China lawyersAs many of you probably know, UCLA basketball players LiAngelo Ball, Cody Riley and Jalen Hill, were arrested in China last week on suspicion of stealing sunglasses from a Louis Vuitton store in Hangzhou. President Trump claims their fast release from custody stems from his having personally asked Chinese President Xi Jinping to intervene in the case.

Whether President Trump was or was not responsible for the quick release of these three players (I am convinced he was), what should those without such presidential connections do when similarly arrested in China. We recommend the following:

1. Contact your Nearest Embassy or Consulate. Your first step should usually be to contact your nearest embassy or consulate, but recognize that it will be limited in the assistance it can provide. Foreigners arrested in China are subject to Chinese laws, not the laws of their own country. This should be obvious, but not everyone knows this.

Your embassy or consulate should be able to help you with the following:

  1. Providing you with a list of local attorneys who speak your native language
  2. Contact your family, friends or employer
  3. Visit you in jail and provide you with reading materials and maybe food.
  4. Monitor your situation in jail and help ensure that you are being treated appropriately.
  5. Provide you with an overview of the local criminal justice process

2. Hire a Local Criminal Attorney. You will need a local attorney. This means if you are arrested in Qingdao you need a Qingdao criminal lawyer and not a Shanghai one. China has many terrific criminal lawyers and they usually require relatively low upfront flat fees to take on a new matter for a new client. This means it is usually relatively easy to find a good and cheap Chinese criminal lawyer, but few speak English.

It is absolutely critical that you get a good local criminal lawyer as quickly as possible. Far too often when our China lawyers get contacted regarding a criminal law situation in China, the detainee or the detainee’s friends or family believe that because the arrest was a “mistake” no lawyer is needed. Some claim they do not need a lawyer because they or someone they know has sufficient guanxi to handle the arrest lawyer-free. Even if these people are right (and they pretty much never are), it still behooves them to get a good local criminal lawyer immediately.

No ifs ands or buts: if you are arrested in China, you need a local criminal lawyer and fast. 

How do you find such a lawyer? That depends. By way of an example, one of our China lawyers was recently retained to find a criminal lawyer in a small Chinese city. This lawyer immediately emailed all of the China lawyers in our firm and we all emailed our China lawyer contacts in various cities to ask for the names of recommended Chinese criminal lawyers in this small Chinese city. The client ended up hiring a lawyer who was mentioned multiple times by the Chinese lawyers we know.

3. Contact Family and Friends but Keep Them Quiet

Sometimes you want your family and friends on the outside to scream up and down about your arrest. Sometimes that is the worst strategy possible. It is generally a good idea not to publicize your case unless your local criminal lawyer instructs you to do so. China is not going to release you because your hometown newspaper is saying you are being held unfairly. Instead, your publicizing the unfairness of your arrest might just cause the local prosecutor or court to double down. But see here for a case where the strategy was to generate bad publicity for the arresting country.

4. Hire an Attorney in Your Home Country (Sometimes) 

Our China attorneys get contacted by arrested Westerners maybe ten times a year. If the matter is something like a shoplifting arrest, we usually do little more than provide our client with a few tips and find them a good local criminal lawyer and sometimes good local translator. This is the case for nine out of ten. But in some cases — when the Westerner arrested is from the United States or Spain or Germany where we have our own attorneys — we do considerably more.

By way of one example, our firm a few years ago represented an American charged by China with massive financial fraud. We stayed involved in this case from its beginning through sentencing (note that more than 99 percent of those charged with a crime in China end up being convicted). For this client we did the following:

  • Found him a top-tier criminal lawyer. This lawyer did not speak Chinese and so we often served as the intermediary.
  • We often served as an intermediary with the US Consulate.
  • We would communicate with the detainee’s family in the United States
  • We gathered up key mitigating documents from the United States and other countries outside China.
  • Perhaps most importantly, we explained China’s legal system to the detainee and his family and, in particular, the huge benefits of admitting to the crime and setting up a procedure to reimburse those who harmed by the crime and a rehabilitation plan. We also explained China’s sentencing and early release laws and the importance/benefit of reimbursing the victims so as to get a sentence term that allowed for early release.

Bottom Line: If you or someone you know are arrested in China, take it very seriously and act quickly.

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

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

Get started on this, NOW. Do not wait.

China Court judgment and Hague Service
Move Along. Nothing to see here.

The China legal world was abuzz this last weekend about a Chinese court in Wuhan enforcing a California judgment against a couple of Chinese citizens. On one level this is indeed a huge deal, but on a practical level, this really does not change anything with respect to what you as an American company should put in your China contracts in terms of where your disputes should be resolved.

At least not yet, and likely not for a very long time.  

Since this blog’s inception, we have preached how terrible it is to draft a contract with a Chinese entity that calls for disputes between the parties to be resolved in the United States. That has not changed.

About a year ago, in Enforcing US Judgments in China. Not Yet, I wrote of how China had never enforced a United States court judgment.

At least once a month, one of my firm’s China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope.

I then went on to discuss how my firm’s China lawyers are often called on to conduct research on this very issue (usually for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from a recent memorandum on that topic:

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.

The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.

The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China rejected enforcement. Since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to China’s Supreme People’s Court for guidance and the SPC held that because there was no multilateral or bilateral treaty governing such matters between China and Japan and because the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will invoke the principle of reciprocity to recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

Earlier this year, in Is Now the Time to Take Your U.S. Judgment to China? I pondered whether China might be ready to start enforcing U.S. judgments and I talked of how I would love to see someone take such a judgment to a Chinese court to test this out:

I find it hard to believe that this decision regarding [enforcing] the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.

I will now discuss the Wuhan (Liu Li v. Tao Li and Tong Wu) case and explain why it has not changed the risk equation for enforceability to impact how you should be writing your contracts with Chinese companies.

This Wuhan case was before the Intermediate People’s Court of Wuhan City. The case sprung from a commercial dispute involving a plaintiff (a Chinese citizen) who paid USD$125,000 to two Chinese citizen defendants for shares in a California company and then got nothing, not even a return phone call. Plaintiff then sued defendants for fraud in Los Angeles Superior Court. Defendants were served with the complaint and summons in this case but they ignored it and the Los Angeles court granted plaintiff a default judgment. Note this was a dispute between Chinese Nationals on both sides and the dispute involved a United States sale of stock. In other words, the fact that it was a United States sale of stock means that it was wholly appropriate for a US court to reach a decision in the case and the fact that the dispute was entirely between Chinese Nationals gives a Chinese court every incentive in the world to enforce the judgment. The additional fact that the defendants certainly appear to be “bad hombres” (I apologize again for using that line but since I started with it I have to continue with it) is all the more reason to expect enforcement.

Plaintiff then took that default judgment to the Wuhan court to have it enforced there. The Wuhan court ruled it had jurisdiction because the defendants live and have assets there. The court ruled defendants had notice of the Los Angeles action and it also held that the Los Angeles judgment did not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Most importantly, the court found reciprocity between China and the United States (California?) and it also held that it should not consider the merits of the Los Angeles court’s ruling, beyond determining that it did not violate any China basic principle. The court found reciprocity based on the Robinson Helicopter case I discuss above. For more on the Robinson Helicopter case see Your Company Can Be Sued In China And That Matters.

This all sounds good right? But for the following reasons I am of the view that this changes little.

  1. This is just one case and it comes from an intermediate court in Wuhan. Are you willing to risk a $30 million contract by making it subject to U.S. court jurisdiction based on this one case out of Wuhan?
  2. Did this decision depend on reciprocity with California as opposed to the United States as a whole? If you are a Texas company are you going to be willing to risk a $30 million contract by making it subject to Texas court jurisdiction?
  3. The underlying case involved a dispute between two groups of Chinese nationals. The case only makes sense if the defendants have property in Wuhan. So the Wuhan court just takes this a dispute between two Chinese that should properly be settled in China. There is always a chance a Chinese court will enforce an arbitration award or a foreign judgment when the parties on both sides are Chinese. It is not at all clear this case can or will be extended to enforce a judgment in a dispute between a foreign party and a Chinese national and the Chinese side appears in China and strongly opposes enforcement.
  4. The the bad act in the underlying lawsuit occurred in the U.S. It is normal for there to be jurisdiction in the place where the bad act will occur. So this case is perfectly normal. Why would you sue someone in China for a stock transaction violation that takes place in the U.S.? It is just a strange accident of fate that the seller/defendant also had presence and assets in China. In fact, it is probable that the entire transaction was illegal under Chinese law because Chinese citizens are supposed to have government approval before investing overseas and it is doubtful these defendants had that approval. This likely illegality also probably colored the Wuhan court’s decision.
  5. The Wuhan court found reciprocity based on the Robinson Helicopter case in which a California federal court enforced a Hubei province court judgment. Wuhan is in Hubei province and the judgment it enforced here was from California. Would the Wuhan court have ruled the same way if Robinson Helicopter had enforced a Beijing judgment? Would the Wuhan court have ruled the same way had Robinson Helicopter been a decision out of Kansas? No way to know.
  6. Even if you get past the various hurdles above, there is a final hurdle which essentially neuters one’s ability to sue a Chinese company in the United States and then use that judgment to collect in China: service of process. China’s Central Authority and its courts have over the last few years begun dragging their feet so much when it comes to Hague Service of Process that those lawyers who do it (and one of the China lawyers in my firm does these all the time) have been discussing among themselves whether it is even possible. It seems China is taking years to effect Hague service of process on Chinese defendants in U.S. cases and it is quite possible that it is no longer effecting such service at all. Without proper service (or at best, with service that takes two to three years), how valuable is suing a Chinese company in the United States?

This Wuhan case arose from a highly unusual and unique situation. When our China attorneys insist on China-centric contracts, we are focusing exclusively on business activity taking place entirely or primarily in China. For example, take this same lawsuit. What if the stock were stock in a Chinese entity and the transfer was supposed to take place in China? Would it make sense to take that law suit to Los Angeles? And if it were to be brought in Los Angeles, would a Chinese court really be likely to enforce the judgment that results from it? Same for failure to deliver product manufactured in China. Same for violations of IP agreements or for violations of reseller agreements and for violations of JV agreements and so on and so on. If you are going to enter into a contract with a Chinese company and some or all of the goods and services covered by the contract are going to be made or provided in China, your situation is going to be 180 degrees different from the situation that gave rise to this Wuhan case.

What is the best way to resolve a dispute in China? Even if we were living in a fantasy world where service of process in an American dispute can be made quickly and easily (or even at all) against a Chinese defendants and the Chinese courts promptly enforce those monetary awards from U.S. courts, you must consider the cost and expense of a U.S. litigation. Consider the problem of evidence and proof if your contract is mostly or all about China. Consider all of these things and then ask yourself whether setting up your contract to require litigation in a U.S. court and then enforcement of any eventual judgment in that court would make sense for you on any particular contract, or even ever? In what circumstances would having to go to two courts be a good contracting strategy?

In the case where a tort has occurred in the U.S., the situation is more complex. The product was made in China but the damage occurred in the U.S. In that setting, a law suit in the U.S. makes legal sense. However, the question then whether the U.S. is the best place to sue? Is it likely that a U.S. style products liability award will be enforced in China against an unwilling defendant? These are important issues and far more likely to be situation specific than the issue of what to put in your contract. So in this respect, this Wuhan case does make it more difficult to figure out the proper way to proceed in China for certain kinds of legal disputes.

But not typically for commercial contracts regarding matters that will mostly or exclusively take place in China. China is not a colony of the United States or of any other country. We are no longer in the early 20th century where China was carved up into foreign spheres of interest and where foreign law was applied against the Chinese people. China is a modern country with an increasingly developed legal system. China is not what it was in the 1980s, where there was virtually no legal system that could be used to resolve disputes. The Chinese know this and its courts fervently believe this and they are offended by foreign parties who insist on applying foreign law and foreign dispute resolution to matters 100% conducted in China. For this reason, it will almost certainly never be the case that China’s courts will enforce foreign judgments for what is truly a China-centered business dispute. For example, if you enter into a Joint Venture arrangement with a Chinese company and you think you can resolve your intra-company joint venture disputes in the United States and have a Chinese court enforce that resolution, you will almost certainly be sadly mistaken. If foreign companies are going to do business in China, they need to be prepared to accept having their disputes resolved in China.

At this point, it would be a mistake for anyone to draft a contract with a Chinese company with a jurisdiction provision calling for disputes to be resolved in U.S. courts. Unless and until there is that certainty, or unless your Chinese counter-party truly has assets in the United States (See Suing Chinese Companies and Citizens in the United States and in Canada: When it Makes Good Sense), it would behoove you to draft your contracts with Chinese companies to have disputes resolved in a Chinese court or, in some cases, before a China-qualified arbitral body. See Is Your China Contract Worthless?

But, if you already have a contract that calls for U.S. court jurisdiction, it would absolutely make sense for you to consider moving forward with litigating it in a U.S. court and trying to effect Hague service of process on the Chinese defendant(s). And then if you succeed in effecting Hague service and in securing a U.S. court judgment, you take that judgment to a Chinese court to have it enforced, perhaps you even do the same if you get the U.S. court judgment even without having effected Hague service.

But to count on this one decision on which to base future US-China contracts? No, that would not be smart.

What are your thoughts?

Shenzhen employment law DongguanGuangdong Province (home to Shenzhen, Guangzhou, and Dongguan, among others) recently came out with new employment laws. The provincial High People’s Court recently released a document entitled the Answers to Difficult Questions regarding Adjudication of Labor Disputes Cases, with the primary goal of making the province’s labor adjudication more consistent. This post discusses a few of its key provisions and I will be writing more about this new law in future posts.

If during the course of the employment relationship, an employer suffers damages as a result of an employee’s gross negligence or intentional wrongdoing, the employer may pursue the employee for a single sum payment at the time of termination. However, the damages will be limited to direct economic losses suffered by the employer, and the court will consider the nature and degree of the employee’s conduct in determining the damages to the employer and it will not allow the employer to impose its own operational risks on the employee.

An employee leaving employment because of employer wrongdoing or abuse (such as failure to provide necessary labor protections or labor conditions), must clearly provide to the employer the reason why he or she was allegedly forced to terminate the employment contract. If the employee fails to notify the employer that he or she is terminating the employment relationship on grounds of employer wrongdoing or abuse, the employee cannot (in most cases) later demand statutory severance for employer abuse/wrongdoing. Though this new rule is employer-friendly, we still advise our employer clients to try to figure out why an employee is leaving. Even if the employee may be barred from suing for statutory severance, he or she may still sue for other issues, such as unresolved overtime pay or vacation penalties. Your goal as an employer is usually going to be to try to resolve all problems with a departing employee without getting sued.

When an employer moves its location, it constitutes major changes of the objective circumstances on which the employment contract was concluded, and for that reason, the employer must consult with the employee and reach an amendment to the parties’ contract. If the parties are unable to reach agreement, the employee can terminate the contract and demand the employer pay him or her statutory severance. However, if the employer’s move does not have any obvious (whatever that means) impact on the employee and the employer has taken reasonable measures to accommodate the employee (such as providing a company shuttle or paying the employee transportation subsidies), the employee’s demand for statutory severance may be denied as there is insufficient ground for the employee to unilaterally terminate the contract. This is not exactly new either, but it is worth repeating that it is virtually always safer to reach a written agreement (in Chinese!) with your employee before you change any clause of their employment contract.

An employee can demand its employer pay contract damages pursuant to the parties’ employment agreement. The applicable employment laws impose restrictions on employers imposing contract damages (similar to and called liquidated damages in some countries) on their employees, but they do not prevent an employee from collecting contract damages from the employer under certain circumstances. Unless there is a law to the contrary, the employee can demand contract damages in addition to statutory severance (or double statutory severance in the case of unlawful termination). If a contract is being proposed by the employee (which is rare but does happen from time to time), the employer should be careful in checking whether there is such a provision that specifies contract damages payable by the employer (note that we generally recommend our clients not use any contract presented to them by an employee). On the flip side, when an employee — especially an expat — gets to negotiate his or her own employment package, they should consider whether it makes sense to include a contract damages clause in their contract.

Stay tuned for more on the new employment law developments in Guangdong.

Direct marketing in ChinaBecause we are one of very few law firms that represent foreign companies doing direct marketing in China we get quite a few emails from companies (and even individuals) regarding China’s direct marketing laws. Long story short, China does not particularly like direct marketing and its direct marketing laws are so restrictive that the industry there has little in common with direct marketing in the United States or even Europe.

The other day, one of our China lawyers received an email from a potential client with a link to a United States government site describing China’s direct marketing laws. The email was short and merely asked whether the information on this site was accurate or not.

It is accurate and current and and helpful and important and to the point and for those reasons I reprint it in full below.

Direct selling is defined by Chinese regulators as a type of business model involving the recruitment of direct marketing sales agents or promoters and the selling of products to end-consumers outside fixed business locations or outlets.

As part of China‘s WTO commitment, the Chinese Government agreed to allow market access for wholesale or retail trade services away from a fixed location. However, these new regulations are quite restrictive, especially in regards to multi-level marketing (MLM) organizations, which are characterized as illegal pyramids under these regulations.  Sales promoters earn commission only according to their sales performance and the proportion of payment to sales promoters should not exceed 30 per cent of the income generated from sales.  Furthermore, commission paid to a salesman is not allowed to be calculated based on the MLM structure, and language exists requiring the construction of fixed location service centers in each area where sales occur for the purpose of after-sales service and consultation. To obtain a direct sales license from the government, further barriers exist as evidenced by a three-year foreign experience rule, a required RMB 20-100 million (USD 2.9-14.5 million) bond deposit and a RMB 80 million (USD 11.6 million) registered capital threshold, among other requirements. Nonetheless, several major international companies have had success in overcoming these barriers. Having said this, the Chinese Government has remained slow to approve direct-sales license applications for new entrants over the past few years. In general, the Chinese central government and the relevant authorities at central and local levels tend to heavily regulate and supervise this industry.

Any questions?

China employment law
Root out differences between your employee contracts and rules and regulations

A well-written employment contract, along with a set of China-centric employer’s rules and regulations are the starting point of what you must do if you have employees (or plan to have) in China. Though it is good thing to have both of these documents in place, it is even better when these two actually work together. Our employer audits often find a company’s employment contracts and employer rules and regulations to be in conflict with each other, with internal inconsistencies or discrepancies that confuse employees (and employers) and can work against the employer in a labor dispute.

Let’s look at a case in Shanghai for an example of this, with the facts simplified for this post. The parties entered into an employment contract for a fixed term under which the employee would be working as a cargo driver. The employee’s contract stated that if the employee is absent from work for five days without good reason, he will be unilaterally terminated without severance. But the employer’s rules and regulations say that an employee may be terminated for three days of absenteeism. The employee was designated to work flexible hours and the employer would give direct orders to the employee by phone regarding specific assignments, and absent such work orders, the employee would stand by at home.

It is undisputed that on August 11, 2015, the employee failed to dispatch per the employer’s direct order. On the very next day (the 12th), the employee was late in dispatching after having received an urgent work order from his employer. Then on August 19th, the employee received a work order and he then verbally notified his employer that he could not perform his duties because he was sick, but he did not provide a doctor’s note at that time. On August 20th, the employer issued a written notice to the employee giving him two days to provide a doctor’s note to prove he was indeed sick as he claimed to be. The employer also served a serious warning on the employee for being late on the 12th. Further, the notice required the employee to return his driver’s permit and operation permit to the company so someone else could operate his assigned vehicle. Then again on August 25th, the employer sent another notice to the employee requiring him to report to work by the following day (August 26th) or be treated as absent. The employer stated in its notice that because the employee had failed to return the relevant permits, the employer had suffered loss for not being able to operate the car assigned to this particular employee, and therefore this failure to return the permits constituted a serious violation of the employer’s labor disciplines. The employee returned the relevant permits and submitted a doctor’s note regarding his August 19th absence. The employer nonetheless terminated this employee for having violated the employer’s rules and regulations. The employee sued for unlawful termination.

The trial court sided with the employee and the employer appealed. On appeal, Shanghai’s First Intermediate People’s Court held as follows:

  1. The employee’s contract expressly gave the employer the right to terminate the employee for being absent from work for five days without justification while the employer’s rules and regulations say three days. The two documents contradict each other on this point. The court went on to hold that applicable judicial interpretations stipulate that when there is a discrepancy between an employer’s rules and regulations and the employment contract and the employee requests the contract prevail, the court will grant such a request. Therefore, the court applied the terms of the employment contract, so only absenteeism for five days or more would justify unilateral termination without severance.
  2. The employee produced a doctor’s note to show he was sick from August 19th through the 21st, so it does not make sense to say he was absent from work without a valid reason during that period.
  3. Even though the employee failed to submit a doctor’s note within the 2-day period required by the employer in its notice, because August 22nd and 23rd fell on a weekend, the employee was absent from work for only three days: the 11th, 24th and 25th. Because the employment contract (which allows for five days of absences before termination) is the governing document, being absent for three days does not justify unilateral termination.
  4. For the reasons stated above, the employer’s termination decision was unlawful.
  5. Because the employer had no right to terminate the employee, the employer had no right to demand the employee return all the permits for the company car, so the employee should not have been punished for returning those permits late nor can he be held liable for the alleged damages that allegedly arose from his failure to return the permit.

If the employer in this case had taken the necessary time to make its employee’s contract consistent with its rules and regulations on the number of days of absence, the employer’s termination decision would probably have been held lawful.

Bottom line: Make sure your employee agreements are consistent with your rules and regulations and make sure they work well together. In comparing these two internal employment documents, make sure that you focus on the Chinese language versions of each because that is the version that legally matters.

China lawyerWay back in 2008 I wrote a post immediately after one of my firm’s lawyers returned from a federal court hearing where the judge essentially said — near as I could tell without any basis in law — that service of an English language only complaint on our client was valid even though she did not speak a word of English and even though the Hague Convention rules on service of process for that particular country explicitly stated that the complaint needed to be translated into her native language. In that post, which follows, I raged (well for me it was raging) against a US legal system that fails to sufficiently account for foreign law.

This post is on private, not public international law. That means it has little to nothing to do with such hot button issues as the United Nations, the Kyoto Protocol, or the International Criminal Court. This post is on how American courts deal with business cases involving foreign parties and foreign or international law as that law applies to such cases. No more, no less.

Many years ago, I was representing a Canadian-Australian manufacturer in a big case down in Texas along with two truly excellent Dallas litigators. At some point in the case, I had the “brilliant” idea of arguing that US Federal law had preempted Texas state law, mandating dismissal of plaintiff’s claims against my client. We settled the case before the court could hear our preemption argument, but I still remember the half-joking advice I received from Texas local counsel. It was something along the lines of, “forget about federal law, this is Texas; we don’t recognize federal law down here.”

I am beginning to wonder about the willingness of US courts to apply foreign or international law, even in those instances where US law calls for such application.

In a few months, I will be in Las Vegas (I count myself among the people who love Vegas!) speaking on the Hague Convention rules on Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, as they apply to Chinese companies. Based on my firm’s experience with getting US courts to recognize international law, I am sorely tempted to just say something like, “forget about international law. This is the United States. We don’t recognize international law here.” Go ahead, just stick your summons and complaint in a bottle, throw it in the ocean, that ought to be enough for you to get a default judgment anyway. And since China never enforces US judgments anyway, why does it matter?

I am sure my speech will be a bit more nuanced by the time I get there, but you get the point.

For at least the third time (two times is coincidence, three times is a trend), a US court has allowed a case to go forward against a defendant despite the plaintiff having clearly failed to abide by the Hague Convention Rules on international service of process. The most recent instance is in a still pending case so I cannot go into the specifics on that one.

Virtually every time we have sought to get the US courts to enforce the Hague Convention or even, in one instance, when we sought to get a US court to pretty much ignore the Hague Convention, the US court has seemed perfectly willing to rule as though the United States has no obligation to abide by a treaty it signed. I have a strong sense US Courts (both state courts and federal courts) will not enforce the Hague Convention’s technical service requirements (including that the summons and complaint must usually be translated into the language of the country in which it is being served). Oh, and getting a US court to throw out or stay (delay) a case so that an already pending case in another country can be decided first — forget it. My conclusion is that US courts are happy to ignore foreign/international law in favor of handling things under US law, whether US law should apply or not.

Since writing the above, our firm has had a Federal Court ignore Australian law in a case without even deigning to explain why and a state court refuse even to consider delaying the US action based on an already pending case in Spain, and get mad at our lawyers for even making the request!

US court judgments are rarely enforced outside the United States and one of the reasons given for this is the failure of American courts to recognize foreign law. Our foreign clients — international businesspeople from countries like Australia, England, Spain, and Germany that are not generally anti-American — are complaining more and more to our lawyers about US courts “think they can ignore the rest of the world.” Add in a President whose response to countries beyond our borders is a big FU and low-life neo-nazis marching in our streets with torches, and you can understand why so many of my non-American friends have been asking if I am concerned about the United States’ standing in the world and the impact all of this will have on our legal system.

My answer is yes.

Strangely enough, I recently thought through much of the above when analyzing an intellectual property matter on which I worked. The matter was for a European company looking to sue an American company under Chinese law in a United States court. (Please nobody ask me to explain either how the parties got into this situation nor why this contortion was even being considered.) What struck me was how despite all of the things about which I wrote above, my opinion to the European lawyers was that if they were to pursue litigation in a US court they could excpect the court to abide by the law, and since the law was clear (and did not really involve court power as did the cases above), we could expect it to apply Chinese law.

I guess I am standing on history (at least that of the U.S. legal system) for now.

Your thoughts?

China employment lawyerI have recently been focusing on Beijing with my China employment law posts because Beijing recently came out with new employment laws. The new laws, entitled the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes (关于审理劳动争议案件法律适用问题的解答)(“the Responses”) were released earlier this year to clarify a number of key employment law issues and to ensure a fairer and more effective and consistent adjudication of labor disputes in Beijing. In this post, I focus on how the Responses lower the standards for terminating an employee during his or her probation period. A China employer is permitted to use “failure to meet the conditions of employment during the probation period” as a basis to unilaterally terminate an employee without having to pay him or her severance. But what exactly does this mean for Beijing employers today?

The Responses make clear that an employer must inform its probationary employee of the conditions of employment during the recruitment process, and must also inform the employee of the factual and legal basis for termination upon dismissal. For a unilateral termination of a probationary employee to be lawful, the employer must be able to prove how the employee failed to meet the applicable employment conditions. This is nothing new. However, the Responses go on to say that in determining whether an employee meets the conditions of employment, the standard may be lower, to the extent appropriate, for a probationary employee than for a regular employee. The Responses also then list the following circumstances under which an employee may be considered to have failed to meet the recruitment requirements:

  • The employee violates the principle of good faith, and conceals or makes up facts concerning himself or herself which will affect the performance of the employment contract, including providing fake diplomas or certificates, fake identification documentations (PRC national ID cards, passports, etc.), making statements regarding his or her experiences, expertise, skills, performances, heath or other pieces of information that are significantly contrary to the truth;
  • The employee commits work errors, which are defined in accordance with the relevant employment laws, the employer’s rules and regulations, or the employment contract;
  • The employee fails to fulfill the terms and conditions agreed by the parties which determine whether the employee passes the probation period.

Employee probation is one of the most often misunderstood China employment law issues. Many employers (and often to their detriment) wrongly believe terminating a probationary employee is much easier than terminating an employee who has completed the probation period. Though this is not the case, the Responses do provide that the standard of review on whether a probationary employee meets the conditions of employment can be reasonably (whatever that means?) lower than the standard of review for an employee during the “regular” term of employment. Our China employment lawyers always advise our clients to specify the conditions of employment in a clear writing (in Chinese!) so the employee understands the employer’s expectations from day one. In addition, employers should preserve good evidence that such conditions are communicated to their employees. None of this advice has changed despite Beijing’s new employment laws and in fact, Beijing-based employers should consider specifying in their rules and regulations and/or their employment contracts exactly what work errors can lead to termination during probation. But be careful in drafting such provisions because our employer audits often find employers that write these provisions in a way that violates applicable laws!

Notwithstanding Beijing’s new employer-friendly law on probationary employees, China employers who treat the probation period as an at-will employment period do so at their own peril. Note this law is applicable only in Beijing, and in practice, many arbitrators/judges in many places (including Beijing, no doubt) treat termination of an employee during the probation period no differently than termination during the regular employment term.

For more on Beijing’s new laws, check out my previous posts here on how to terminate an employee on the basis of there having been a “significant changes in objective circumstances, and here for on the new rule that permits Beijing employers to terminate an employee who seriously violates labor disciplines or professional ethics and here for the new rules on reinstating employees to their old jobs when an employer’s termination decision has been deemed unlawful. Oh, and once again, please check out my new book, The China Employment Law Guide, which will very soon be coming out in paperback format as well.

 

 

 

China HR AuditsEarlier this year I wrote about Beijing’s new labor laws, called the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes (关于审理劳动争议案件法律适用问题的解答)(“the Responses”). These new laws focus mostly on adjudicating labor disputes more fairly, effectively and consistently. My previous post focused on the new rules on reinstating employees to their old jobs when an employer’s termination decision has been deemed unlawful. A super brief summary is that an employer that unlawfully terminates an employee must reinstate that employee to his or her previous position unless one of a limited number of circumstances exists that render the original employment contract no longer able to be performed. As I noted, one of the “defenses” the employer may raise is that the employee has started working for another employer and it therefore would not make sense to grant the employee reinstatement.

The new rules set out in the Responses were not an attempt by Beijing to make itself an employer-friendly jurisdiction, but rather, to increase uniformity in the law across the different courts within the municipality of Beijing. Nonetheless our China employment lawyers have been seeing employer-friendly interpretations that seem to be bringing Beijing one step closer to Shanghai, which is the most employer-friendly among China’s major expat cities. One example is Article 13 of the Responses, which provides that an employer may terminate an employee who seriously violates labor disciplines or professional ethics, even if the employer’s rules and regulations and employment contracts are silent on the specific employee misconduct. The Responses refer to paragraph 2 of Article 3 of the PRC Labor Law which mandates employees shall comply with labor disciplines and professional ethics. The Responses state that an employee’s serious violation of this requirement will allow the employer to terminate that employee based on paragraph 2 of Article 3 of the PRC Labor Law.

This means employers need worry just a little bit less about listing every single possible punishable offense in their rules and regulations. However, what constitutes a “serious violation” of labor disciplines or professional ethics is unclear and will be determined on a case-by-case basis. What has not changed in Beijing (or even Shanghai for that matter), is that an employer’s termination decision must be reasonable and the employer must prove the reasonableness of the employee’s termination to prevail in a labor dispute. In other words, Beijing is becoming more like Shanghai with respect to employee terminations but it is NOT like the United States which mostly allows for employee terminations at will.

Beijing employers still must proceed with extreme caution in terminating anyone and mutual terminations with settlement agreements and claim releases are still usually the safest route for employers to take. We still routinely see China employers’ unilateral termination decisions stricken because of defects in either their rules and regulations or in how they implemented those rules and regulations. We constantly perform HR audits of foreign companies doing business in China and more than nine out of ten of these companies are clearly not doing enough to withstand an employee termination dispute.

I will be writing more about Beijing’s Responses in later posts so please stay tuned.

 

 

notarization, appostille, consularizePretty much every week, our China lawyers get emails or phone calls from someone (probably half the time a fellow lawyer) seeking assistance with making a document legal for some sort of use somewhere in the world. Maybe 40 percent of the time, the request relates to a need to authenticate an official Chinese document or government record so it can be used in a United States court or government filing or U.S. transaction. Maybe another 40 percent of the time, it’s essentially the opposite: the person needs a U.S. document authenticated so it will work for a Chinese court or a Chinese government filing or China transaction.

Much of the time, the party reaching out to us expects a quick answer that will allow them to do what they need to do, at little to no cost or for us to do it for a couple hundred dollars. Pretty much without exception though, we have to burst that bubble by explaining how these things can be quite complicated and time consuming and, hence, expensive. The reason being that what is actually required varies in pretty much every instance, depending on the exact reason the authentication is needed and if they wish us to provide them with legal counsel we will need to do the following:

  1. Research exactly what will be required. This typically involves our reviewing the law and talking with the appropriate government official (especially if it is China).
  2. Oftentimes, we must arrange with a notary in a specific city to notarize a document and many times we also must deal with the appropriate Secretary of State (or comparable) for an apostille or comparable and with the appropriate consulate or embassy or court for the consularization or legalization. Accomplishing these things can be incredibly time consuming as they often involve multiple letters and phone calls, and even occasionally flights when things get delayed.
  3. Translations are also often required.

Just saying….