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.

Chine employee termination lawBecause China is not an employment at will jurisdiction, mutual termination of an employee is usually the safest path for China employers that wish to terminate a China employee. Many foreign employers understand the risks of terminating a China employee (whether on a fixed-term or open-term contract or even on probation) and seek a mutual termination to reduce those risks. Nonetheless, mutual termination of a China employee requires much care and our China employment lawyers keep seeing the following mistakes.

Using a non-Chinese style settlement agreement. An employer that uses a non China-centric settlement agreement probably will not have much problem getting its employee to sign it because the employee knows this agreement will not be enforced. I cannot tell you how many times one of our China attorneys has been contacted by a China WFOE needing help one or two months after having “settled” with an employee because that employee has returned to ask for more money or has just gone ahead and sued for it. If you are going to pay money to settle with one of your employees, you must get them to sign an agreement that will actually work.

Sending a mutual termination agreement as a total surprise to the employee. If you choose to go for a mutual termination, it usually means you lack a firm legal basis for termination and your employee almost certainly knows this. Just sending a mutual termination agreement to an employee to be signed usually leads to the employee rejecting the proposed agreement or to the employer having to pay much more than it would have otherwise. If the employee refuses to sign, the odds are good you will be stuck with this employee until the end of his or her employment term or perhaps until the employee reaches his or her mandatory retirement age. If you unilaterally terminate the employee, the employee will probably sue for unlawful termination and this may lead to his or reinstatement with the company. The better way to approach a mutual termination is to go to the employee seeking his or her buy-in and with a practical negotiation plan in place.

Presenting a mutual termination agreement with no or close-to-zero severance. China employees usually will agree to a mutual termination agreement with a quick and fair payout. But virtually no employee will agree to a mutual termination with no severance. In fact, the reason why this type of termination is called mutual termination is because the employee’s “price” for voluntary termination is a severance payment. If you offer no severance pay, you might as well forget about mutual termination. Since a mutual termination is like a contract negotiation, your offer will be perceived as negotiating in bad faith and the employee will not move forward with the negotiation. You should instead offer a fair amount in exchange for the employee’s voluntary departure and a written release of all claims against you.

Mailing a mutual termination agreement to the employee for signature. It is best to have the employee do this signing right in front of you on or before the employee’s last working day. If you mail a hard copy to the employee to sign, you had better take all necessary steps to ensure you receive an original of the fully executed agreement because if you don’t get that, it is essentially the same as having no written agreement at all. And with no written agreement, you as the employer will be at great risk of later legal action by the employee for the exact same issues you thought you had settled.

Leaving important matters open when concluding the mutual termination agreement. You need to carefully consider and seek to resolve all outstanding issues before the employee’s termination. Are there unpaid wages? Did the employee give up unused vacation days for your business and not get compensated for that? Is the employee owed any bonus? Did the employee get all overtime compensation due? Act slowly and carefully and do not allow an employee to rush you into signing an incomplete agreement. Employees will often say something about how these agreements are “just a formality and we can figure out by email later how much more you need to pay me for things like the statutory vacations days I did not take while working for you.” Do not go along with this! The goal of your termination agreement and your severance payment should be to end the matter once and for all. If “tying up” all loose ends means you will have to pay a little extra, so be it.

Slow down and get your mutual termination agreements right.

China employment lawyers
How to stay on track with your China employees.

When it comes to your employees in China, it is a lot cheaper to stay on the right track than to have to dealing with issues or problems after they arise. The following eight tips are intended to help you stay on the right track with your China employees.

1. Your employment contracts should spell out every aspect of your employment relationship. In the United States (most other countries, not so much), employers can terminate employees for nearly any reason. This U.S. concept of employment at will has no application in China and American companies often get into trouble when they fail to adequately understand this significant difference between the two systems. China has an employment contract law system. This means as a China employer, you must have written employment contracts with all your full-time employees.

Employers operating in China without written employment contracts will be exposed to several risks. Specifically, if an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, it will be required to pay double the employee’s monthly wage.

If an employer goes more than a year without executing a written employment contract, the employee without the contract will be deemed to have entered into an open-term employment contract with the employer. This usually means the employer must retain the employee until his or her retirement age. So do not expect your employees to push you for a written contract!

Because China does not have employment-at-will, after an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is on an open-term contract.

2. Include all mandatory provisions in your employment contracts. Your employment contracts must contain a number of mandatory provisions to be legally enforceable. The exact provisions required varies by locale, but they generally include the following:

  • Basic information about the employer and the employee (the employer’s registered name and address and the name of the legal representative or the person-in-charge, and the employee’s legal name, national ID/passport number and address)
  • The term/duration of the employment contract
  • A description of the work to be done by the employee
  • Location of the workplace
  • Working hours and the applicable working hours system (standard or alternate)
  • Rest and leave time
  • Remuneration
  • Mandatory social insurance
  • Applicable labor protections, labor conditions and protection against occupational hazards
  • Other terms required by relevant laws and regulations

In addition to the above required provisions, China employers should include provisions describing any additional benefits they will provide to particular employees.

3. Spell out the term of the employment contract and the probation period (if applicable). A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish a probation period of no more than one month; for employment terms of one year or more but less than three years, the probation period cannot exceed two months, and for employment terms of three years or more or for an open-term employment arrangement, the probation period cannot be longer than six months. Each employee can have only one probation period.

Since it is more difficult to terminate an employee after the probation period, we usually (but certainly not always) recommend an initial term of three years for a new employee. That allows you to provide a six-month probation period (the longest permitted under Chinese law).

Under the written law, an employee is entitled to an open-term contract after two consecutive fixed-terms. However, in practice, in most places in China, once an employee has been renewed at the end of the initial fixed term, you have essentially converted that employee to an open-term employee. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether it makes sense to have the employee on your team long-term.

You are not required to set a probation period. Even terminating a China employee on probation is difficult and tricky in China, so as a practical matter, be very careful with your hiring.

4. Know China’s working hour rules. Most China employees can work under only the Standard Working Hours System. Under this system, a full-time employee’s working time is generally limited to 8 hours a day and 40 hours a week (usually from Mondays through Fridays). There are two exceptions to this system: Flexible Working Hours System and Comprehensive Working Hours System. An employee can only be designated under either of the alternate systems if all conditions under the local laws are met. I need to stress that the laws on this are local because our China employment lawyers have recently handled a number of matters where the new client had secured flexible hours approval in some of the cities in which it had employees and just assumed this meant it had the same approval nationwide when it did not.

China’s Flexible Working Hours System is roughly similar to the salaried employee system in the U.S. but employees under this system are not necessarily exempt from all overtime pay. Under the Comprehensive Working Hours System, an employer may generally require an employee to work longer hours without overtime pay if the average hours worked in a certain “comprehensive calculation” period (e.g., a quarter) do not exceed the applicable legal maximum on total working hours for that period.

Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.

5. Know China’s vacation rules. China requires employers provide their employees (both Chinese and non-Chinese) with paid vacation days based on total years of service.

  • 1 year or more and less than 10 years’ service: 5 days of vacation
  • 10 years or more and less than 20 years’ service: 10 days of vacation
  • 20 years’ service or more: 15 days of vacation

Employers are obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of normal wages for each unused vacation day. So be sure to make all necessary arrangements for your employees to take their vacation days. Allowing your employees to carry over their vacation days to the next year (though not prohibited by law) will complicate things and is therefore not usually recommended.

6. Understand what you’re getting into before paying for a 13th month. Getting a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.

Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from deferring their individual income tax payments

7. Factor in social insurance and housing fund payments. China employers are typically required to contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all employees (but there are exceptions!). The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your location. If you are required by law to make the payments, you cannot contract out of your obligations by agreement with an employee and any such agreement will be disregarded by the authorities.

8. Make Chinese your employment contract’s governing language. You should clearly state in your employment contract that Chinese is the official language. It should also be in clear English so your foreign management and HR people can make good use of them in making their HR decisions. And make sure the Chinese and English versions actually line up. Employment documents with mistranslations nearly always work against the foreign employer in the event of a dispute.

China WFOE employment law
Get off on the right employment law foot when forming a China WFOE

Our China lawyers are constantly helping foreign companies set up companies in China — usually wholly foreign owned enterprises or WFOEs. As part of these WFOE formations, we help our clients with their employment matters that arise before, during and after the WFOE is formed. One of the things we always do for our WFOE formation clients is draft the employment documents they will need for their newly established WFOE.

When a WFOE is up and running, it needs employee agreements in place for all its employees. When we are called on to provide China employment law assistance to China WFOEs-to-be and freshly minted WFOEs, we usually recommend what we call an Initial Employment Package, which consists of the following for each employee:

  1. Employment Contracts
  2. Rules and Regulations
  3. Trade Secrecy and Intellectual Property Protection Agreements
  4. Sign Off Agreements, (acknowledging each employee’s receipt of the Rules and Regulations)

Having the above for your employees is crucial to operating as a WFOE in China with employees. If all you have is an employment contract, you are not fully protected. Specifically, your technical secrets or other trade secrets and the related intellectual property rights are not well protected as against your employees. And you likely will have no recourse against an errant employee no matter what the employee’s wrongdoing, since you do not have a set of China-centric Rules and Regulations to facilitate penalties or termination.

Your Rules and Regulations need to work for your specific locale(s), so if you have multiple locations in China, you need separate, standalone policies tailored for each location. Your employment contracts also should be localized. For more on the need to localize your China employment documents, see China Employment Law: Local and Not So Simple. We have worked with 1) companies with one WFOE and employees throughout China, 2) with companies with multiple WFOEs, one for each city, and 3) with WFOEs with branch offices in each city in which they have employees. Each of these structures require different documentation.

We also frequently draft non-compete agreements and these also virtually always need to be tailored to the specific situation, with that usually depending on the positions of the employees and their salaries and the shelf-life of the information that needs protecting.

Another common employment law issue we see with new WFOEs is what they can and should do with employees who work flexible hours. It is important to note that your new employees usually cannot be designated to work under China’s flexible working hours system until you have obtained the necessary government approval for the WFOE and it is up and running.

It pays to start with a strong employment law and document foundation for your China WFOE.

 

 

 

 

 

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!