employee and so you issue a termination notice to the offending employee, citing the mistake as the basis for your termination. You give the employee a small severance payment and the two of you execute a settlement agreement. The severance amount is much lower than the minimum statutory severance and your by now ex-employee sues you, claiming it is an unlawful termination.

How will this case be resolved? In a real case based on similar facts, the employee lost on his unlawful termination claim. The court noted that it would have been too harsh for the employer to have unilaterally terminated the employee for a one-time mistake, but went on to hold that because there was an agreement where the employer paid the employee a severance in exchange for the employee’s voluntary departure, the termination was mutual. The court then held that the mere fact that the agreed severance amount was much lower than the minimum statutory minimum did not change the outcome because the employee failed to show that the settlement agreement was a result of coercion or deceit by the employer. Because the termination was mutual and because the employer-employee settlement agreement was sound, the court upheld the settlement agreement and ruled against the employee’s unlawful termination claim.

The employer prevailed because it signed an enforceable settlement agreement with the employee, in a circumstance where it would not have prevailed had it terminated the employee unilaterally. However, please do not emulate what this employer did. Had this employer actually paid its terminated employee more, it likely would have avoided the lawsuit and ended up paying considerably less overall. How much to pay a mutually terminated employee is one part art and one part science. When one of our China employment lawyers is called upon to craft a mutual termination settlement, we look at all sorts of factors in determining the just-right amount, including our own experience.

Bottom line: An enforceable AND reasonable mutual termination agreement will not only help you prevail in any lawsuit, it will go a long way towards preventing you from getting sued in the first place.







Five China employment law red flags
Five China Employment Document Red Flags

If you have employees in China, you need written Rules and Regulations to govern the terms of your employment relationships. Since China is not an employment at will jurisdiction, well-crafted Rules and Regulations are critical to giving you a basis for disciplining or terminating an employee. And unenforceable or unworkable Rules and Regulations expose you to regulatory, liability and lawsuit risks.

Though we audit our client’s employment documents year-round, the beginning of each year always brings on an onslaught of such work, as doing so seems to be (and should be) part of every company’s New Year’s resolutions. The following are red flags, that tell you (loud and clear) that you need to revise your Rules and Regulations to avoid future trouble.

1. Your Rules and Regulations are in English only. This is by far the one our China employment lawyers see most often and this is a dead tell that whoever drafted your Rules and Regulations was not familiar with Chinese employment laws. Nine out of ten times, this also means that your Rules and Regulations came from overseas and have no real relationship with China’s employment laws. If you don’t have your Rules and Regulations in Chinese, you essentially don’t have Rules and Regulations. Oh, and just translating your English language documents is not going to cut it. You need bilingual China-centric policies written not just for China, but for your industry and your locality.

2. Your Rules and Regulations are in Chinese only. From time to time, our China employment lawyers are called (usually urgently) to assist a foreign employer whose Rules and Regulations are in Chinese only. The problem here is that none of the key HR personnel understand a word of what the Rules and Regulations say and yet they are expected to make important personnel decisions based on them. The other problem is that these China-only Rules and Regulations are nearly always inadequate. In an ideal world, your Rules and Regulations are clearly written in both Chinese and in English.

3. Your documents haven’t been updated for years. China laws change at light speed and China’s employment laws change even faster than that. The fact that employment laws are incredibly local only increases the odds that your Rules and Regulations are no longer good. You could be exposed to huge risks if you make an employment change (discipline, wage reduction or termination especially) based on Rules and Regulations that have become contrary to law. Also, what made sense for your business years ago may no longer make sense now. For example, if you started your business five full-time employees in one city but now half your 50 person workforce is part-time employees in three different cities, you need new Rules and Regulations. Like right now.

4. Your key employment documents are all over the place, both in what they say and where they are located. You cannot believe how common this one is; we see this maybe 75 percent of the time. I recently did an employment audit for a client where three different people from three different cities gave me three different sets of employment documents and nobody knew which were current nor which employees had been given which. The only solution: start all over with yet another set of documents and make sure every single employee signs on for this new one.

5. You lack signed acknowledgments from your employees confirming receipt of your employment documents. This is much worse than most realize. You need to make sure your employees actually receive a copy of your Rules and Regulations and you have proof that they did so. If you end up having an employee dispute, the employee will virtually always claim never to have received a copy of your employer Rules and Regulations. Without a Chinese language acknowledgment of receipt signed by your employees proving they received your Rules and Regulations, you will have a difficult time justifying your employment decision in front of the arbitrator/judge.

If you see yourself in the above, get cracking.




China employee terminations
Rules and Regulations are the key to China employee terminations

As I have previously written, one of the best grounds for unilaterally terminating a China employee without having to pay statutory severance is for a serious breach of employer rules and regulations.

The basic rule is that if you as an employer do not have specific provisions in your rules and regulations that will justify the termination, you may have no recourse against an employee, no matter how terrible your employee’s conduct. Shanghai courts, however, generally dislike employees who act in bad faith and for that reason, a Shanghai-based employer may still be able to terminate an employee who has acted in bad faith so long as the employer rules and regulations give them reasonable grounds for doing so. If you regularly follow my China employment law blog posts, you know Beijing and Shanghai do not usually see eye to eye on most employment law issues. The recent (decided just last month) Alibaba employee case I write about below indicates Beijing is inching closer to Shanghai in putting more emphasis on the employee’s duty of good faith.

The employee was hired by Alibaba to work as a senior manager in Beijing beginning January 28, 2013, under a fixed-term employment contract without a probation period. On April 19, 2013, the employee notified Alibaba via email that he had to take a 2-week sick leave to treat his neck pain and Alibaba approved. Specifically, the employee told Alibaba he suffered from a severe headache and then after a doctor’s appointment, he learned he had serious neck problems and would need two weeks of full rest and he might need hospitalization for more treatment after his follow-up appointment after the Labor Day holiday. The employee later produced a doctor’s note issued on April 18 that essentially confirmed the above. The employee then went to Brazil on April 19, 2013 and returned on May 4, 2013. On April 25, 2013, Alibaba first tried to terminate the employee by citing the employee’s  failure to satisfy the conditions of his employment during the probation period, but it then withdrew that notice. Alibaba then issued a notice of immediate termination to the employee on May 16, 2013, citing a serious breach of employer rules and regulations based on the employee having deceived his employer and having provided false information to go on a leave. Alibaba seemed to believe that if the employee’s neck problems were so bad, he could not and should not have gone to Brazil. The employee disagreed, claiming his trip to Brazil was not for pleasure and contending it was none of the employer’s business where he was while on an approved sick leave.

The employee brought a claim against Alibaba for unlawful termination and demanded the reinstatement of his old job. The employee won at trial and then again on appeal. The primary basis for Alibaba’s losing was because there was nothing in the employer rules and regulations restricting where an employee must be during sick leave and no such mandate in any Chinese law, there could be no statutory basis for the unilateral termination. Finally, at a re-trial before Beijing High People’s Court, the employee lost, somewhat unexpectedly. The Beijing High People’s Court stated that although it was true employers should have reasonably specific rules and regulations, it would be impractical to require the rules and regulations to cover every single detail regarding an employee’s daily activities and when the document was silent on a specific situation, the basic principle in the civil code should apply and the employee can be expected to follow the principle of good faith, which was the foundation of every employment relationship. It ruled that even though the employer rules and regulations did not specify where employees must take their sick leave, the employee’s behavior during the leave must be consistent with the reasons for taking the leave. It went on to say that based on “common sense,” Alibaba had every right to question the purpose of the employee’s leave request and the employee’s refusal to come forward with the truth when questioned by Alibaba meant he violated the principle of good faith, causing significant bad consequences to Alibaba by disrupting its work order and business operation. Alibaba was therefore justified in terminating the employee for his serious breach of the employer rules and regulations.

Please do not read too much into this case. Note the employer was Alibaba, not some WFOE. Also, think about the time and money and not so good publicity Alibaba got for taking this case through all these proceedings. And is it really reasonable to believe this one employee disrupted Alibaba’s business operations by taking a two week trip to Brazil? Go with mutual termination if you feel you must terminate an employee or maybe just give them a second chance.

Bottom Line:, This may be the beginning of a trend (but it probably isn’t), but the bottom line is still the same: if you don’t have  well-crafted rules and regulations, you will still find it nearly impossible to terminate a problem employee, in Beijing and pretty much everywhere else in China.


China employees during WFOE formation
Be safe. Hire after your China WFOE has been formed.

If you are a foreign (i.e., non-Chinese) entity with no legal presence in China, you cannot directly hire any employees in China. The basic rule is that you cannot hire a Chinese individual until after you have formed an entity (e.g., a WFOE) there and violating this rule can (and nearly always does) bring all sorts of bad things down on everyone involved. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

What though do you do if you are in the process of forming your WFOE in China? Can you bring on employees during that time to assist with setup and other such things? Surely during this usually three to five month period, it is okay to bring on people and pay them as “employees” and then “convert” them over to legal status employees as soon as the WFOE is formed. Unfortunately, this is technically not allowed; there is no way for a foreign entity to hire a Chinese national “directly” unless and until it has an entity (a WFOE or a Joint Venture) in China. Sending illegal payments to your Chinese “employees” is not “hiring directly;” that is engaging in illegal activity before the WFOE is formed, and it is generally not a good way to start.

Though there is absolutely nothing in Chinese law that allows for “hiring” an “employee” before a WFOE is formed, the truth is that none of our Chinese lawyers have heard of anyone getting in trouble for this. This is not to say though that bringing on workers during the formation phase of your WFOE is not without risks. First off, past performance is no guarantee of future performance. Second, everything in China is somewhat local and that is particularly true of anything related to employment. See China Employment Law: Local and Not So Simple. In other words, what works in Shenzhen may not work in Shanghai, and vice-versa. And you must realize that for tax collection reasons the Chinese government is on a constant lookout for foreigners doing business in China without a WFOE and they have become exceedingly good at finding them.

The biggest risk of bringing on workers during the formation phase of your WFOE probably comes from the workers themselves. If things go well with them, no problem. But things very often do not go well with Chinese “employees.” Here is an all too common situation: a foreign company hires a Chinese person to work on the ground before the WFOE comes into existence. This Chinese person does something illegal in China and the foreign company informs the Chinese person that he is fired.  The Chinese person then says: “you cannot fire me because my engagement was illegal and that means you are operating illegally in China and everything I did that you say was illegal was done for the company and so you (the company) were doing illegal things too. I know more about these things because I am the one who was doing them but if I report them I won’t get in trouble for them, you will.”

If the foreign company terminates the employee that individual will no doubt files a lawsuit for unlawful termination AND report the foreign company to the Chinese government and then the WFOE and its management get in trouble, in addition to having to take the employee back because the termination was unlawful. The best resolution at this point is virtually always to reach a settlement with the “employee,” but because the “employee” has so much leverage in this sort of situation, the company usually has to pay quite a lot of money to extricate itself from the rogue “employee.”

Even after the WFOE is formed the new WFOE is at some risk of one of its pre-WFOE “employees” ratting it out for the pre-WFOE hiring, but that is much rarer. To ameliorate this risk, we always advise that you give your employees seniority and full other credit for any time spent working for your company during its pre-WFOE days.

Bottom line: Not bringing on Chinese employees directly while in the process of forming your China WFOE can be inconvenient, but it is always the safest route.






China lawyers employment
No company is too small for China’s regulators

If you want to be a well-protected employer in China, you need a well-written China employment contract and a China-centric set of Rules and Regulations, no matter your company size. Your employer Rules and Regulations should, at minimum, address your employees’ important rights and obligations and labor disciplines. No matter how comprehensive your employment contracts, those cannot serve as a replacement for Rules and Regulations.

Our China lawyers are often asked whether a foreign employer with a tiny China workforce (say 1-19 employees) needs to have rules and regulations document. The emphatic answer is yes. Rules and regulations are in most places in China a flat-out requirement. And in those few places where they are not required (mostly in places foreign companies never go), they are still a necessity. But the main reason why you so need rules and regulations no matter how small your China operations is because for 99% of all things employer-employee in China, China does not make any distinctions between large and small companies. So just because you are small, it does not mean you are exempt from the requirement to have a set of employer rules and regulations. This is different from the U.S. and most of Europe where small employers generally enjoy a de minimis exception.

I would even argue that having a good set of rules and regulations is even more important for a small company than for a big one and this is simply because not having one is so risky and small companies are usually less able to take risks. If you are a massive multinational and ten of your employees each win USD$100,000 against you because you had no rules and regulations, you will easily survive. But if you are a small business the impact of having to all of a sudden cough up a million dollars, the situation could be really bad.

The reality is that China’s employment authorities may cut some slack for Chinese-owned companies but they do NOT cut slack for foreign-owned businesses no matter their size. So to the extent your China advisors or employees are telling you that they see certain companies get away with certain improper employment practices, there is a very high chance those companies that got away with such practices are Chinese companies. If you are a foreign employer, you are virtually always under stricter scrutiny and this means both that the Chinese government is more likely to go after you on employment issues and your own employees will be a lot more likely to pursue litigation against you because you are foreign company; the Chinese government likes to see money go from foreign companies to Chinese citizens.

When we tell our clients they need rules and regulations no matter how small they are, they sometimes ask us for a “template” set of rules and regulations they can modify for their own use. If only it were that simple. See China Contract Templates for $99 Each.

We completely understand why our clients are irritated with the need for rules and regulations (especially those who are China start-ups with 1-3 employees) and want to do whatever they can to keep their costs down. Unfortunately, there is not much we can do. The problem is that rules and regulations are important and for them to be effective they must be tailored to suit the specific industry and type of business and location of each employer. And this sometimes means that the rules and regulations for a ten-employee company can be longer and more complicated than the rules and regulations for a 1,000 person company.

No matter your size, as a China employer you need employer rules and regulations and the complexity and length of those will be based on more than just your size.


China employee resignations
China employee separations are often a land mine

Because employer-initiated terminations are generally so difficult in China, employers (especially foreign companies doing business in China) tend to focus so much on terminations that they overlook the problems that can arise from employee resignations. Just a super brief summary of China’s laws on employee resignations: in many places, an employee can leave with 30 days’ written notice during the contract term and 3 days’ notice during a probation period.

Consider this hypothetical: Employer and Employee enter into an employment contract. Employee sends a resignation letter to Employer via email on 1/1, stating a final departure date of 1/31. Employer accepts by replying to that resignation email and schedules a meeting on 1/15. Employee then seeks to retract his resignation letter because Employer persuaded him to stay on at the company. Employer disputes this version of events during proceeds with processing Employee’s 1/31 separation. Employee sues for unlawful termination. How will a Chinese court likely rule?

In the real case on which this hypothetical is based, the employer prevailed primarily because the employee failed to produce evidence to prove that the employer had ever talked to him about staying or that the parties had essentially mutually revoked the effect of the employee’s initial resignation letter. The court held that the resignation letter sent to the employer on 1/1 took effect even before the employer formally accepted it because under Chinese law an employee does not usually need the employer’s consent to resign. The law provides that unless an exception applies (e.g., the parties have agreed to a service period agreement), the employee can leave employment by providing 30 days’ written notice and that’s it. An important note here: do not assume you get to say no to an employee resignation simply because the employee signed a fixed-term employment contract or even an open-term contract. Generally speaking, you as an employer do not get to say no to your China employees trying to leave early.

Even though it ultimately turned out to be a good day for the employer (after several layers of legal proceedings, including labor arbitration, a trial, and an appeal), there were a couple of things the employer could have done differently to avoid being sued in the first place. First, the employer probably should not have handled the employee resignation by emails, because having hard copy evidence is usually better than email evidence. Second, the employer should have made clear in writing to the employee that the resignation had been accepted and this was the case no matter what they might discuss orally later. Also, when it became clear the employee had changed his mind and was not going to leave voluntarily as he initially said he would, the employer should have considered settling with the employee so as to avoid the pitched and expensive legal battles that followed.

Bottom line: Be careful with your employee resignations throughout the separation process.