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

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

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

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

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

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

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

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

 

 

 

 

 

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

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

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

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

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

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

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

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

Sorry.

China employee resignations
China employee separations are often a land mine

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

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

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

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

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

 

China employer auditNow is the time of year when we usually go full one with our employer-employee audits. The below is what we usually recommend to our employer clients for our audits. Due to China’s recent rash of employment law changes, the importance of these audits have increased in importance. Though not an exhaustive list, the below can serve as a good starting point. Going through the below will help you see where you are in terms of employment law compliance and, most importantly, what you should do to avoid future problems. Now is the time to do this because certain requirements must be satisfied by the end of the year.

  1. Employment contracts. Do have a written contract with every single one of your employees, including part-time employees? Are all of your employment contracts current? Are all your open-term employees on open-term contracts? Do all your contracts contain non-compete provisions while it is not necessary to include them?
  2. Employer rules and regulations. Do you actually have a set of employer rules and regulations? More importantly, does this document work for China? Have you given it to all of your employees? Have your employees signed an acknowledgment of receipt proving they actually received it? Is that form in Chinese?
  3. Female employees, especially those who are pregnant or nursing or are maternity leave. Are you providing the labor protections and conditions required by the relevant laws? Are you providing the required maternity leave? Are your employees on maternity leave being paid what they should be paid during the entire period of their leave? Are you extending the contracts of female employees who are in the specially protected class as required by law?
  4. Working time, rest and vacation days. Are your employees using up their vacation days each year? If not, can you still make arrangements so they can take their unused vacation days without incurring payment obligations on your part? Are you making sure your employees who are designated to work under the standard working hours system do not exceed their standard working time? Are you staying on top of your employees’ overtime? Are you current on the alternate working hours system renewal? Are you giving your employees on these systems enough rest and due consideration to their health?
  5. Employee remuneration. Are you meeting the minimum wage requirements? Do you timely pay your employees in full? When you withhold payment from an employee, do you explain the reasons to the employee and document the situation so you will be able to show your action was reasonable and lawful?
  6. Social insurance contributions. Are you making all mandatory social insurance contributions? How do you treat your part-time employees? Are you treating your expats according to the local law?
  7. Expats. Are you current on all paperwork for your expats? Are you providing the employee benefits as mandated by law?
  8. Last but not least, employee terminations. Are you handling all of your employee terminations according to the law? Do you document your employee terminations including so-called voluntary resignations in writing? Do you timely transfer your terminated employees’ files and social insurance accounts? Do you perform all your obligations upon employee departure, such as providing a Proof of Termination of Employment Relationship document?

Get started on this, NOW. Do not wait.

China employment law on pregnancyChina has many special laws/rules related to protecting female workers, especially those who are pregnant, nursing, or on maternity leave. For example, Chinese law generally prohibits employers from unilaterally terminating the employment contract of a pregnant or nursing employee or an employee on maternity leave. The only exception to this is that the employee may be unilaterally terminated due to the employee’s wrongdoing. Specifically, such employees can be terminated for any of the following:

  • Failing to meet relevant recruitment requirements during the probation period;
  • Materially breaching labor disciplines or the employer’s rules and regulations;
  • Committing a serious dereliction of duty or practices, such as engaging in graft or causing substantial damage to the employer;
  • Establishing an employment relationship with another employer which materially affects the completion of her tasks with the employer, or refusing to terminate such an employment relationship with the other employer after she is required to do so by the employer;
  • Has criminal liability imposed in accordance with the law.

If an employer wants to terminate a female employee but has no legally permissible ground to do so as a unilateral termination, the employer should seek to obtain agreement from the employee for a voluntary termination in exchange for severance. With a voluntary termination, the parties agree to a mutual termination with the “price” for the employee’s departure being a severance payment.

It should go without saying — but it is so important I will say it anyway, but when it comes to terminating an employment relationship with a female employee, you need to be super careful. Our policy with our clients is to err on the side of securing a mutual termination, paying severance, and getting a signed and enforceable settlement agreement, rather than risk months or years of expensive litigation.

Most foreign companies realize the difficulties inherent in terminating female employees in China (many learned this by being sued) but too few are aware of a similar need to be super careful when not renewing a female employee’s employment contract.

Consider this hypothetical: Employer and Female Employee enter into a written employment contract in year one for a 2-year fixed term. Two months before the end of year two, Female Employee provides Employer with a doctor’s note stating that she is pregnant. Employer ignores this, thinking pregnancy status is not relevant in considering whether to renew Female Employee’s contract. Employer then notifies Female Employee in writing a month before the end of year 2 (assuming this meets the specific locale’s requirement on notice of non-renewal), that her employment contract will not be renewed. Female Employee then sues Employer, demanding she be reinstated. The Chinese court will side with Female Employee and require Employer re-hire her at her old job back until her nursing period ends. When a female employee is pregnant, on maternity leave or nursing, the law prohibits an employer from ending the employment contract even when the contract term expires; it requires the employment contract be extended until the end of the nursing period.

Now, let’s consider hypothetical 2: Female Employee never provides Employer with a doctor’s note saying she is pregnant until after Employer processes Female Employee’s separation. Female Employee never raises any objections or concerns during the entire separation process, but when that process is completed, she sues and demands reinstatement because she finds out she is pregnant. Unless Female Employee has convincing evidence that she did, in fact, inform Female Employer of her pregnancy status before the expiration of her contract, Employer will likely prevail.

Hypothetical 3. Same facts as hypothetical 1, except Employer does not ignore Female Employee when she submits the doctor’s note, but rather asks her whether it is okay to proceed with not renewing her employment contract. Female Employee orally says “okay,” but immediately after her departure, she sues Employer anyway.

Employer will likely lose and have to take Female Employee back as an employee. Indeed, because so many China employment laws cannot be contracted away, even had she given written consent to Employee not renewing her employment contract, she still would have a very good chance of prevailing. So in this situation as well, the safer path is usually to enter into a mutual termination agreement with the employee and provide the employee with at least the statutory minimum severance. Going this route will usually beat a strict non-renewal with clear documentation.

Bottom line: China has high expectations for how employers must treat their female employees, especially pregnant and nursing employees and those on maternity leave and employers that fail to follow China’s particularized laws on protecting female workers tend to get burned.

 

Shenzhen employment law
Shenzhen employment law

To ensure smooth implementation of the measures on handling labor disputes and to “harmonize” the interpretation and understanding of the application of laws in employment cases, the Shenzhen labor arbitration committee recently released a summary of its meeting minutes to address issues regarding adjudication of labor disputes. Their summary is intended to be a guide to district-level labor arbitration committees within Shenzhen.

A quick aside. Though Shenzhen is in Guangdong Province, you should not assume the Guangdong provincial laws automatically apply to Shenzhen because they don’t and there are in fact many differences between the employment laws of Guangdong Province and Shenzhen City. As I am constantly mentioning on this blog, China’s employment laws are very localized and this is something of which you must always be aware.

The good news for employers is that the Shenzhen labor summary includes an employer-friendly rule regarding non-compete agreements and provisions. Specifically, if an employee breaches a non-compete, the employer can demand the employee return all non-compete compensation paid to the employee during the period of breach. The employer can also demand the employee pay contract damages and require the employee to continue to perform his or her non-compete obligations. So a breach by the employee does not suspend the non-compete agreement as the employer can choose to hold the employee to the non-compete until the non-compete period expires. If the employee breaches the non-compete again, the employer can demand the employee pay contract damages for the second breach. This is not exactly new, but it makes clear that employers have multiple remedies for an employee’s breaches of a non-compete: paid compensation, specific performance, and contract damages.

Though this is all good, Shenzhen employers still must proceed with care on non-competes. First, before entering into a non-compete with an employee, the employer should consider whether the employee is even eligible to sign a non-compete under Chinese law? If the answer is no, it will not be able to enforce the non-compete. And when sued for breach, China employees almost always argue that the signed non-compete is not enforceable against them because the employer is not allowed by law to impose non-compete restrictions on them. You should be prepared to rebut this argument.

Second, you must pay your employees consideration for their not competing during the entire term of the post-termination non-compete period. You will not be able to enforce your non-compete unless you make these payments and the required payments in Shenzhen tend to be on the high side. So before you execute a non-compete agreement or provision with one of your employees, you should consider the business and financial pros and cons of doing so.

Third, for your choice of remedies to work to their fullest extent, you should include a legally enforceable contract damages provision in your non-employment agreement or your non-compete agreement.

You should be aware that if you as an employer enter an agreement with an employee regarding an employee leave where the employee will not do work for you but will still get paid, you must pay the employee during this entire period. This is because your failure to pay your employees even during such a leave will give them the right to terminate their employment contract with you on the basis of employer abuse and to demand damages for being forced to leave employment.

Part time employees in China
Do not employ anyone in China without a written employment contract.

China requires an employer have a written employment contract with all full-time employees. But because China’s employment laws can vary so much depending on locale, there is no such universal rule regarding part-time employees. But for many reasons, no matter where you are in China, you should have written employment contracts with your part-time employees as well. The most important reason to have such a contract with all of your employees — full and part-time — is because it will be your best evidence to show what your employment relationship entailed.

Consider this hypothetical. An employer and employee orally agree the employee will work no more than 12 hours each month. The employee works in the finance department and she is allowed to make her own schedule. The employee does not record her attendance. The employer pays her on monthly basis and it pays for all her social insurance (just as it does for its full-time employees). It is unclear when the employee officially started with this employer, nor is it clear exactly when she ceased being an employee.  Around the time of her termination, the employer promised to pay the employee 1.5 months her monthly wages as severance.

The employee sues the employer for (among other things) damages she sustained for being employed without a written employment contract and for the difference between what she made in wages and the local minimum wage. How will the court likely rule?

Most facts of this hypothetical come from an actual case in Beijing. Let’s look at the Beijing court’s analysis here.

At the outset, it is important to note that the employer has converted the employee to a full-time employee by its own actions. How so?

First, Beijing mandates a 15-day payment cycle for part-time employees. This differs from the rules for full-time employees who are usually paid monthly. The employer violated the law by paying the “part-time” employee on a monthly basis and the employer’s payment cycle with this employee suggests the employer viewed her as a full-time employee. Note that the payment cycle standing alone does not determine whether an employee is full-time or part-time, but it is an important factor Chinese courts consider in determining an employee’s status. So you do not want to lump your part-time employees together with your full-time employees in terms of payroll. You should pay your part-time employees every 15 days at most, no matter when you pay your full-time employees.

Second, the employer’s failure to record the employee’s attendance made it impossible for it to meet its burden of proving the employee worked 12 or fewer hours each month and therefore made it impossible for it to prove she was truly a part-time employee. This flexible arrangement essentially set the employer up for trouble because the burden is on the employer to prove the employee’s working hours do not exceed the legal maximum for part-time employees. So foreign companies need to beware. Being too flexible (especially without anything in writing) is a common recipe for foreign company employer problems in China.

Third, the employer agreed to pay this employee severance at the time of termination of the employment relationship. In Beijing, employers are not required to pay part-time employees statutory severance when the relationship is terminated. The employer’s choosing to pay this employee severance notwithstanding its argument that this is a part-time employee actually backfired on them as it was yet another factor the court used to determine this employee had not been part-time.

Lastly, the employer contributed the full range of social insurance for this employee, but because Beijing does not require this for part-time employees, these contributions were considered as further evidencing the employee was full-time.

The court ruled this employee was a full-time employee and held that she was owed double her monthly wage for the time period she was employed without a written employment contract. Needless to say, the employee also should have been paid at least the local minimum wage because of her “full-time” status.

Just one very clear reason why you should have a contract with your part-time employees. And if you are going to have such a contract, you must make sure it makes sense for China and works under Chinese law.

 

How to Terminate a China Employee
How to terminate a China employee: make it mutual if you can

Terminating China-based employees is difficult. Article 40(2) of China’s Labor Contract Law permits an employer to unilaterally terminate an employee, with severance, if the employee is incompetent and remains incompetent after training or assignment to a different position. In practice though, Chinese courts tend to be very strict in applying this law and employers that fail to have “checked all the boxes” before the termination almost always face adverse consequences.

Consider hypothetical 1: The employer and the employee enter into a written employment contract in year 1. The employer also provides its employee with a written statement explaining its expectations and performance requirements for the employee’s position. The employee signs on that statement but the employee’s performance perpetually fails to meet the employer’s expectations. The employer unilaterally terminates the employee for “poor performance” and pays the employee statutory severance: three months salary, plus one additional month’s salary in lieu of advance notice. The employee sues on the basis of unlawful termination.

How will a Chinese court likely rule: This termination will almost every time be deemed unlawful because the employer failed to generate good contemporaneous evidence of its employee’s failure to meet the job requirements.

Now, let’s consider hypothetical 2. Same facts as above, except that the employer did yearly performance reviews and documented the results. These performance reviews indicated the employee was not cutting it and they were acknowledged and signed by the employee. Then during the next 6-month period, the employee did nothing to improve her job performance and it became clear the employee was not going to get better at her job. The termination notice in year three was the same: unilateral termination of the employee with the same amount of severance for “poor performance..”

In this scenario, the employer did a better job documenting the employee’s incompetence but it will still almost certainly lose. The employer will lose because it did not follow the law in making the termination decision as it did not provide the employee with any training so she might improve at her job nor did it ever assign her to a different position. For these reasons, the employer will lose for failing to meet its burden of proof regarding the need to provide a failing employee with training or a different position.

Hypothetical 3. Same facts as above, except: during the 6-month period before termination, the employer worked with the employee diligently to come up with a corrective plan for improvement. The employer worked with the failing employee on correcting her work errors, on monitoring her work progress and on providing her with ample training, all of which the employer documented clearly in writing.

Will this employer prevail in a legal proceeding initiated by the employee? Probably yes. I say “probably,” for two reasons. First, generally speaking, if there is a workers union, the union needs to be consulted before a unilateral termination decision can be made final. Failing to go through this step may subject to the employer to liabilities for unlawful termination. Second, even assuming there is no workers union, there may still be additional requirements imposed by the local authorities and those will need to be followed as well.

Your outcome from your termination decisions will, of course, depend on the facts, including where your company and your terminated employee are based. Note though that even in the last hypothetical the multiple hoops with which employers must jump through to satisfy their burden of proof oftentimes makes sense even for employers that have followed all termination steps to come to a mutual termination agreement with their terminated employee to avoid the legal battles altogether. The more you do right, the less you will usually need to pay.

 

 

We are always emphasizing on here how you need a China-centric contract when doing business in China or, in most cases, even with China. See China Contracts: Make Them Enforceable Or Don’t Bother. This holds doubly true for employment contracts with China employees because everything about such agreements is highly local. If you are having someone in China other than a company performing services for you, you need both your own entity in China (See Doing Business in China with Deportation or Worse Hanging Over Your Head) and a China specific written employment contract with each of those individuals.

China employment law
Don’t let your China employment agreement get lost in translation

And though I should not have to say this, translating your existing employment agreements into Chinese is not going to cut it — not even close. Yet just about every month some foreign company (almost invariably an American or Australian company for some reason) or an executive with such a company (again, almost invariably American or Australian) will come to one of our China employment lawyers with a problem involving a foreign country employment agreement that was translated into Chinese.

The below are some of the common examples we see where a foreign contract/foreign mindset does not jibe with the China employment law reality.

  1. The employment agreement makes clear the employee is being hired on an at-will basis, which means he or she may be fired for “good reason, bad reason, or no reason at all.” This generally works in the United States and in a few other countries around the world, but it absolutely positively does not work in China and putting such a provision in your employment contracts can and often is used as evidence to support a wrongful termination claim, so please just skip it. Terminating a China-based employee nearly always requires good cause and far too often companies that put these at-will provisions in their China employment contracts actually believe what they say and end up in big trouble for wrongful firings.
  2. The employee is expected to work whenever needed to get the job done. This can sometimes work for certain China employees provided various specific conditions have been clearly met, but putting this sort of provision in a contract is not a way to meet those conditions — it is yet another red flag for China judges when you get sued by one of your employees. For you to be able to use your China employees after hours without having to deal with overtime provisions, that employee must (1) have been cleared by the appropriate labor bureau authorities as eligible to work under an alternative working hours system, (2) have specifically agreed in his or her employment contract to work under such an arrangement. Note also that clearance for one of your employees being able to work under an alternative working hours system typically lasts for only a year, depending on the locality. Note also that the alternative working hours system cannot be used with most employees and that means they must work under the standard working hours system which requires overtime for anything beyond 8 hours a day and 40 hours a week. Getting an employee to consent to this without government approval does not work.
  3. The employee agrees to adjudicate all employment-related disputes through arbitration. This does not work if you try even to limit your employees to only labor arbitration and it certainly does not work if you try to require your employees to arbitrate disputes against you in your home country or really anywhere outside the jurisdiction where they are employed. I surprisingly often have to tell American companies that putting a provision in a contract with a China employee that United States law will apply and all disputes must be resolved in some U.S. city has the same likelihood of success in China as would a provision requiring an Omaha employee be bound by Chinese law and Chinese jurisdiction, which is exactly zero. Think about it. Is any American jurisdiction going to let you hire someone and pay them pursuant to China’s minimum wage requirements? Of course not, and the reverse is equally true.
  4. The employee agrees to a non-compete that comes into force after termination of employment and the consideration for this non-compete is the promise of employment. This generally works in the United States (though not in California), but in China, if you want one of your employees to be bound by a non-compete provision, you must pay them consideration for their not competing during the entire term of the post-termination non-compete period. For example, a sign-on bonus may not be consideration for a China non-compete; the (former) employee must receive compensation via bank transfer on a monthly basis after termination for your non-compete to hold.

Provisions like the above send strong signals to your employees, to China labor bureau authorities and to China’s courts that you do not understand how China’s employment laws and you are not willing to make the effort to comply with them. This increases both the odds of your having China employment law problems and the odds of your employees suing you when such problems arise. And as mentioned above, having these unenforceable and illegal provisions in your China employment contracts also tends to prejudice judges against you when you are actually sued.

Bottom Line. Use a China-centric employment agreement with all of your China employees.

Check your China employment contracts
Check your China employment contracts

Do you check your employment contracts? A company in Shenzhen wasn’t careful in checking theirs and it had to pay an employee nearly 150,000 RMB as contract damages for unpaid wages and an additional nearly 3,000 RMB for overtime compensation. In the end, this company had to pay this one employee nearly 50 times more than what was actually owed. Before I discuss this case and what you should do to prevent the same thing from happening to you, let’s quickly review relevant China employment laws.

An employee can demand its employer pay contract damages pursuant to the parties’ employment agreement. The law only imposes restrictions on employers imposing contract damages (similar to and called liquidated damages in some countries) on their employees, but an employee can collect contract damages from an employer under certain circumstances. At the time of termination, unless there is a law to the contrary, the employee can demand contract damages in addition to the applicable statutory severance. But again, be careful, this is just the general law in Guangdong tvince and there may be exceptions and, as is pretty much always true when dealing with China employment laws, there are local variances.

Now back to the case I mentioned above. In that case, the Shenzhen employer and the employee entered into an employment contract under which the employer agreed to pay its employee 50 times any missed/miscalculated base salary and overtime pay. In other words, for every Yuan the employer is short in wage payments, the employee must be paid 50 RMB as a penalty. When the employment relationship went awry, the employee sued and sought nearly 150,000 RMB in contract damages for having been shorted a bit under 3,000 RMB owed to him. The trial court — The People’s Court in Baoan District — sided with the employer on this claim, concluding that this damages provision did not comply with the employment law and the amount far exceeded the actual amount owed to the employee. It then applied a “fair” standard for damages and ordered the employer to pay the owed wages plus an additional 25% of those wages as damages.

The employee appealed, arguing that the Baoan court had no legal basis for its ruling. The employee argued that the employer intentionally included this damages clause in the employment contract to make the job look more enticing and it would not be fair to allow the employer to be released from a contractual obligation it had created. The employee also argued that China’s freedom of contract laws called for enforcing the contract.

The Shenzhen Intermediate People’s Court determined the damages clause did not violate any mandatory laws or social interests and it reflected the parties’ true intent. The employer was the more powerful party and the employee an ordinary worker with only minimal bargaining power. The contract damages provision was therefore enforceable against the employer and the employee was entitled to the full amount of contract damages.

If the Shenzhen employer had been careful about what it allowed into this employment contract it could have avoided this penalty altogether. Our China employment lawyers regularly audit the employment records of foreign employers in China and this means we frequently see employment contract provisions that heavily favor the employee. One of the most common things we see is for the English to say one thing (that’s good for the employer) and the Chinese to say another (that’s good for the employee). This is a problem because the Chinese language controls.

Do your employment contracts contain a “surprise” clause that would potentially expose you to unwanted liabilities? Now is the time to check to make sure.