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.

 

China WFOEOur China lawyers are constantly helping foreign companies set up companies in China — usually wholly foreign owned enterprises or WFOEs. When a client’s WFOE is approved or a freshly minted WFOE gets in touch with us requesting guidance on China’s employment law, we usually send out the following WFOE Employment Letter:

Now that your WFOE is up and running, our China employment lawyers will assist you in making sure your WFOE is protected on the employment front. Towards that end, the first thing we will do is provide you with employee agreements for your use with all your China employees as part of what we call our Initial Employment Package, which consists of the following for each employee:

  1. An Employment Contract;
  2. A set of Employer Rules and Regulations;
  3. A Trade Secrecy and IP Protection Agreement; and
  4. A Sign Off Agreement (acknowledging each employee’s receipt of the Employer Rules and Regulations).

Having the above for your employees is crucial to operating as a WFOE in China with employees. In addition to the above mandatory documents, we also draft the following optional agreements for eligible employees:

  1. Non-compete Agreement; and/or
  2. Education/training Reimbursement Agreement.

During the process of drafting the Initial Employment Package, we will also work with you on any additional employee-related procedures you might need in China. For example, a common employment law issue we see with new WFOEs (and sometimes established WFOEs as well) is related to employees who work under an alternate working hours system such as the Flexible Working Hours system. In most locales, an employee cannot be designated to work under such a system until its employer has obtained government approval for the WFOE, which usually requires we work closely with the local labor authorities.

After you approve the employment documents we create for you, we will let you know what you need to do to maintain those documents. Ideally, the WFOE’s legal representative would sign all employment documents with WFOE employees, and the second-best option would be for the WFOE’s general manager to sign.

It is important the WFOE affix its official chop on all relevant employment documents. Besides stamping the company seal on the documents, you can also fan out the pages and stamp your company seal across all pages to make them look even more formal.

You should also make sure all your employees sign and date the documents appropriately. It is best to have both parties (the WFOE and each employee) execute the documents on the same day, before or on the employee’s first day at the WFOE.

You should provide one copy of the fully executed employment documents to each employee for their own records and you should hold onto at least one original copy of each fully executed document. Most places in China require you retain the employment contract for a minimum of two years after an employee’s departure, but we generally advise you hold onto the originals of all employee-related documents for as long as possible.

Please let us know right away if you encounter any issues in the signing process.

We recommend you check in with us as around one year from now for an assessment of your China employee situation. This quick audit normally involves our reviewing your employment-related documents, checking for any possible non-compliance against all national and local employer laws, speaking with your HR people and/or management regarding any imminent or potential employee problems (this includes you thinking about terminating an employee) and resolving any employment matters. Spotting employee issues and taking appropriate actions early can significantly reduce your headaches and costs. China’s employee termination laws are extremely strict and your costs to make sure an employee termination is handled correctly will be considerably less than your costs to defend against a wrongful termination lawsuit.

We also recommend a subsequent employer audit about three years from now. Among other things, because most WFOE employees start with a three-year employment term it is advisable to spend some time considering whether to extend the employee’s contract before the initial employment term is up. Because terminating a China employee is generally so difficult, you want to be sure not to retain an employee for a second employment term unless you are certain you wish to continue employing that person. Failing to properly terminate (or otherwise renew) an employee before his or her initial term has expired may convert that employee to a lifetime employee who you must retain until he or she reaches the mandatory retirement age. If you use a shorter initial employment term for an employee, we suggest you come to us at least one month before that employee’s employment term expires.

China’s employment laws are complicated and localized and they can change quickly. You should therefore have your employment situation checked regularly to confirm you remain in compliance with all applicable employment laws. I mention the hyper local nature of employment laws because it is not uncommon for companies to get into trouble when they hire employees in a new locale in China without effective employee documents for that specific locale.

Please do not hesitate to contact us should you have any questions or concerns now or along the way.

China employment lawyerHardly a day goes by without one of our China employment lawyers getting an email or a phone call asking whether we can help them with such and such employment law matter with their existing or (usually) their ex-employer. Many times they will briefly describe their situation and conclude their email with something like, “do I have a case.”  Our employment attorneys nearly always respond with something like the following:

We do not know and for us to know we would first need to run a conflict check to make sure we do not represent your employer. Most importantly, we also will need to review your employment contract and we probably will also need to briefly research China’s national employment laws and the local employment laws in your area as well.

And guess what? Much of the time when we do review these contracts they are just terrible for the expat employee. Like really really terrible. We then have to tell the expat that there is little to nothing we can do beyond trying to make their transition to any new job as smooth as possible.

Even though we are pretty certain we know what their answer will be before we ask it, we then ask whether any attorney reviewed their employment contract for them before they signed it. We ask this NOT to emphasize the need to use a China employment lawyer before signing a China employment contract, but on the off chance that their contract was actually reviewed by a lawyer who might be willing to pay the employee some money for having done such a poor job on the contract. So far, no such luck as the response has always been either “no” or “no, it just never occurred to me that might be necessary” or “there was no point because it was just a form contract anyway.” Ugh.

If you are an expat working in China or seeking a job in China or even just renewing your contract with your current employer and it is for a substantial job with a substantial salary, you should have an experienced China employment lawyer review your China employment contract before you sign it. This is especially true if you will be working for a Chinese domestic company. This is also true even if you are given a “form” contract. Many companies use some sort of template or form document for their employees but this does not in any way mean you should not have a qualified lawyer review what you will be signing. Just because the employer uses a template does not mean you will be protected nor does it mean you cannot or should not negotiate the changes you need in it.

In fact, the window after you are offered the job and before you sign the employment contract to take the job is usually the best time to go “back and forth” with your employer to make sure the terms and conditions in your proposed employment contract are as favorable to you as possible. Once you sign your employment contract and begin working, that window has closed and your employer has very little incentive to revise or add anything to your contract.

Your proposed employment contract should be reviewed to make sure it protects you and includes everything you need or want to be included. To the extent there are ambiguous terms, take the time to seek clarification. And make sure that what you have been promised orally or in some other writing that is not in your employment contract goes in your employment contract. Do not be pressured into signing an employment contract by an arbitrary deadline. If they want you on their team, they can and they will wait a couple of extra days for you to get your employment contract right.

Even on those provisions you cannot change, a good attorney review will give you actionable information for the future. What provisions in your employment contract are illegal and therefore not enforceable against you? What provisions are unfavorable or unfair to you? What matters important to you are missing? Answers to questions like these will give you clarity and help you decide whether to take the job or not. They also will let you know what you can and cannot do if you do take the job.

But in our experience, employers are nearly always willing to make concessions to get the expat on board as an employee. Employers are often reluctant to make changes to their form contracts but far more willing to add things to it. For example, if a bonus is created just for your position, you should make sure this bonus is mentioned in your employment contract and that it specifies how much and when and under what conditions you will receive it. Far too often expats are offered a guaranteed bonus that is not mentioned anywhere in their contract.

On a related note, “yin-yang” contracts are never a good idea for either the employer or the employee. These are contracts where the employer offers the expat an employment contract the expat knows is a fake. The real deal between the employer and the expat employee is in a different document or not in writing at all. These yin-yang contracts are illegal and usually done to skirt taxes and they pretty much invariably lead to trouble. Just don’t do it.

Bottom Line: Expats looking to work in China should have their employment contracts reviewed by a China employment lawyer before they sign it, not after. This is way cheaper and way better in the long run. Trust us on this.

 

 

China employee talentIf you are an employer in China, you need a well-written China employment contract and a China-centric set of Rules and Regulations (a/k/a employee handbook). Since China does not have employment at will, well-crafted rules and regulations setting out your employment terms are critical for being able to discipline or terminate an employee. But the need to have written Rules and Regulations goes beyond that.

it is not uncommon for an employer to meet resistance from its employees when it first tries to implement its rules and regulations. Our China employment lawyers have heard all sorts of explanations from Chinese employees as to why there should be no rules and regulations, with the following three probably the most common:

  • “None of my previous employers had employer rules and regulations and they never had any trouble.
  • “Everything has been good here so I don’t understand why we need them now.”
  • What, you don’t trust us employees?

If you want to protect your company (and even to a certain extent protect your employees), you need a set of rules and regulations.

One way to get past employee resistance is to emphasize how they too will benefit from the clarity and protections the rules and regulations will provide. This document should not only set out the rules and regulations related to employee discipline and terminations, it should also detail employee rights and benefits. For example, if your company has a vacation program, the rules and regulations should explain how that program works. If your company has a system for rewarding employees for good work, that should be covered too. If your China company gives employees paid or unpaid leaves, that should be in there too. Clear and logical and practical rules that work for your specific locale will benefit both sides.

We are often asked what foreign companies can do to attract talent in the Chinese job market. One of our answers is to have employer rules and regulations that evidence they are good and law abiding employers.

China employment lawyers
China vacation rules

Chinese employment laws require all China employers provide their employees with annual paid leave based on the employee’s total years of service. Employees who have worked more than a year but less than 10 years get 5 days annual leave, employees who have worked between 10 and 20 years get 10 days, and employees with more than 20 years get 15 days. This annual leave schedule applies to all employees, both Chinese and non-Chinese.

The Regulation on Annual Paid Leave for Employees, makes clear that employers are legally obligated to ensure their employees take their annual paid vacation time. This is enforced by requiring employers pay their employees an additional 200% of normal wages for each unused vacation day.

A question our China employment lawyers often get from foreign companies with China-based employees is what happens with required annual paid leave when an employee submits his or her notice of resignation? Must the employer pay the additional 200% of normal wages for each unused vacation day or can it require the soon-to-depart employee take any unused vacation days before leaving for good? Somewhat surprisingly, most locales in China allow employers to require the departing employee take any unused vacations during the resignation notice period (which is usually 30 days).

However, the best way to proceed (and the safest for the employer) is to make sure (beforehand!) that your employer rules and regulations and/or your employment contracts include language making clear that you as the employer can require resigning employees to use up any accrued and unused vacation days during their applicable resignation notice period. Like pretty much everything else having to do with Chinese employment laws, it is nearly always easier/safer to be clear in your employment documents (like your rules and regulations and your employment contracts) so that you do not have to rely on the whims of your local labor bureau or court.

What though should you do about an employee who leaves your company with accrued vacation time but gives you no prior notice of their resignation? It depends on where you are located in China, but in many places such as Shanghai, the employer will not have to pay the employee for unused vacation days. This is because it is the employee who made it impossible for the employer to make any arrangements and it would not be fair to punish the employer for the employee’s unreasonable behavior.

A couple of “quick” things about China employee vacation days. The burden is on you as the employer to keep close track of whether your employees take their vacation days. The best way to stay on top of things is to have your employees use up all of their vacation days each year and for you to document this accordingly. If an employee gives up certain annual paid leave for her own reasons, you should be sure to have that employee sign a document making clear that he or she did so voluntarily. This won’t necessarily work but it is at least something. It also helps to have your employer rules and regulations and your employee contracts written so as to be easy for both your employees and your management to understand. This often means it should be in well-written English for your management and in well-written Chinese for your employees and for the China labor bureau and the courts.

 

 

China employment lawyersIn late 2017 an old and yet important set of China Employment laws —the Measures for Severance Payment due to Violation or Termination of Employment Contracts — issued by the then-Ministry of Labor back in 1995 was abolished by the PRC Ministry of Human Resources and Social Security. Since our China employment lawyers keep getting questions regarding the impact of this change I am writing this post to provide some clarification.

The short answer is that there are no significant changes. The fundamentals of China’s employment laws have not changed. China is still NOT an employment at will jurisdiction and its employment laws remain very local. 

The old Measures provided guidance on how to calculate statutory severance. They had some special rules for calculating severance payments, including (1) how a 12-month cap on severance would apply to mutual terminations or terminations for incompetence, (2) how severance was to be calculated using the average monthly wage for the 12 months prior to termination under “normal productions conditions,” and (3) how to calculate severance for employees terminated after various leaves of absence, for employees with contracts that can no longer be performed due to major changes surrounding execution of the employment contract, and for mass layoffs.

Before these Measures were abolished, many Chinese arbitrators and judges held that they had already been partially annulled because they conflicted with the China’s Employment Contract Law, but the legal outcomes on this issue were inconsistent.

When China’s Employment Contract Law took effect on January 1, 2008, it made clear that for terminated employment contracts severance payments under Article 46 of this Law shall be calculated based on the number of years of employment from the implementation date of this Law. The basic rule under the Employment Contract Law is that for each year (which is any period longer than 6 months) an employee has worked for the employer, he or she is entitled to one month’s wages in severance. For any period of employment of less than 6 months, the employee is entitled to half a month’s wages. If an employee’s monthly wage exceeds 300% of the local average monthly wage for the preceding year, the local average can be used to calculate the severance payment. In this situation, the number of years of service used to calculate statutory severance is capped at 12 years.

But the Employment Contract Law left open how to deal with an employee whose employment started before January 1, 2008. Before the mentioned Measures were annulled they were still technically in effect and this created several different methods for calculating severance. Subject to varying local employment laws, the specific method depended on: (1) the employee’s years of service with the particular employer; (2) how much time the employee put in working for the particular employer before January 1, 2008; (3) the employee’s average monthly wage during the 12 months before the employment contract ended or was terminated; and (4) the basis on which the employment relationship terminated or ended.

Not much has changed with the annulment of the Measures, though as is pretty much always the case with China’s employment laws, many of the specific changes (and lack of changes) will vary depending on the locale in which the employer is located.

Suppose the Measures were still effective and the employer’s locale does not have different local rules. An employee who worked for her employer since June 1, 1995 is terminated pursuant to a mutual termination agreement signed on January 1, 2018, According to China’s employment laws, the employee must receive severance. How do you calculate this employee’s severance if her average monthly wage during the 12 months prior to termination was greater than 300% of the local average monthly wage for the preceding year? If you apply the rules within the Measures, you would divide it into 2 periods in calculating the severance: (1) for the period before January 1, 2008, at her average monthly wage during the 12 months prior to the termination multiplied by 12 (because it would be subject to a 12-month cap); and (2) for the period after January 1, 2008, the severance would be 300% of the local average monthly wage for the preceding year multiplied by 10.

After annulment of these Measures the severance calculations under the above scenario do not change much. You still must divide it into 2 periods. Period one is the period before January 1, 2008 and her severance for that period would be calculated using her average monthly wage during the 12 months prior to her termination, multiplied by 13 (since the 12 month cap no longer applies); for period two, the period from January 1, 2008, her severance would be 300% of the local average monthly wage for the preceding year multiplied by 10. As you can see, in this scenario, the annulment of the Measures will increase the employee’s severance by 1 month at the average monthly wage during the 12 months prior to termination.

So at the end of the day, the most important factors for calculating severance payments are still how much the employee made during the 12 months prior to termination and when the employee started working for the employer. And of course, what your local employment rules say as well.

But whenever our China employment lawyers deal with China employment severance situations, our advise is usually not to get too bogged down with the severance amount because by far the most important thing is to make sure your termination is lawful. If you lack a legal basis (again, both under China’s national employment laws and under the local laws that apply to your specific business) for the termination there is little point in spending time calculating whether you have applied all the applicable severance caps.

And it is in the termination itself where our China employment lawyers most often see the big mistakes. Far too often foreign companies doing business in China terminate employees without a legal basis to do so. The easiest and safest way to terminate a China-based employee will almost always be via a mutual termination, using the minimum statutory severance as a starting point in your settlement discussions with your departing employee. When dealing with a mutual termination situation, paying the employee more than the minimum statutory severance does not invalidate the mutual termination agreement and doing so often makes sense as a way to secure a fast and relatively amicable resolution.

China employment lawyers
How to achieve tranquility with your China employees

Those who regularly follow this Blog know China is not an employment-at-will jurisdiction and so terminating China employees will always be fraught with risk. Foreign companies doing business in China should realize that avoiding termination problems needs to go beyond just having well-crafted employment contracts and employer rules and regulations. Both of those things are absolutely crucial, but because China’s employment law system and employee culture are so different from the West, foreign companies need also understand the need to have a good understanding of Chinese employees.

Let me explain by using a couple of China employment scenarios our China employment lawyers see often.

Scenario 1. The foreign parent company determines it is no longer profitable for it to maintain its China office and decides to shut it as quickly as possible. Before determining whether it is eligible to initiate a mass layoff, it starts informing its China employees of the imminent shutdown, including an employee on maternity leave. To smooth things over and to show its appreciation for the good work of its soon to be terminated China employees, the foreign company offers all of them severance pay substantially above the statutory minimum and doubles that for the pregnant employee. A number of employees (including the pregnant employee) take the severance pay and then sue the company (in the courts and via labor arbitration) for unlawful termination.

Scenario 2. Employer has had a good working relationship with an employee for many years. But as the employee becomes more senior, the costs of retaining her have increased and so the employer asks her to consider voluntarily resigning in a year or so with a vague mention of working out some sort of severance package.

In the first scenario, in addition to failing to analyze what it would mean to do a mass layoff and what it would mean for each employee, the employer made the massive mistake of alerting its employees to its mass layoff decision. China considers informing employees of an impending mass layoff as a unilateral employee termination and it is unlawful to terminate an employee on maternity leave even as part of a mass layoff. See China Employee Terminations and Pregnant Employees. Unless the employee has committed a wrongdoing that warrants unilateral termination, an employee on maternity leave can only be terminated via a mutual termination. So instead of informing the employee of what is essentially an illegal unilateral termination decision, the employer should have requested she agree to a mutual termination and offered to pay her substantially to do so. See Terminating a China Employee: Why Mutual Termination is so Often the Key. Shutting down a China WFOE is always going to be difficult, but if you are facing employee lawsuits it becomes borderline impossible. See Closing Down a China WFOE: You Can Run But You Can’t Hide (Part 2)

The employer in the second scenario made two major mistakes. First, it should not have asked a long-term employee to resign. Under Chinese employment law, an employee who resigns is not owed any statutory severance and so employees usually view a request to resign as a firing in disguise and they don’t like it one bit. The employer’s second mistake was asking the employee to leave “in a year or so.” Even if an employee agrees to this sort of arrangement, there would be nothing to stop her from simply refusing to leave the company when her time is up. Chinese employees also do not generally do well with this sort of termination uncertainty (does anyone?) and it is not unusual for an employee in this sort of situation to become disgruntled and to retaliate in some way against the employer. When clients come to us with this sort of situation, we work with them on finding workable alternatives to a termination. Might the employee be open to working part-time? What about a mutual termination with an earlier date and a clear amount of severance and a mutual termination agreement?

Far too often foreign companies believe that if they pay their employees a good salary with benefits and act “reasonably” towards them, all will be good. This can help, but it rarely helps if you treat your Chinese employees in a “non-Chinese” way, especially in an employee termination situation. Foreign companies that do best with China employees usually do the following three things:

  1. Treat their employees well.
  2. Treat their employees per Chinese employee culture.
  3. Follow all relevant national and local employment laws (and even customs) to the letter.

 

IChina Employment Lawyest is important for foreign companies doing business in China to onboard their employee hires correctly. Unfortunately, there are many myths that make doing this less likely. In this post, I will I briefly explain some common and potentially dangerous China hiring myths.

Myth 1: Hiring without a Chinese legal entity (WFOE or Joint Venture) is fine so long as you only bring on independent contractors.

Wrong. You cannot legally hire anyone other than through an already established Chinese legal entity, such as a WFOE or a Joint Venture. Improper hirings are one of the most common and most dangerous things we see foreign companies do in China. For what can (and pretty much eventually always does) go wrong with hiring employees without a WFOE or a JV, check out Doing Business in China with Deportation or Worse Hanging Over Your Head.

Myth 2: Even if your initial hiring is done badly, once the employee becomes legal, you can discipline/terminate as you wish pursuant to your employer rules and regulations.

Suppose things are good before you form your WFOE or Joint Venture is established and you convert your “employee” to a legal status as soon as the WFOE or JV is actually formed. Now suppose you terminate the by-now legal employee pursuant to your employer rules and regulations, When your initial hiring did not comply with Chinese law, you have opened your company up to all sorts of risks, especially if your employee preserved evidence that may be used against your company. Employees in this sort of situation will usually threaten to report you to the Chinese government for your long-ago improper hiring unless you pay them a big severance payment. Our advice is usually to pay and hope that doing so works.

Myth 3: Hiring independent contractors is okay in China.

The PRC generally does not allow what we would call independent contractors in the United States. For individuals, the only permitted form of employment is through a formal, written employment contract pursuant to China’s Employment Contract Law. The primary reasons for this law are to prevent tax evasion and to ensure that the social insurance and other protections of the employment contract system are applied to the individual.

Myth 4: A retired person is not subject to employment law protections and they can be hired as an independent contractor.

In most (but not all) places in China, a Chinese entity can hire a retired person via a labor services agreement not governed by the PRC Employment Contract Law and certain employment laws. Nonetheless, certain basic employment laws must still be observed and the specific rules will depend on  your location. For example, in Shanghai, the company must provide a sanitary and safe work environment, pay at least minimum wage, and follow the laws on working time and hours. In most places, this type of arrangement allows the parties to contractually agree on the grounds for termination and no severance upon termination, similar to an employment at will relationship like in the United States. However, unlike under an independent contractor relationship in the United States, the Chinese employer must withhold the employees income taxes and it also usually must make certain employee benefit contributions. Also, many Chinese jurisdictions also require the employer pay the employee’s work-related injury insurance even though the employee is already collecting a retirement pension. In these sort of post-retirement hiring situations, you should be sure to enter into a formal written English/Chinese agreement covering all labor-related issues that complies with all applicable laws — both national and local — and with local practice.

Bottom line: Bringing on China employees the right way will save you time, trouble and money down the road.

China employment lawyersChina employees can terminate their employment contracts and secure severance against their employer if their employer has not provided the labor protections or abided by the work conditions set forth in the employment contract. Many employers do not realize this applies to sexual harassment as well.

China employers are obligated to prevent and stop sexual harassment against their female employees in the work place and a female employee has a legal claim against an employer that fails to take necessary actions after the employee complains of sexual harassment. What this all means in real life is that if you do not already have a China-specific sexual harassment policy in place for China, you need one. NOW.

Whatever you do, do not use your U.S. or your European sexual harassment policy in China. China’s laws on this are very different from the West’s and just translating what you have will in no way cut it. See China Employment Contracts: Why Ours Are In Chinese  and Using English-Language Contracts in China. Not only must your sexual harassment policy by tailored specifically for China, it should also be tailored specifically for the locale or locales in which your China employees are based. See China Employment Law: Local and Not So Simple. A sexual harassment policy not tailored to the relevant locale within China can be deemed unenforceable. Even more common, our China employment lawyers often see foreign companies get sued for following an employment policy that does not jibe with local laws or customs.

As a China employer, you should be protective and encouraging toward a harassed employee. Consider the not uncommon situation where company policy mandates harassed employees must come forward to report any harassment and stops there. What happens if a harassed employee fails to report the harassment? Will the employee be disciplined in some way? If you do not intend to punish the employee, this sort of provision makes no sense and could very well prove harmful to you since it is not usually appropriate to penalize a harassed employee for failing to report harassment. Instead of saying “must” or “shall” you probably should say “is encouraged to.”

One-sentence in your rules and regulations stating that your company does not allow sexual harassment is not nearly enough. You need to be specific about the discipline you will impose. If all your employment documents state is that you may take appropriate disciplinary actions against an employee who engages in sexual harassment you might as well not even bother with having a policy. Your policy should set out specific measures you will impose and those specific measures need to fit the general approach of your rules and regulations and fit what is appropriate to the nature of the harassment and even the locale in which the harassment occurs. Your sexual harassment rules should not only be specific; they should be concise as well. A lengthy policy with too-complicated mechanisms or multiple-layers will not serve as good guidance to your management or to your employees and therefore is virtually never a good idea for China. You should also set out various reporting mechanisms and the measures you will take to assist sexual harassment victims.

Now can you see why a U.S. or Europe sexual harassment policy simply does not work for China?

By clearly setting out the specific discipline you will impose for sexual harassment you will establish a written basis for disciplinary actions or terminations you impose against an employee who commits sexual harassment. Since China is not an employment-at-will country you as employer generally need a specific contractual/legal basis to discipline or terminate an employee. See Six Common Myths About China Employment Laws. The legal basis for a China employer being able to discipline or terminate an employee who engages in sexual harassment would be serious breach of employer rules and regulations. This means that if you do not clearly enumerate your sexual harassment rules and policies in your written employment documents, you will lack a written basis for disciplining or terminating an employee who harasses and you will have a hard time justifying any punishment you impose on such an offender.

There have been a few cases in China where employers terminated an employee for sexual harassment and then succeeded in defending themselves in unlawful termination lawsuits despite any specific sexual harassment provisions in their employer rules and regulations. These employers succeeded by arguing that the employee has violated his general duty to follow mandatory laws prohibiting sexual harassment and/or by highlighting a catch-all provision in their employer rules and regulations that provided for termination for any serious offense. But these employers could have saved a lot of time and money had they merely implemented a specific sexual harassment policy. Also, in many pro-employee jurisdictions, if you do not have a set of enforceable employer rules and regulations, you have no recourse against an employee no matter how terrible the employee’s conduct. Seven Myths About China Employer Rules and Regulations (aka Employee Handbook).

Bottom line: Check your China sexual harassment rules and policies for legal compliance under Chinese law and for your locality. Now. See Why NOW is the Time to Comply with China’s Employment Laws, Part 2.

2. My recent webinar, Employment Laws for Female Workers in China, now available on demand.

 

China employment lawyersAs I have previously written, during its new hire on-boarding process, China employers should confirm there are no encumbrances or restrictions on any new hires coming to work for your company. In particular, employers should make sure there are no in-force non-compete agreements. Let me explain why this is so important.

Though non-compete agreements are generally disliked by China’s administrative and judicial authorities, many employers like to have a non-compete agreement in place with every employee they hire, even part-time workers. Moreover, many employers prefer to have an elective agreement where the employer has the right to decide whether or not to enforce the non-compete agreement upon termination of the employment contract. In other words, the employer gets to decide whether it will pay the employee for not competing for a certain period of time after the employee’s departure, or whether the employee can “go free” without any restraints. The legality of such an elective arrangement depends on where you are located in China, but for purposes of this discussion let’s assume such terms are in fact legal and enforceable.

It makes complete sense for the employer to want to wait until the end of the employment term to see if the employee possesses any proprietary information worth protecting, since things may change during the course of employment. This especially makes sense because in China the employer must pay its departing employee not to compete.

What though happens if the employer does nothing when the employment relationship ends. Usually,“no action” on the part of the employer means the non-compete agreement does not come into force. If this is the employer’s intention it’s probably okay. But if the employee is both expecting and wanting a non-compete payment from you as his or her employer and you have not clarified the non-compete issue at time of termination, the employee may send you a demand for payment or even bring a lawsuit against you to enforce the non-compete. To avoid this battle and headache, if you decide you are not going to enforce the non-compete provision or contract, your best course of action is to make this clear to your departing employee before the employee’s departure. Doing this virtually always stops a terminated employee from suing for non-payment on a non-compete.

But what if you as the employer want to enforce your non-compete provision or agreement? In this case, you will need to inform the employee that you are electing to enforce the non-compete and you should also be sure to comply with all of the terms of the non-compete, including paying all non-compete compensation due to your departing employee. You should put your employee(s) on notice of your intent to enforce the non-compete via a clear writing to the employee. And by this I mean a hard copy document with clear language (in Chinese if your employee is Chinese) setting out your intention to enforce the non-compete. In most China jurisdictions, an employer who does not affirmatively confirm its desire to enforce a non-compete will be deemed to have waived its right to enforce the non-compete after three or so months. The exact number of months an employer can go without being deemed to have relinquished its rights to enforce a non-compete depends on the locale — as is true for just about everything else relating to China’s employment laws. See China Employment Law: Local and Not So Simple.

In the old days, when China non-competes were less complicated, our China employment lawyers pretty much always suggested to our clients that they put non-compete provisions in their China employment contracts. Nowadays though, we suggest they balance their need for a non-compete against the risks that such a provision or contract could eventually cause them problems. For example, what happens if you use a non-compete that automatically takes effect upon the employee’s termination and you have no intention of enforcing it when the employee leaves but you forget to terminate the non-compete when processing the employee’s departure? Though this too depends on your locale, in many of China’s cities, this will mean you will either need to reach agreement to pay your employee for a mutual termination of the non-compete or you do not pay any non-compete compensation and you run the risk of a Chinese arbitrator or judge determining that you are “stuck” with the non-compete because you knowingly signed a binding agreement that included one..

The bottom line is that you should be careful with your non-competes and that means not just inserting one without thinking through the repercussions of doing so and being very careful to act on any non-competes before any impending employee termination.