Autonomous VehiclesDevelopment of the self driving car is the centerpiece of the Chinese government’s plan to redesign its manufacturing and technology sector. The Chinese have coined the term Intelligent and Connected Vehicles (ICV) (智能网联汽车)as their own technical term for describing the China version of what is an international race towards a difficult technical goal. The ICV is an ideal goal for China because it combines elements of all three of its current key technology programs: Made in China 2025, Internet+ and the Artificial Intelligence Strategic Plan.

As is typical of the Chinese system, the central government seeks to place itself on the top of the system, providing guidance and control from the top down. In furtherance of this goal, the PRC Ministry of Industry and Information Technology together with a number of related PRC agencies just issued a comprehensive set of national guidelines (建设指南) to provide the framework for development of ICVs in China.

The full set of guidelines is as follows:

(i) the National Guidelines for Developing the Standards System of the Telematics Industry (Overall Requirements) (国家车联网产业标准体系建设指南 (总体要求)). (June 2018)

(ii) National Guidelines for Developing the Standards System of the Telematics Industry (Intelligent and Connected Vehicles) (国家车联网产业标准体系建设指南 (智能网联汽车) (December 27, 2017)

(iii) the National Guidelines for Developing the Standards System of the Telematics Industry (Information Communication) (国家车联网产业标准体系建设指南 (信息通信) (June 2018).

(iv) the National Guidelines for Developing the Standards System of the Telematics Industry (Electronic Products and Services) (国家车联网产业标准体 系建设指南 (电子产品和服务) (June 2018).

Though the Guidelines are detailed and complete, these are only guidelines. That is, this is a standard to be followed for the drafting of binding regulations and statutes. The Guidelines merely set out the path to be followed. The real work remains to be done.

To date, the most important regulation with substantive impact is the Intelligent and Connected Vehicle Test Management Practices (智能网联汽车测试管理规范) issued on April 12, 2018. Under this regulation, individual Chinese cities are permitted to develop standards that allow for on the road testing of autonomous driving vehicles on public roads. In response to this new regulation, Chinese cities that seek to host the development of ICVs are working with the players to host testing in their own city. The typical regional divisions that characterize Chinese technology development are already taking form:

a. Beijing has set up a licensing program for Baidu.

b. Shanghai has set a licensing program for Ali Baba.

c. Shenzhen has set up a licensing program for Tencent.

Each city is seeking to establish its own regional champion in this new area. To avoid being left behind, other Chinese cities are joining in to create their own ICV on road testing programs. For example, the city of Tianjin recently announced its own ICV testing program in collaboration with the Tianjin Intelligent Connected Vehicle Industry Research Institute. It is expected that other Chinese cities will follow suit, with all of them seeking to create a regional (not national) ICV champion.

This movement towards regional rather than national ICV champions is of course contrary to the MIIT goal. But the overall development of the Chinese vehicle market shows that regional rather than national development is the dominant trend. There is little prospect that the Beijing authorities will be able to do anything to stand in the way of these regional developments. Note that this move to city/regional based ICV fiefdoms is dramatically different from the experience in the United States. California recently opened its roads to self-driving car testing. In response, over 50 different manufacturers have chosen to conduct tests on California roads. Consistent with general U.S. policy, California makes no attempt to favor one company over the other. The market will choose the winner. The Chinese system is developing in exactly the opposite direction, where regional governments are picking their winner in advance. Developments over the next decade will show which system works best.

This then leads to my central theme in considering this issue. In the development of the ICV, technology is everything. The Chinese central and regional governments have plenty of money for developing this program. But that money will be used in classic Chinese fashion. It will be used to purchase land and to build factories. That is, the money will be used for hard infrastructure.

But the question for China is what will those factories actually do? Without the most advanced technology, the factories will do nothing more than build the sort of low standard electric vehicles that already clutter the roads of China’s second tier cities. For the second tier cities like Tianjin, the technology issue is even more acute because the players in Beijing/Shanghai/Shenzhen are not planning to share their technology. In this project, it is every region for itself. So each regional player is faced with a existential issue: after the factories are built, from where will the ICV technology come?

The search for technology will be intense. A huge company like AliBaba can perhaps develop the technology on its own. But that only works for the Shanghai fiefdom. What about everyone else? In response, Chinese regional governments, research centers and production companies will be scouring the world for the latest in ICV technology. Since China currently appears to be the major market for electric and ICV vehicles, foreign companies will need to decide whether or not they want to work in China. For those companies that decide to work in China, the real issue will come down to the issue we continuously raise on this blog. Will you retain control over the technology or will you give it away? Will you get paid for what you give away, or will you wrap it up as a gift?

This growing market for ICV technology is an opportunity for foreign companies. The demand will increase over time, making the market for the transfer of ICV technology to China a long term trend. The question for foreign companies is whether China is a market where a profit can be made or is it just a trap leading to bankruptcy?

Though U.S. companies continue to complain about IP theft and forced transfer of technology to Chinese companies, there are ways to avoid presenting your technology to the Chinese side as a gift. But avoiding this result requires two things. First, you have to accept that if you refuse to make the gift, the Chinese side may walk away and you will then be excluded from that market. Second, you have to do the work required to provide yourself with protection. That means entering into tough, enforceable contracts and making the required patentcopyright and trademark registrations in China. If greed blinds your eyes to the risk, then you will not do either and the result will be predictable.

China employment lawyersAs both a big-time sports fan and the son of an English Professor I’ve always reeled whenever anyone talked about “giving 110%.” So yeah, I realize something cannot be 200% dangerous — heck, I’m not even sure something can be 100% illegal — but I feel compelled to over-exaggerate (which word is also of dubious usage) to make sure this post gets read.

The reason I want to be sure this post gets read is because our China employment lawyers are seeing increasing instances where expat employees working in China are having their salaries “split” by their Chinese or foreign company employers. We strongly counsel our employer clients against doing this sort of salary splitting and we even more strongly counsel against expat employees accepting such splitting. For one very simple reason: it is illegal and it puts you at great risk.

Let me explain.

China employer taxes and benefits are steep. Very roughly speaking, for every 100 Yuan an employee in China gets paid, the employer pays out an additional 40 or so Yuan in employer taxes and benefits. In other words, about 40 percent. And for every 100 Yuan a China-based employee gets paid, the employer is supposed to withhold around 25 Yuan for employee taxes. In other words, about 25 percent. So imagine the savings if instead of paying an employee $100,000 on the China tax and benefit grid, you instead pay just $30,000. How though can a China employer achieve this savings while still paying its employees at market rate? I mean you cannot just pay a top tier foreign software engineer $30,000, or can you?

You can if you are willing to violate Chinese law by engaging in tax fraud. This is most commonly done by splitting the salary by paying the employee $30,000 in China and $70,000 via Hong Kong or the United States or wherever. Ten years ago — before China became considerably more sophisticated with its tax system and its ability to root out tax cheats, foreign SMES with employees in China (especially expat employees) would engage in this sort of salary splitting. You might have a company in Houston that would send an employee to China and have its WFOE in China pay that employee $30,000 in China while sending $70,000 each year from the US company to the employee’s US bank account.

China now employs various techniques to crack down on this sort of thing and in response to that it has become way less common to see a foreign company engage in such fee splitting. One of its best and easiest techniques is to simply call bullshit on the idea of a company being able to pay a top-tier expat software engineer $30,000 a year. The other is to offer a tax amnesty to your just- terminated employee to get him or her to report your tax fraud. Then armed with that, China will not so politely demand you immediately pay it all past taxes and benefits, plus interest, plus massive penalties.

But while foreign companies are for the most part ending illegal salary splitting, Chinese companies have been taking it up with somewhat of a vengeance. Ten years ago, it was rare for an expat to work for a Chinese company in China, but today that is commonplace. But it is also commonplace for Chinese companies to be unhappy/reluctant about high expat salaries and having to pay full taxes and benefits on that. This has led our China employment lawyers to now see a slew of expat employees being offered $100,000 with $70,000 paid to them through Hong Kong.

This has also led Chinese companies to come up with some very creative justifications for their illegal actions, in an attempt to quell any expat disquiet about participating in tax fraud. Their first “line of defense” is usually to say “everyone does this and your American lawyers simply don’t know China.” When this doesn’t work, they often propose the expat employee become a director or an officer of the Chinese company’s Hong Kong entity and get paid the $70,000 for doing that. Yeah right. Anyone who knows China law enforcement, especially China tax law enforcement, knows this is never going to fly. See this Forbes article, China’s Tax Authorities Want You.

What we are also seeing, most unfortunately, are a slew of expat employees accepting such split payment contracts to their massive detriment. We see this when the expat employee writes one of our China employment attorneys  for help against their China employer who just fired them or who is not actually sending any of the promised money via Hong Kong. These expat employees want to sue their China employer as though they have an employment contract for $100,000, when of course they don’t have such a contract because the Chinese employer is smart enough not to have put anything in writing about the $70,000 that was to have been sent from Hong Kong. Seriously, who is dumb enough to put their own tax fraud in writing?

This sort of non-payment has become so common I am now of the view that many (most?) China company employers that split salary payments do so not so much to engage in fraud as against the Chinese tax authorities, but rather to engage in fraud as against their expat employee. More than half the time when we get an email from an employee seeking our help in getting their $70,000 split fee payment, the employee has been working for her or his China employer for more than a year and that means their China employer saved about $100,000 over the last year (the $70,000 salary plus the approximately $28,000 in employer taxes and benefits it never had to pay) without violating a single law.

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

Then there are the instances where the employer does pay the employee out of country but stops for a while and then stops paying the out of China portion or fires the employee. The employee contacts our China employment lawyers believing he or she can sue his or her employer for damages based on a $100,000 salary. But how can they do this when their employment contract says their salary is $30,000? Are they going to stand up in a Chinese court and say, “excuse me, your honor, I know the contract says only $30,000 and I know my taxes show I have been paying income taxes on only $30,000” but this employer and I were together engaging in tax fraud against the Chinese government and so I just really feel like I am entitled to have this court enforce the oral agreement my employer and I used to defraud the Chinese government. Yeah, right.

All this very much reminds me of how in the old days when foreigners were not allowed to own real property in China they would buy real property in the name of their Chinese citizen girlfriends (it was pretty much always guys) to get around this prohibition. Then, once the girlfriend had the property, she would break up with her foreign boyfriend and keep the property, insisting that it was a gift. The foreigners would then contact my law firm wanting to sue their exes and we would have to tell them how we viewed that as folly because they would need to argue to the Chinese court that they had bought the real estate not as a gift to their girlfriends, but to have their girlfriends illegally hold the property in a sort of trust for them. Yeah, right.

Our Chinese employment lawyers frequently help expats with their China employment contracts. See China Expat Employment Contracts Because They Matter. A Lot. Even when we are not retained, we like to stay in touch with those who wrote us for employment contract help just so we can know what happens to expats who negotiate their own employment contracts. The below is an email we have used for those who admit to having entered into a split payment employment arrangement:

What your employer has done here is 100% illegal and it puts you at risk. Both you and them are engaging in tax fraud but all that should matter for you is that you are engaging in tax fraud — assuming your employer actually pays you outside China, which they often do not. Your employer may claim otherwise but there is no doubt about this. You are supposed to be paying China income taxes on all of your earnings attributable to your work as a China expat employee. Plain and simple. But under this arrangement (again, assuming you do actually get paid outside China what you have been promised) you will not be doing that. If I were you I would go to my employer and insist it change this payment plan and if it does not, I would consider getting a new job, and fast. Just this week I wrote here how China is — in response to the US-China trade war- – stepping up its hunt for Americans violating China’s law just as you are doing. Do you really believe China would not love to call out and penalize Americans right now for tax evasion?

I am sorry I have to be such a downer, but if you were to end up in jail or deported I would not want it weighing on me that I did not at least warn you about your risks.
Expat readers, please consider this post your warning.

China company chop

It is always a good idea to have your Chinese counter-party “chop” or “seal” your China contracts with their official China company chop. It has been more than five years since we blogged about what constitutes an official China company chop and it seems like our China lawyers are getting an uptick in requests for us to explain how to discern what is and is not an official China company chop. This post is a response to those emails and a necessary update to our previous posts on China company chops.

Every contract with a Chinese company must be executed by a person at the Chinese company with authority and it must be chopped with the official company chop (sometimes also referred to as a company seal). However, there are many types of company chops. Which one should be used? How do you know if the company chop is real? What does a real China company chop look like? What does Chinese law require of a China company chop? What are some examples of fake company chops?

An official Chinese company chop on a contract says the Chinese company itself has authorized the contract. This means that the company cannot later claim that whomever signed it was not authorized to do so and so the contract should be deemed invalid.

The rules/requirements for Chinese company chops are different in every city, so there is oftentimes no way to know whether a company’s chop is a proper, legally registered and authorized company chop just by looking at it. For this reason, the Chinese courts have decided that they generally do not care and if the document is chopped with something that purports to be the company chop and if the signer of the document is either the legal representative of the Chinese company or a person with apparent authority to act on behalf of the Chinese company based on his or her business card the Chinese courts will usually not invalidate the contract based on a technical argument related to the validity of the company chop or the authority of the signer.

What this means in real life is that if you ever sue a Chinese company for breach of contract and the Chinese company tries to claim that the chop on your contract is not really theirs and its President (per his or her business card) did not have authority to sign on behalf of the company, it will almost certainly lose. Nonetheless, what this also means is that you will have one more litigation hurdle you must jump and on which you could conceivably fall. What if it is a mid-level manager who signs your contract and not the President? Your prevailing on your breach of contract litigation now looks less certain.

Since there are so many kinds of company chops, it is best to insist on the standard round company chop using red ink. Some of these company chops are numbered and some are not. This varies by district and is not an indicator of validity. The newish oval company chops in black and purple are not common and should be avoided for companies that want to take the cautious approach. Unfortunately, some districts have moved to using these oval company chops and so it can be a good idea to determine whether you are in one of these districts. Nonetheless, none of our China attorneys have personally dealt with a Chinese company that did not have access to a standard round company chop with a star in the middle.

The only way you can be virtually certain about the authenticity of a Chinese company chop is to do expensive and time consuming and difficult in-person due diligence. You can visit the head office of your Chinese counter-party and inspect the company chop there and then compare that company chop to the company chop used on previous contracts executed by the company and provided to you during your visit. For this sort of visit to be helpful, you need to be fluent in Chinese and know enough about Chinese law and business to be able to discern whether the older contracts you are being shown are real or not. As you can imagine, this sort of in person due diligence is not ordinarily done, other than on really big money transactions.

Better yet, you send a China attorney to confirm with the government that the company chop that will be used on your contract is actually the company’s real company chop. But this method too is usually reserved for only big money transactions because because getting an attorney to run to the local MOFCOM office is not going to be cheap or easy.

Our firm’s China lawyers are occasionally engaged to do one or even both of the two company chop verifiers described above, but for verifying company chops for more typical China contracts we usually suggest foreign companies do the following:

Ask the Chinese party to provide you with the following four pieces of information:

  1. The signatory’s title, in Chinese and in English
  2. The signatory’s name in Chinese characters.
  3. A scanned copy of the signatory’s business card, in Chinese and English [unless you already have a copy
  4. A copy of the Chinese company’s business license

Armed with this, our China lawyers cannot guarantee anyone that the company chop is indeed authentic, but we can at that point let our clients know whether we are comfortable or not with the chop. By this point we have almost certainly already done basic due diligence on the Chinese company and so we already know it is a legitimate company and so once we get the above information relevant to the company chop, it is the incredibly rare instance when we express discomfort.

The bottom line on China company chops is that so long as the company chop looks authentic and so long as the person signing the contract or document has apparent authority to act on behalf of the Chinese company, that is all that is normally required. Due to the variations from district to district regarding Chinese company chops, on all but really large transactions, it will usually not make economic sense for you to do much more than to get your experienced China lawyer (who must be fluent in Mandarin) the four pieces of information listed above and have them give the company chop a relatively quick perusal.

To a certain extent, China company chops are somewhat overrated. The big issue is whether you are dealing with a person in the Chinese company with authority to bind the company. Are you even dealing with the company and not some rogue employee or third party? Does the company even exist, using the name they have given you? Those are the real issues, and they require real work to resolve. The notion that “the company chop is everything” is no longer a wholly accurate representation of the current state of law in China. Finally, any company chop can be faked. So even if you know what the genuine chop looks like, you do not know whether the one you are looking at IS that chop or is rather a fake.

However, insisting that that any legal document be chopped is still required in China so the basic best practices described above should be used for all your China contracts.

Got it?

 

 

China WFOE lawyerIf you are an American company doing business in China, you don’t need me to tell you how so many things have changed for you over the last year or so, and so I won’t.

But I do need to tell you — somewhat urgently — that if you are operating in China without a legal Chinese entity, you need to stop. Like right now.

Back in March, we did a post, Doing Business in China with Deportation or Worse Hanging Over Your Head in which we discussed how “China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See also Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. Our thesis — based on what we were seeing on the WFOE front and on other crackdowns involving even things like bar fightsvisasexpat taxescannabis, and employment law — was that China was toughening up enforcement against foreigners and foreign companies in China on all fronts, but especially against Americans and American companies as a sort of a slow and not terribly public retaliation against President Trump.

With all the talk now about US tariffs against China, legal enforcement in China against American companies operating in China without a WFOE has gone into hyperdrive. One of our readers, herself a China lawyer, recently wrote me to let me know how ridiculous she thought I was for believing Beijing would “quietly” go after American companies. My response to her was that we had no idea whether China’s stepped up legal enforcement is being directed from Beijing or is more in the nature of a slow and quiet and yet widespread uprising against the United States being mounted by government officials throughout China.

We can debate who is leading this enforcement charge and even the reasons for it, but to me the most important thing is that if you are an American company and you are not in full compliance with Chinese law you are at greater risk now than you have ever been. If you are doing business in China, especially if you are doing business there “through” a Chinese citizen you are paying, you need to think long and hard about your China company formation options.

Whenever we write about how China is getting tougher with such and such a law, we invariably get emails and/or comments saying how idiotic and/or unfair we are for criticizing China for enforcing its laws. Just so the record is clear, we have not said that and we are not saying that; we are as neutrally as possible merely writing on what we are seeing and we would be more than happy to leave it to the legal philosophers to put these sort of real-life China business and legal issues into some larger context.

In addition to the stepped up enforcement of China’s WFOE requirements, we are also seeing a massive uptick in American companies forming Hong Kong Companies or consulting WFOEs in ill-advised efforts to get legal. So let me use this blog post to once again make clear, forming a company in Hong Kong does not do a thing to make your business operations legal in Mainland China:

Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

In fact, the more you get on the grid in China without actually doing everything the right way in China, the more you make your illegality more obvious and easier to spot. See Quasi-Legal In China. Not the Place You Want to Be andQuasi-Legal in China. Not the Place You Want to Be, Part II.

We are also hearing from many American (and some European companies as well, but we’ll save that for a subsequent post) companies that formed their WFOE in China the “fast and easy way.” Some less than reputable WFOE formation companies will tout how they can form China WFOEs quickly and cheaply and for only around USD $15,000 in minimum capital. What these WFOE formation companies typically then do is form your company as a consulting WFOE in an “easy” China city. Please don’t fall for this. If your WFOE is not going to be in the consulting business, it cannot legally operate as a WFOE in China and it will get shut down. See How To Form a China WFOE. Scope Really Really Matters, Part II. And if your WFOE is going to be operating in Xi’an you do not want it to be formed in Shenzhen, for just a whole host of reasons.

If you are not complying with Chinese laws it is important you move quickly to get into compliance. But it is also important that in moving quickly you not expose yourself to even more and potentially greater problems. To borrow from a famous legal quote, you should move to get legal in China with all deliberate speed.

China company formation done wrong is not going to be your answer.

What are you seeing out there?

incoterms, FOB, FCA, CIF, ECWInternational shipping terms are way more complicated and important than most realize and international companies and lawyers seem to constantly get them wrong. My law firm has had multiple cases where BOTH sides of a dispute had chosen the absolute worst shipping terms possible for themselves. In these situations, each side makes various arguments as to why the other side’s choice of shipping terms should prevail.

A few weeks ago, my Uber driver on a very long ride in Spain was a logistics coordinator who was lost that job during Spain’s financial crisis. Desperately wanting to improve my Spanish, I asked him all sorts of questions regarding logistics and at one point he mentioned that “almost nobody except the Germans” understands what shipping terms mean. He then laughingly regaled me with stories where companies from all over the world were dead-on wrong (to their detriment) about what they thought they had agreed to by way of shipping terms.

If you purchase product from China, you typically should not use FOB as your shipping term. Use FCA or CIF or even EXW instead. Get a copy of Incoterms and learn what the above shipping terms mean and use them exactly as specified. Do not use the UCC: Incoterms only. Do not edit the terms.

In 2015, there was a massive explosion at the Tianjin Port with supply chain losses of approximately $9 billion. Who bore the loss of that destruction. The product sellers or the product buyers? Did any insurance company pay for the losses? Or did they escape the obligation to pay because in fact no insurance covered the items sitting in the port waiting for delivery? Sure, incidents as big as the Tianjin port explosion are rare, but there are all sorts of other things that can make shipping terms determinative, ranging from sanctions to theft to tariffs.

If you are a foreign company that purchases product from China pursuant to a contract manufacturing arrangement your  completed product is probably packed into a container at the factory in China, then transported from the factory to the port by truck. The container sits in a processing yard at the port for a week or so and then is finally loaded onto a ship.

A lot can go wrong in this process. Consider risk of loss. Who gets paid if the container is lost? What if the truck carrying the container to the port has an accident and the entire shipment is destroyed? What if the container is stolen from the port? What if there is an explosion at the port and the container is destroyed? What if the ship sinks in a storm in the Gulf of Alaska? What if the container is offloaded and the same misadventures happen before the container is delivered to you, the buyer, at your facility in North America or Europe or Australia?

Your shipping terms will typically determine risk of loss. International shipping terms have been carefully developed over many years and they are embodied by Incoterms. What is Incoterms? I will let Wikipedia explain:

The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. They are widely used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers.[1] A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law or define where title to goods transfers.

The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts[2] worldwide.

“Incoterms” is a registered trademark of the ICC.

Incoterms cover virtually all important issues related to international shipping of goods and selecting a single Incoterms shipping term typically will resolve all important issues related to a shipment. For this reason, every buyer and seller who will be involved with international shipping must decide what term will be used and then comply with the selected term.

The choice of shipping terms determines who bears the risk of loss transfer. Many U.S. buyers make the mistake of choosing Free On Board (FOB) as their shipping term. They chose FOB to ensure the price of the product does not include the price of insurance and freight to ship the product from China to the U.S.

When they chose FOB, these inexperienced buyers do not usually realize they are not accounting for risk of loss. Under FOB, risk of loss passes only after the product has been loaded onto the vessel (crosses the rail). Since risk of loss transfers when the product crosses the rail, the buyer purchases insurance that covers the product at that point. Now ask yourself: who has the risk of loss from when the product leaves the factory until it is loaded onto the ship? The answer of course is that the factory has the risk of loss.

But Chinese factories almost never purchase insurance for the brief period between when the product leaves their factory and is loaded on the vessel. The Chinese factory just assumes the buyer has purchased insurance as if the risk transfers when the carrier takes delivery. But this is not true.

This means that during the period between delivery to the carrier and loading on the vessel, the risk of loss for the product is uninsured. If the buyer is aware that the product in uninsured, that is a risk that the buyer willingly assumes. The problem is that hardly any buyers understand that they are taking this risk with product they already have paid for — at least in part. Many Chinese factories demand full payment at the time the product is put into the control of the carrier. They do not want to wait until the product is loaded on the vessel since they can never be sure when this will happen.

The solution to this problem is simple. Use the right shipping term. As the drafters of Incoterms clearly state, for modern shipping by sea, the FOB term should never be used. The proper term is Free Carrier (FCA). Under FCA terms, risk of loss passes when the shipment is put into the custody of the carrier. It does not matter where the carrier takes delivery. It may be at the factory or it may be at the port. Since the buyer can be certain where risk of loss passes, the buyer can be certain it has obtained the appropriate insurance. The issue of insurance is not left to the seller. The responsibility and benefit of insurance rests on the buyer where it belongs.

Another problem our international lawyers often see are buyers that seek to create their own shipping terms. We see contracts where buyers provide that the shipping term will be FOB but risk of loss transfers only after the product is delivered, inspected and accepted. But because FOB means risk of loss transfers when the shipment is loaded on the vessel, this self-created language makes no sense. There is no shipping term that provides for transferring risk of loss under these terms and these buyers confused risk of loss with acceptance of the goods, two unrelated concepts. By providing internally incoherent contract language the buyers harm themselves. If the shipment is lost, will the insurance company pay? If it pays, will it pay the factory or the buyer? Who knows? If you want expensive litigation create your own shipping terms!

Bottom Line: Failing to use standard Incoterms shipment terms in the standard way will decrease predictability, Choose the right Incoterms shipment term for your situation and don’t modify it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

International Trade Lawyers False Claims Act
The False Claims Act can be radioactive

I and the other international trade lawyers at my firm will sometimes get asked by US importers about their obligations to make sure that the product they get from overseas truly comes from the country listed on the shipping documents. The short answer is that US importers are required to make sure the products they import are truly from the country listed on the import documents and a failure to fulfill this duty can lead to jail time, especially under the Trump administration.

The examples below are illustrative.

  • A US importer receives an e-mail from a Chinese chemical producer/exporter seeking to get the American company to buy the Chinese company’s chemical products, which are covered by a US antidumping (“AD”) order. The Chinese producer tells the US importer not to worry about the AD duties because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act. 
  • A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer then decides to be the consignee of the products and not the importer of record because US antidumping laws make the importer of record liable for AD duties and not the consignee. The Vietnamese government later closes down the Vietnamese facility for transshipping Chinese products and that leads the US government to prosecute the US consignee company for conspiracy to defraud the US government to avoid AD duties. The owner of the US consignee company is found guilty and sent to prison.

Transshipment is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and avoid liability and stay out of jail.

The US government is very serious about hunting down and prosecuting those who transship and, not surprisingly, the Trump Administration has made known its desire to vigorously transshipment claims.

What few realize is that there is a way for companies and individuals to profit from the transshipping of others. Title 31 of the United States Code, Section 3729 (G) (commonly known as the False Claims Act) provides that any person or company that “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” faces triple damages and an $11,000 penalty per claim.

Now here is where it gets interesting and where any of you readers can profit. Section 3730 of the False Claims Act provides a private right of action that allows anyone to sue on behalf of the US government for anyone else’s violation of section 3729. This private party merely need file a complaint and written disclosure of material evidence and information under seal in the Federal District Court to show that certain US importers and foreign producers/exporters committed fraud on the US government by transshipping products covered by antidumping and other trade orders so as to avoid the duties. This complaint and the evidence supporting the complaint are not served on the defendants. They are instead served on the US government, which has 60 days to decide whether or not to intervene in the case.

If the government decides to intervene and prosecute the action, the private party is entitled to 15 to 25 percent of any recovery.  If the government decides not to prosecute the case and the private party goes forward, the private party is entitled to 25 to 30 percent of any recovery.

The remedy in a False Claims Act case is triple damages and in many AD and countervailing duty (“CVD”) cases, especially against China, the missing AD or CVD duties can be well over 100 to 300% on imports over the last 5 to 6 years. By way of example, if total annual imports from the transshipment country are over $15 million, the total damages could be close to $200 million, with the party that spurred on the claim getting 30 to 40 million dollars of the government’s recovery.

If you are doing business with a person or company using transshipments to minimize US customs duties, you could be in very big trouble and you should contact a lawyer immediately. If you are aware of such transshipments by a company with which you are not doing business, you should consider contacting a lawyer to determine whether you might profit from your information.

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

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

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

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

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

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

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

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

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

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

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

 

 

One of our China lawyers got an email the other day that cited to a super old post we did on using third party hiring agencies in China. The reader then went on to essentially excoriate us for getting it wrong on China third party hiring. The email (modified a bit to protect the guilty) was as follows:

First of all congratulation for your blog, there is some great content on it. However i am very skeptical about the reasons you give for recommending labor dispatch services in China.

I have been studying this topic for quiet a while as my company initially needed to dispatch a staff in China to setup supply chain management in a Shanghai factory.

On your blog you mention there is the possibility of doing third party employment in China. However after checking with wo local China lawyers it appears this practice is illegal — it works so long as the government does not look into it.

A rew companies like _____ and ________ are openly illegally providing these third party employment services (I spoke with them). They offered to hire my staff upon payment of a monthly fee under their company name  and in fact the hiring would not even be done through their company, but rather through some third party Chinese company bearing an unrelated Chinese company name.

If a foreign company wants to setup operation in China for a long term staff through a third party hiring agency the only “legal” way is with a WOFE or a Rep office or a Joint Venture, but even then it is limited to only Chinese staff and only for six months  or  less 

I would invite you to clarify this or modify your view on this.

I was a nice as I could be with this person, but it was difficult, for the following reasons:

1. The post he cited to claim that we recommend using a third party hiring agency was about ten years old and it did NOT recommend using a third party hiring agency. It merely mentioned doing so as a possibility.

2. Since that post ten years ago, we have right here on this blog (and on many occasions) written how China is cracking down on  third party agency hiring. For instance, in early 2014, we did a post, titled, Getting Your China Employee Into Your WFOE From A Third Party Agency that began with this: “As China inexorably continues increasing its restrictions on hiring personnel via third party employment agencies (sometimes referred to as FESCO companies or as staffing agencies), our China lawyers are more and more being tasked with helping clients move their personnel from the third party hiring company to a newly formed (or even existing) WFOE.” Then later in 2014, in China Labor Dispatch Rules. Almost Fresh Off The Presses we reiterated the limitations of third party hiring agencies (again, in the very first sentence of the post): “China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing all sorts of confusion for foreign companies doing business in China or seeking to do business there.” Most

3. I got the strong sense that the person who emailed me was at least as concerned with our China labor lawyers giving his company free advice than he was with what our blog said.  My response to him was as follows:

Not sure even what you are talking about because we most certainly do not recommend that. Just the other day in fact I wrote the following to someone:

We mostly stopped working with third party hiring companies at least five years ago when it became illegal 98 times out of 100 and half of the other two times it is ill-advised. Then when you add in that many of the companies that claim to do this are themselves operating illegally and are mere brokers, you can see why we stopped writing about this industry.

The big flaws in using even a legal third party hiring agency to do your hiring legally is the cost of making sure it is legal and the lack of intellectual property protection. How will you protect the information you reveal to “your” non-employees hired by third parties? Chinese companies search out these non-employees and poach them specifically for the unprotected trade secrets they can reveal.

We now use various other work-arounds for our clients who want someone on the ground for them in China and yet want to avoid the cost and expense of forming a WFOE or a Joint Venture.Just to be clear, I do not know your situation and it is possible it is the two in one hundred. This area of China employment law is incredibly complicated and there is still room for third party hiring agencies to do this legally and the law might even vary depending on the jurisdiction. So it is impossible to know what is legal and what isn’t without really digging deeply into the facts and the applicable laws to determine. Which is why I list this as another reason why using third party hiring agencies typically oftentimes does not make sense, but sometimes it does.

Last year, our lead China employment lawyer, Grace Yang, did a post on the new rules for third party employment agencies in China, titled, China Labor Dispatch Rules: Why Did You Ever Think It Would Be Easy? In that post, Grace set out the three categories of “dispatched” employees China still allows to be hired by a labor dispatch agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

She then went on to describe the additional requirements for third party hiring within these three categories.

So, yes, it is still possible, but it is not easy and we never said it was.

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.