Basics of China Business Law

China Stock Options and SIPs
China stock options and share incentive plans

Companies often use share incentive programs to motivate employees by tying compensation to their service. Though no foreign person can own stock in a private Chinese company, it is possible for a PRC employee of a foreign company’s Chinese subsidiary to participate in the foreign company’s employee share incentive plan (“SIP”). However, due to China’s currency controls, whether such an employee can actually “cash out” on the benefits of such a program depends on whether the foreign company is or becomes listed on a foreign stock exchange at the time of exercise.

The primary rules on PRC citizen employees participating in a foreign company’s SIP come from the Circular on Foreign Exchange Administration of Domestic Individuals Participating in Share Incentive Plans of Foreign Listed Companies [2012] No.7 (“Circular 7”,  issued by the State Administration of Foreign Exchange (“SAFE”).

  • Registration and Designated Account

Under Circular 7, a foreign listed company can offer SIPs to its PRC subsidiary’s employees in China via an incentive plan. The incentive plan must be registered with the local SAFE office where the foreign company’s domestic agent is located. This domestic agent can be the PRC subsidiary of the foreign listed company participating in the SIP (if multiple places, then the location of the headquarter) or a third party domestic entity that is qualified to provide asset custodian services.

Once the registration is complete, the domestic agent must open and maintain a domestic foreign exchange account designated for handling foreign payments and collecting money for all domestic individuals participating in the SIP of the overseas listed company. Any payments under the incentive plan must go through this special account before they go to an individual participant’s bank account.

Again, just like China employment contracts, we cannot emphasize enough how SAFE registration is highly local. It is critical to consult with the local SAFE office about specific requirements for registration before submitting an application. And just as is true of pretty much anything and everything in China, you do not want to get halfway through the process before you realize you are doing it wrong because this will make doing it right more difficult or perhaps even impossible.

  • Type of Awards Covered

Under Circular 7, share incentive plans mean any incentive plan where the shares of the foreign listed company are offered to directors, supervisors (officers who supervise directors and senior management of a company, a position created under the PRC Company Law), senior management employees, other employees of the domestic company or individuals who have a labor relationship with the domestic company. This includes employee stock option plans, share ownership plans, and any incentive plans permitted by law.

Though Circular 7 does not enumerate the specific types of awards to which it applies, the relevant registration form provides checkboxes for the following types of awards: stock ownership plans, stock options, stock appreciation rights, phantom stock, restricted stock (units), performance shares (units), and stock purchase plans.

  • Nationality of Participants

Circular 7 defines “domestic individuals” as directors, supervisors, senior management and other employees within the scope of article 52 of the Regulation on Foreign Exchange Administration who are PRC, Hong Kong, Taiwan, and Macao nationals, and other foreign nationals who have resided within China for one year on a continuous basis, except foreign diplomats in China and the representatives of any international organizations in China.

  • PRC Employees and Foreign Private Company Incentive Plans

Certain special rules apply to special purpose vehicles (foreign companies established or controlled by PRC residents or organizations) and PRC law and Circular 7 are silent on domestic individuals participating in purely foreign private companies’ SIPs. This does not mean Chinese individuals are not allowed to participate in a foreign private company’s SIP, but the lack of clear legal authorization makes it practically impossible for PRC individuals to receive benefits or awards under those plans if the foreign company is not yet public by the time of exercise.

And again, because SAFE registration is so highly localized, even though the law does not require registration of a private foreign company’s SIP, it is advisable to consult with the local SAFE office and attempt registration anyway. It doesn’t hurt to ask.

A foreign company with a concrete plan to become publicly listed in the near future can enter into an agreement with its employees in China to offer stock option or other awards. If the company does go public as planned, such awards can then be registered with SAFE and special accounts can be created to process payments in compliance with PRC laws. However, when entering into such agreements, the company should also make sure its employees in China understand that if the company does not go public, the employees may never receive SIP related proceeds due to China’s foreign exchange control rules.

 

 

China Design Patents
China Design Patents

Design patents are increasingly becoming an essential component of our clients’ China IP portfolios. They’re reasonably priced, don’t take that long to acquire, and provide pretty good protection.

That said, it’s important to understand the limitations of a design patent. A design patent does not provide protection for a product’s functionality or inner workings. It does not protect a product’s manufacturing process. It does not even protect the materials or components used in a product. The only thing a design patent protects is the external appearance of a product. For this reason, the application for a design patent is short and sweet, with the substantive parts limited to orthographic drawings of the design and a brief description.

The main reason design patents can be acquired with relative ease in China is that they are not substantively examined. China’s State Intellectual Property Office (SIPO) only examines design patent applications to confirm that the drawings and description meet formal requirements, i.e., adequately describe the design. SIPO does not search to see if the design is the same as or similar to prior art. That sort of examination only takes place if the design patent is challenged.

Like other patents, design patents in China have a requirement of absolute novelty. If you have already disclosed or commercialized a product anywhere in the world, it is not eligible for design patent protection in China. This is a marked difference from trademarks, which can be registered at any time regardless of when use actually began. To be sure, it’s almost always a good idea to file a trademark as soon as possible, even before use. – it’s just not legally required. Design patents are also different from copyrights, which are protected at the time of creation even if they’re never registered. This disjunction can be confusing, especially when aspects of a design could (theoretically) be covered by multiple forms of IP. For certain products, the appearance of the product itself may be protectable under trademark, copyright, and patent regimes. That is rare, but it can happen and it lulls some of our clients into forgetting that though they are legally allowed to wait on filing a trademark or copyright (no matter how often we tell them not to wait) if they wait too long to file a patent they may be legally barred.

Once our clients are ready to move forward with a design patent application, we send a list of questions pretty much as follows:

  1. Please provide the name and passport number (if not a PRC citizen) or national ID number (if a PRC citizen) of the person who designed the product. If you commissioned a design firm, then the name should be that of the person at the design firm.
  2. Please provide the priority date, if relevant. You would only have a priority date if you had filed a patent application in the US (or some other jurisdiction) for this design in the past 6 months.
  3. If you have filed a previous application in another jurisdiction, we will need a copy of the filing documents.
  4. Please provide a set of formal drawings for the design. Assuming that you want the design patent to cover all sides of the product, then we’d need an orthographic projection of all sides (usually 6 sides: top, bottom, left, right, front, back). The drawings cannot contain dotted or dashed lines, or shading to indicate perspective.
  5. Please provide a brief (one-paragraph) description of the name and use of the product incorporating the design and the essential features of the design.

Like I said, short and sweet.

China e-commerce law
Earlier this week, in China E-Commerce: Resistance is Futile, we set out what will likely be the new rules for foreign.

I could not have scripted better responses to that post as I personally received emails from what I would describe as “both ends of the spectrum.”

The first email is from a European businessperson I know who has been doing business with China for 25+ years and living in China for at least a decade. He has become pretty cynical about China and the focus of his email was on how China is setting everything up to “screw us foreigners”: Here is his email:

Great post as usual. It nicely encapsulates what I see happening here with everything. China is re-writing its laws to make its own companies rich and to screw us foreigners.

On the flip side, I got the following email from a very experienced China lawyer essentially saying nearly the opposite:

Exactly. The intelligent way to approach China is to figure out what is their plan and then work that plan to your advantage. Fighting against the plan is futile. Working with the plan can result in a lot of money. Google decided to fight, and they are gone. Microsoft finally decided to go with the plan and they are still in the middle of the China system.

When I say these sorts of things I get accused of being too negative and I would bet you will get that reaction to this post. But I do not view it negatively at all. It outlines a clear plan to success in China. It’s just that the plan follows a basic path outlined by the PRC government and Alibaba and the other rules of the PRC Internet. There is lots of money to be made and there are many things to be done to make the deals and to protect IP and similar.

That was our exact point with the post. There are great opportunities to make money on China e-commerce but to do so you must follow China’s rules. You can complain about those rules all you like, but the real issue is whether you are going to jump in and seize the opportunity (flawed though it is) or not. What’s your answer?

Earlier this year, I attended Alibaba’s Gateway ’17. The theme of that event was that there is easy money to be made by Western companies selling their products on Tmall and on Taobao. There is most definitely a lot of money to be made but it is debatable how easy it is to make it. I don’t know about you, but I doubt that any of our long list of clients who are making money in or from China — be it via China e-commerce or otherwise — would ever claim it to have been easy. And yet, I also doubt that any of them would say that it has been so difficult as to not be worth it.

The bottom line is that selling your products to China consumers via e-commerce will not be as easy or as cheap as selling your products to U.S. or EU consumers. But is that enough to stop you? In our next post, we will talk about what you should do to protect your IP before you start selling online to China.

 

China WFOE Formation
How to name a China WFOE

Strange but true: WFOE formations are seasonal and fall is for our law firm always the busiest time of the month for WFOE formations. Like clockwork every year, companies come to us in September and October seeking our help in getting their WFOE formed “by the end of the year.”

This plethora of WFOE formations has meant a correspondingly large number of e-mails from our China lawyers to our clients explaining the steps required to form a WFOE in China. Because these emails are helpful to anyone forming a WFOE in China or even just considering doing so, I will from time to time run some of those on here. Today’s email is about choosing a name for your WFOE.

It is necessary to select a Chinese language name for your WFOE. In choosing the name, please note the following:

1. In China, only the Chinese language name has any legal status; as a legal matter, the English is not relevant. This means you can use any English language name you want.
2. Chinese company names follow this rigid structure: [City of formation] Company Name [business type] [Company Ltd.]
So, an English equivalent of a typical Chinese company name would be: Shenzhen ABC Consulting Co. Ltd.
The elements in [] square brackets are fixed by the local government. This means the only thing we need determine now is the Company Name. Since as you can see, company names can get rather long, it is usually best to limit the Company Name part to 3 or 4 Chinese characters at most.
3. The company name must be different than any other company registered in your same kind of business. It is often surprising how many good names are already taken. For this reason, the local authorities require we submit AT LEAST five alternative names and they (and we) prefer ten alternatives if possible.
4. There are two approaches to selecting a Chinese company name. You can pick a descriptive name or you can pick a name that has no meaning but is intended to reproduce only the sound of the parent company name. When descriptive names are used, investors often make the mistake of choosing names that are too long. As noted above, the name should be limited to three or at most four Chinese characters.
5. You will need a native speaker of Chinese to assist you in choosing the names. Some companies simply work this out with their current staff. Some companies hire a public relations or a branding company to work with them on the issue. Note that your Chinese company name will become your identity, so a careful choice is advised. We can give you names of some branding companies with whom we have worked on China matters.
6. When you have chosen your names please submit them to us for a preliminary review. We check to see if there are any obvious conflicts with existing names and we also can give you some advice on the suitability of the names selected. We will then work with the local government to devise the full Chinese name to be used on the WFOE registration papers.
We realize this WFOE naming process can be somewhat confusing and so we urge you not to hesitate to reach out to any of us for further assistance on this or on anything else on which we are working to form your China WFOE.
China e-commerce laws
China e-commerce laws

The PRC National People’s Congress last week promulgated a second discussion draft of the PRC E-Commerce Law (电子商务法草案). If you are interested in commenting, you can find the new statute and a portal for comments here.

This statute is an attempt to gain greater control over the online consumer markets. These markets have exploded in China, in a situation where there is little or no regulation. The lack of regulation has not slowed development of e-commerce in the PRC. The success of online marketing is shown by the recent results of Alibaba’s November 11 “Singles Day” online sales event. As reported by ZD Net, the results were impressive:

Alibaba Group has raked in US$25.3 billion (168.2 billion yuan) in gross merchandise volume (GMV) from its annual online shopping festival, breaking last year’s record sales by 39 percent.

Held on November 11, its Singles Day shopping bonanza this year involved more than 140,000 participating merchants, including 60,000 international brands. Some 165 of these each generated more than US$15.1 million (100 million yuan) in sales, including Gap, Nike, and Samsung, with 17 merchants exceeding US$75.4 million (500 million yuan) and six surpassing US$150.9 million (1 billion yuan) in sales.

Japan, Australia, and Germany were amongst countries with the most sales selling into China during Singles Day this year.
At its peak, Alibaba processed 256,000 transactions per second and US$1 billion (6.6 billion yuan) was processed within the first couple of minutes. In the first two hours, it registered US$11.9 billion (78.8 billion).

Overall, Alibaba processed 1.48 billion payments, up 41 percent year-on-year, and 812 million delivery orders via its logistics arm, Cainiao Network. This was 23 percent higher than last year’s 657 million delivery orders.”

As you can see, foreign products played a big part in the success of the Singles Day event. Section 5 of the Discussion Draft sets out the proposed rules for cross-border sales. The Singles Day even illustrates the way the Discussion Draft plans for the future of cross-border online sales:

1. Foreign retailers will not be permitted to directly participate in online sales in China. All online sales will be limited to Chinese owned entities that have obtained the required commercial ICP license. Though there had been some hope there would be a limited exemption to the ICP license rule for e-commerce produce sales, there is no hint of such a change in the Discussion Draft. The PRC government intends to continue restricting e-commerce sales to Chinese owned or controlled entities.

2. Foreign-owned operators of e-commerce platforms will also be excluded from operating in the Chinese market. Sales of foreign products will be forced to come into China through Chinese owned or controlled platforms.

3. The Discussion Draft provisions on cross-border e-commerce focus on ensuring cross-border sales comply with Chinese law and only approved products are imported into China and all taxes and duties on those products get paid. The Discussion Draft seeks to shut down online sales as a way to import illegal products into China and to shut down online sales as a method for evading China taxes and import duties.

4. The method for control proposed by the Discussion Draft is to create highly centralized e-commerce processing centers. The China (Hangzhou) Cross-Border E-Commerce Processing Pilot Area is an example of the ultimate goal. The idea is that these centers will handle the procedures related to e-commerce: foreign purchase, shipping to China, import into China with full compliance with all PRC applicable regulations on product approval, inspection and quarantine, payment of duties and taxes, and warehousing and distribution.

The plan is to funnel all cross-border e-commerce through a limited number of processing centers, all of which are controlled by the national government. These processing centers will also be under the control of a single e-commerce sales platform. The Hangzhou Center will be controlled by Alibaba, with competing online sales giants in China presumably establishing and controlling their own competing centers. This would be the opposite of the freewheeling approach that typifies e-commerce development in the U.S. It is though quite consistent with the current domination of retail e-commerce in the U.S. by a limited group of large players.

The success of the Alibaba event shows that the model envisioned by the Discussion Draft is already fully functioning. Foreign retail brands were excluded from direct sales. They were instead funneled through the single channel provided by Alibaba. Alibaba assumed all liability for compliance with PRC rules and regulations. No foreign entity was involved in any way with the actual direct sale of its product or with any direct relation to any Chinese consumer; all of this was handled by Alibaba.

This is the future of e-commerce in China. For foreign brand owners that want to penetrate the PRC online sales market, the Discussion Draft makes clear how the system will work.

Resistance is futile.

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.

 

China lawyersNot sure why but the number of frauds from China seems to be increasing. A lot.

I thought about that last week after our China lawyers received no fewer than three, but this morning was the kicker. I woke up to two of them. Five in one week has to be a record and this record did not come out of nowhere. The number has been on the rise for months. Anyone know why because I sure don’t.

Anyway, as a sort of public service, I am going to run two recent emails below and explain why I believe they are scams. I have changed them where necessary to protect the parties involved.

I’m with a small Nebraska company that sells organic towels and I’ve been reading your posts. We have agreed to basic terms with an import/export company in Xiamen named Xiamen ________ Development Co., Ltd. to sell them 30,000 towels. They have agreed to EXW shipping and to pay 40% upon signing and 60% before shipping. Still, I am concerned. They have asked us to come to Xiamen for signing and the contract does mention a notary, i.e., some of the “red flags” I’ve seen discussed on your blog, but not all. We’ve already spent $1500 on passports and visas, and we are about to book our flights/hotels (they didn’t recommend a hotel). How can we protect ourselves?

My response was as follows:

I am nearly certain this is a fraud so you have essentially two ways to protect yourself. One, just walk away and not go. Two, pay us to do some basic due diligence on this company. I am virtually certain the most basic of due diligence will prove this is a fraud, but if it doesn’t, we can take next steps.

How do I know this is a fraud? For all of the following reasons, none of which I mentioned in the email because there is always the possibility that I am wrong.

1. Why does a company in China need to go all the way to Nebraska to buy organic towels? They don’t and this alone is highly suspicious.

2. The name of the company is “__________ Development ______” and they are in the business of buying and selling towels? I don’t think so. Chinese companies are to a large extent required to list their business in their name and Development and towels just don’t seem to me to go together.

3. The name of the company ends in Ltd., which makes me think it is not a Chinese company at all, but a Hong Kong company. Believe it or not, I am not aware of a legitimate Mainland China company ever committing this fraud. Legitimate Chinese companies are expensive to form and they would have a lot to lose if reported for this sort of fraud. HK companies, far less so.

3. The Chinese company has agreed to pay 40% upon signing and 60% before shipping. Not sure what world you all live in but in my world and that of the Chinese attorneys I know, this sort of payment upfront from a Chinese company doesn’t happen. Like never, and certainly not with towels.

4. The Chinese company wants the American company to go to Xiamen to sign. This makes no sense. If anything, the Xiamen people should be going to Nebraska to sign, and while there they can check out the products on which they will be spending so much money. Wanting to meet in person happens on complicated deals all the time but not one involving the purchasing of towels.

5. The contract mentions a notary. Honestly, I’m not sure I’ve ever seen a legitimate contract come from China that asks for a notary.

6. The email said there were some of the “red flags” we have discussed on here, “but not all.” Other than the fact that the Americans are not being put up in a particular hotel chosen by the putative scammers, I truly do not know what more by way of red-flags would be required.

The other one was somewhat different but at its core, it gave me the same feeling. Here is that one, again with a few changes:

I have been contacted by a company in Yantai, China called _________ Investment Group / Yantai _______University). The person’s name is Wang Xi.

They have asked my company to design a University Campus in Yantai. As I am an Architectural company I assumed the contract was legitimate. I sent the contract to a lawyer who confirmed the contract seems real. I have not been asked to pay any money.

Today I received this email:

We are going through notarization formalities and he will need 2 weeks. After completing the notarization formalities, we will make the first advance payment as soon as possible.
Followed by this email:
The notary office has accepted the contract documents signed by us. Please find attachment for notarization document, please sign and mail to me.
I read the papers they asked me to sign and notice the name of the company wasn’t my company name. Do you have any advice?

Yes. Hire a lawyer who knows something about China as this reeks so much of fraud that I can smell it all the way here and I am in Spain right now [for this].

This one is a bit more difficult to prove just on the emails but, again, none of it makes much sense. Why does a University in China pick someone overseas to design its buildings when there are so many foreign architecture firms with offices in China? And again, what is it with the notarization? And this “university” just happened to get the name wrong on the contract? You don’t think that might be because it sends out hundreds of these contracts in the hopes just one company bites?

None of this smells right and asking some random lawyer who doesn’t breathe China contracts every day to determine the validity of the contract is a complete waste of time. Anyone can pull what looks like a contract off the internet, but that does not mean it is a real contract for China.

Anyway, just you be careful out there. Especially now.

China employment lawyer

China employment law is technical and getting technicaler (yes, I made up that last word but you know what I mean). See China Employment Law: Local and Not So Simple. It is one of the most consistent problem areas for foreign companies doing business in China and it has become a massive growth area for our law firm. As we are always writing, China wants harmony and China is a communist country. Combine those two and you have a country that wants to keep its workers happy, especially as compared to your run of the mill foreign company that operates in China and competes with Chinese businesses.

All of this combines to mean that if you have employees in China or you are thinking of having employees in China it is of paramount importance you have at least some understanding of what is required of you as an employer in China. This book, for the low low price of less than $20 in paper form, gives that to you. It is also sold as a Kindle version for $9.99, but you really should spend the extra $10 to be able to have it in physical form in your office for you and anyone else to be able to consult easily whenever necessary. I am writing about this book again today because we just learned that it is now available at Barnes & Noble as well as at Amazon.

Disclaimer: This book is written by our lead China employment lawyer, Grace Yang and we get a cut of every sale.

Our typical attorney-client interaction on China employment laws usually goes something like this:

  1. Foreign employer company contacts one of the China lawyers at my firm because it terminated an employee and that employee has either sued or threatened to sue, oftentimes over a technical violation by the foreign employer.
  2. One of our China employment lawyers looks at the case and determines the foreign company employer violated Chinese law in the termination and the employee would almost certainly prevail in his or her claim. See China Employee Terminations: Don’t Get Lazy.
  3. We explain the above to the foreign company employer and we learn the company is violating China’s employment laws with all of its employees.
  4. The foreign company employer wants its violations excised.
  5. We then conduct an employer audit to determine what other employment problems need fixing. See China Employment Compliance and Audits: THE New Big Thing.
  6. The employer audit invariably generates a laundry list of problems that require fixing.
  7. We fix the employment law problems, one by one.

Foreign company employers have so many employment problems in China not just because China has started getting so tough with such problems and not just because there is probably but one employee in all of China who does not understand the leverage they hold over foreign employers –and that one employee probably will immediately find a lawyer who will tell them of their employee rights? The small to mid-sized foreign company typically goes into China with maybe one or two foreign employees and one or two Chinese employees, none of whom know anything about Chinese employment laws (on the local, regional or national level) and all of whom are — naturally — focused more on getting the business off the ground than on complying with the letter of the multiple sets of China employment laws. And anyway, at this point they are usually a tight-knit group of founding employees who view themselves as much as founders as they do employees and who all get along with each other and view their futures with the company as bright. As the company grows, little to nothing changes on the China employment compliance front, mostly because nobody realizes how important it is to make the changes and because even if they did, there is nobody in-house who knows how to do it. Plus, why spend money on complying with obscure employment laws when there has never been a problem necessitating that? So employment law compliance gets kicked down the road.

But then a problem arises and a China attorney at my firm gets called — usually by someone high up in the U.S. or the Europe or the Australia office as opposed to someone on the ground in China. The person who calls us is often the head of HR, the CFO or the CEO who is trying to find out what is going on with HR in China and is receiving only vague or nonsensical responses and is starting to worry.

All of the above is my long-winded way of saying foreign companies with employees in China need to get on top of their China employment situations and stay there. Employer audits are the way to go in most situations, but in the meantime and as a supplement, it is critical someone at your company understand China employment law basics. Someone at your company needs to know enough to be able to spot your company’s China employment law issues before they blow sky-high.

The China Employment Law Guide is the book for that and you really really really should buy it and put it on your shelf. And when I say put it on your shelf, I mean you should buy the softcover version (not the Kindle version) so you can literally put it on your shelf. Heck, get more than one copy and give it to everyone in your company who manages your employees or plays any role in their hiring or their firing. This book is meant to be used for background and for reference and as a decision-making guide.

Just a little bit about Grace Yang, its author. Grace grew up in Beijing and excelled at and graduated from China’s best law school there — Beijing University. She then came to the United States to attend the University of Washington law school where she again excelled and graduated. Grace is my firm’s lead China employment and labor lawyer and she is the lawyer at our firm to whom everyone else goes for China employment and labor law questions. Grace is a licensed U.S. lawyer (she is licensed in both Washington and New York) and she splits her time between Seattle and Beijing.

Anyway, did I tell you that you should buy the book? Of course I did and you should. And while on the subject of shameless plugs (hey, come on, how many of those have you seen in our more than a decade writing this blog?), I would be remiss if I did not also mention that Grace will be putting on a webinar on October 26 on Chinese Employment Law Landscape: Key Issues and Staying Compliant in the Local Market. This webinar is described as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they have come via a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

Please join Grace Yang as she helps you better understand the Chinese employment law landscape. She will focus on helping you recognize key China employment issues and give you guidance on how to solve real-life China employment law issues and problems.

WHAT YOU’LL LEARN

This webinar will cover the following:

  • The basics of China’s employment law rules
  • How to draft an employment agreement that works for your China locale
  • How to draft China employer rules and regulations (aka employee handbooks)
  • The other agreements you should consider for your China employees
  • Frequently contested issues, such as overtime, vacation days, commission payments, and leaves of absence
  • Employee terminations
  • HR audits
  • AND MUCH MORE!

YOUR CONFERENCE LEADER

Your conference leader for “Chinese Employment Law Landscape: Key Issues and Staying Compliant in the Local Market” is Grace Yang. Grace heads Harris Bricken’s China employment law practice and contributes a weekly column about China employment law issues for the multi-award winning China Law Blog. Grace received her B.A. degree in law from Peking University and her J.D. degree from the University of Washington School of Law. She represents both China employers and employees in their China employment law matters. Grace recently published a book entitled The China Employment Law Guide.

How can you miss it?