China employment lawyerIf you as a China employer are not documenting your employee separations in writing, you are not doing it correctly. And with China’s pandemic-induced economic downtown, it is more important than ever that you handle your China employee separations correctly.

Regardless of the type of employee termination, you should clearly and correctly document it in writing. Among other things, this means that you need to be sure all of your separation-related documents comply with all applicable national and local laws and fully protect your interests. Our employer audits often reveal that employers regularly fail in correctly documenting their employee terminations. Some employers wrongly believe they need to document their terminations only under certain circumstances, such as when they need an employee release to prevent the employee from bringing legal action against them. China employees must clearly and correctly document every employee departure simply because that documentation will be your evidence in any employment dispute.

Suppose your recently resigned employee sues you (their employer) for statutory severance, something which happens all the time in China. If you can produce a resignation document signed by your former employee in which he acknowledges that you do not need to pay any statutory severance for his voluntary departure, he is not likely to prevail on his claim. But without such a document, your chances of prevailing will be considerably less and your litigation costs will likely be considerably higher.

The right termination documents depend on the type of termination you are facing. For example, a unilateral termination initiated by the employer will require much different paperwork than an employee resignation (a unilateral termination initiated by the employee). A mutual termination (our China employment lawyers often encourage these when our employer-client does not have a good legal basis to unilaterally terminate an employee but is willing to pay the employee severance in return for the employee agreeing to leave) require their own special paperwork.

No matter the type of employee termination, your termination paperwork should be in Chinese (for the court) and in your native language (for you) and it should clearly specify the type of termination. This is true in most other parts of the world as well, but it bears repeating here: as an employer, you must be very careful with your words because words matter. China employers can and often do get in trouble for failing to specify the type of employee termination correctly in the termination documents.

Knowing the type of termination you are dealing with is crucial as this determines whether you are required to pay statutory severance and this is also determinative of other important issues as well, such as bonuses and vacation balance payouts. It is absolutely critical that your termination document covers all outstanding issues between you and your employee so there is final resolution of all such issues and so that any future court or arbitration tribunal knows this.

As part of the employee separation, you should also be sure to remind your departing employee in writing of his/her ongoing obligations to maintain the confidentiality of your confidential information and your trade secrets. Our employment lawyers usually like to see the writing refer to the specific document that mandates the employee’s confidentiality obligations, such as a signed Trade Secrecy and Intellectual Property Protection Agreement. You should also remind your departing employee of any other applicable obligations he/she may have, such as abiding by any non-compete provisions — if you plan to enforce those. On the other hand, if you do not plan to enforce the non-compete provisions, you should inform your departing employee in writing that he/she is released from the non-compete obligations, if this release is legal in your locale. You also should require your departing employee return all company property and confidential information and cut off their access to company data. Lastly, do not forget to perform all of your employer obligations, such as issuing a proof of termination of employment relationship document to your departing employee.

Documenting all of your employee separations also is a good way to keep track of how you are doing in terms of talent retention. When looking back, you can see why people left your company and then use that information to retain and attract more talent.

Though not all departing employees in China end up suing their employers enough do (and this is especially true for foreign company employers) that having a clear written record of how you handled the separation is a smart thing to do to be litigation ready. Even if you do not have an imminent employee separation, you should take the necessary time to check your termination-related documents to confirm they are in good shape and ready when you need them. With all that is happening in China and between China and the West these days, it helps to be ready.

If you want to know more about how to handle employment law matters in China, I urge you to attend my free webinar on June 23. For more about this webinar and on how to sign up, please go to FREE WEBINAR – China Employment Law: What Your Company Needs to Know.

International lawyers for trade law On May 26, 2020, MTD Products Inc. (Petitioner) filed antidumping (AD) and countervailing duty (CVD) petitions against Certain Walk-Behind Lawn Mowers from China and Vietnam.  MTD produces lawn mowers that are sold under the Troy-Bilt, Bolens, Cub Cadet and Craftsman brands.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

Before filing these petitions, MTD a few months ago had vigorously opposed the AD/ CVD petitions that were filed by Briggs & Stratton against vertical shaft engines from China in January 2020 and small vertical shaft engines from China two months later.  In those cases, MTD argued that AD/CVD duties should not be imposed on imported Chinese lawn mower engines.  Instead of blaming imports, MTD argued that Briggs & Stratton’s problems were caused by a variety of other issues unrelated to imports.  For example, consumer preferences had shifted away from gas powered mowers to electric/ battery powered mowers. Briggs & Stratton also had to deal with tariffs imposed on steel and Chinese imports which increased its manufacturing costs, making their engines more expensive than foreign engines that did not have to deal with those extra tariff costs.  Moreover, Briggs & Stratton made the dubious business decision to compete with its main customers; instead of focusing on designing, producing and selling engines to U.S. OEM lawn mower producers in the United States such as MTD, Briggs & Stratton decided to acquire a number of small lawn mower producers (Snapper and Murray) and directly compete in that market segment against some of its top customers.

The ITC, however, disagreed with MTD and other respondents and in both vertical shaft engine cases made affirmative preliminary injury determinations.  Seeing how the AD/CVD cases on vertical shaft engines could very well lead to AD/CVD duties being imposed, MTD realized that these AD/CVD duties would increase its lawn mower production costs and would affect its manufacturing supply chain, thus making them less competitive against other foreign lawn mower producers.  So from vigorously opposing AD/CVD duties on vertical shaft engines, MTD now strongly supports AD/CVD duties on imported lawn mowers.  MTD apparently decided it needed to bring its own AD/CVD petitions against lawn mowers from China and Vietnam to protect itself as it deals with the fallout from the vertical shaft engine AD/CVD cases.

This new round of AD/CVD petitions is yet another example of the trickle-down effect of protectionism.  Section 232 tariffs on steel and aluminum imports first begat a wave of AD/CVD cases filed by US producers of products using steel (e.g., steel kegs, vertical metal file cabinets, lawn mower engines).  These AD/CVD cases are now triggering another wave of cases from downstream industries (e.g., lawn mowers) seeking their own import protection.  As the economy reels under the strains of the COVID-19 pandemic, we very likely will see more AD/CVD cases being filed with more U.S. industries desperately trying to survive the economic downturn often by seeking protection from import competition. The cost of protecting each layer of U.S. manufacturers gets added to the cost of the goods ultimately purchased by U.S. consumers.

If you import products from China, be on guard; America’s ever-rising anger at China only increases the odds of more such cases.

The following is the vital information on this new lawnmower case:

— Scope

The petition identifies the merchandise to be covered by this AD/CVD investigation as walk-behind lawn mowers powered by an internal combustion engine with a power rating of less than 3.7 kilowatts which are rotary-powered grass cutting machines.

See here for the proposed scope definition from the petition.

— Alleged AD/CVD Margins.

Petitioner calculated estimated dumping margins ranging between 245.47 to 313.58% for China and from 285.10 to 416.00% for Vietnam. Petitioner did not provide any specific Chinese subsidy margin calculations.

— Named Exporters/ Producers

Petitioner included a list of companies it believes are producers and exporters of the subject merchandise.  See attached list of these companies here.

— Named U.S. Importers

Petitioner included a list of companies it believes are U.S. importers of the subject merchandise.  See attached list of these companies here.

–Estimated Schedule of Investigations.

May 26, 2020 – Petitions filed

June 15, 2020 – DOC initiates investigation

June 16, 2020 – ITC Staff Conference

July 10, 2020 – ITC preliminary determination

October 23, 2020 – DOC CVD preliminary determination (assuming extended deadline) (8/19/20 – unextended)

December 22, 2020 – DOC AD preliminary determination (assuming extended deadline) (11/2/20 – unextended)

May 6, 2021 – DOC final determination (extended and AD/CVD aligned)

June 20, 2021 – ITC final determination (extended)

June 27, 2021 – DOC AD/CVD orders issued (extended)

 

International Manufacturing Lawyers to protect your manufacturing molds
Our international manufacturing lawyers are seeing many companies lose their molds when moving their product manufacturing from China. Not surprisingly, these are the companies that did little or nothing to protect their molds when they first went into China to have their products made there. On the flip side, with so many companies setting up manufacturing relationships in countries outside China, it becomes critical they understand how to protect their molds going forward.

In seeking to protect our clients’ molds — both in and outside China — one of the primary goals is to draft a contract that makes clear our client (the foreign buyer) owns the physical molds. Whether drafting mold provisions that are part of a larger contract (such as a manufacturing agreement or a product development agreement) or one that essentially stands alone as part of a mold ownership agreement.

The first thing we want our contract to make clear is that the overseas factory can use our client’s molds only for producing our client’s product; not for producing anything for any other party. We also want to make clear that if our client has the contractual and legal right to take possession of the molds and transport them to a new manufacturing location anywhere in the world whenever it wishes to do so. Negotiating these terms with overseas manufacturers is sometimes difficult, since these manufacturers have an incentive to hold molds as “hostage” to prevent their foreign buyers from switching their manufacturing to another factory.  For why it is so important to be clear regarding mold ownership and for some additional information on what you must do to prevent your overseas factory from keeping your molds, check out Product Molds And Tooling: Three Things You Must Do to Hang on to Yours.

As outsourced manufacturing  has become more complex, molds for products have also become more complex and, in many cases, our clients’ molds embody much (sometimes all) of their product’s intellectual property. In some products, the interior mechanism is based entirely on open source hardware. The external enclosure surrounding the mechanism is therefore the primary protectable IP for the product and the IP resides entirely in the molds used to manufacture the product case. The ”look and feel” of the enclosure becomes the identity of the product and if that “look and feel” is not protected their overseas factories can freely copy their product.

With some of our clients, the form embodied in the mold constitutes nearly the entire value of their product. Take for example a complex part used to manufacture a turbine or jet engine. After all the engineering and testing, all that remains is a single part produced by casting into a mold that embodies the entire intellectual property in that part. In this sort of situation, whoever controls the intellectual property in the molds controls the product. If — as our international IP lawyers so often see — no party owns any IP in the molds, the molds are effectively open source. So in figuring out what to put into contractual mold provisions, our manufacturing lawyers focus on the ownership of the physical molds and the ownership of the intellectual property inherent in the molds.

Mold IP issues can arise both when dealing with third party mold fabrication shops and with the outsource factories themselves. Further complicating the legal side of all this is that these two facilities are often in two different countries, thus necessitating two different mold ownership and mold IP protection provisions.

Third Party Mold Fabrication Issues

It is standard procedure to require the factory making your product be responsible for fabricating the molds for that product. In the old days, the same factory nearly always made both the molds and the product. Today, however, it is more common for the product factory to outsource mold fabrication to a third party. This means that the IP protections in your mold agreement with your factory are compromised when your mold’s specifications are sent to a third party mold manufacturer. Your fundamental IP risk is that the mold manufacturer will sell copies of your molds to other factories interested in cloning your product. This cloning and then selling molds has become a thriving business in China and around the world and we often see molds made outside China end up in China and used for product cloning and molds made in China end up in Vietnam or Thailand or wherever.

The factory that manufactures your product has an incentive to keep your mold for its own use because if it gets out into the world it will be used by your factory’s competitors. When this happens, your factory is damaged in much the same way as you because its production of your product will likely decline or even cease. Your mold manufacturer views you as a one-shot buyer and selling your molds as increasing its revenues.

Though losing molds via third party mold fabrication shops is a big risk, few foreign product designers or factories make much effort to control the mold fabricator. Not only do foreign product designers seldom enter into a contract with the mold fabricator, they usually do not even know their mold fabricator’s identity. They mostly just assume their product factory is also their mold factory.

Because many product designs are protected primarily as trade secrets, the release of the design to a third party mold fabrication shop with no written agreement breaks the secrecy in the product itself and thereby eliminates any trade secrecy protection. Third party mold production leaves a gigantic hole in IP protection that can and should be closed with contracts.

The protection you give your molds also implicates your product’s patent protection. If you outsource your mold to a third party mold fabrication shop, the question of who actually designed your product becomes far less clear. Is it the foreign designer who developed the basic idea behind the product? Is it the product factory that did some preliminary drawings of the product? Or is it the third party mold fabricator that did the detailed drawings and produced the final working model? Or is it all three, with each entitled to an uncertain portion of the patent?

In our next installment in this series, we will discuss how to approach the above issues when dealing with the overseas factory to which you are outsourcing your product manufacturing.

 

Mold Issues with Your Foreign Product Manufacturer

Once a product becomes commercially successful, our international manufacturing lawyers often need to be retained to deal with the following problems:

  • The foreign outsource product manufacturer proclaims it will substantially increase its price for the product it manufactures for the product buyer. This often surprises the product buyer who expected its per unit price would decline as production increased.
  • The foreign outsource product manufacturer is not able to keep up with the product buyer’s increased production requirements. This often surprises the product buyer who had been assured by the foreign outsource product manufacturer that it had sufficient capacity for pretty much any scale of product orders.
  • An increase in production demand causes a decrease in quality from the foreign outsource product manufacturer. This often  surprises the product buyer who expected quality would improve over time.

In response to these issues, the product buyer informs its foreign outsource product manufacturer that it will be moving some or all of its production to a different manufacturer. In the old days, the issues that arose at this stage mostly focused on ownership of the physical molds, which issue can be resolved with a relatively simple mold ownership agreement. See Product Molds And Tooling : Three Things You Must Do to Hang on to Yours.

These days, the foreign outsource product manufacturer often makes arguments  that render the situation far more complex, such as the following:

  • The foreign outsource product manufacturer factory tells you: “You did pay us to make molds, but that fee only covered our time and material costs. We spent additional time and money on the CAD drawings and on the related specifications required to fabricate your molds and we also spent additional engineering time integrating the molds into our production process, so before you can take the molds, you must compensate us for these costs.” Then the manufacturer demands an unreasonably high amount and if you do not pay that amount it will hold your molds hostage. This has become a fairly standard practice in outsource manufacturing, particularly in China. It is therefore essential you have an enforceable written contract that makes clear your payments for molds includes all costs and that no additional payments will be required when you seek to take possession of the molds.
  • The foreign outsource product manufacturer tells you: “Because we did the mold design work we own the design embodied in the molds. We will give you a limited license to use the molds for producing your products at some other factory, but you may not copy the molds and we retain the right to copy and use the mold design for our own production and to sell the molds to third party factories for their own production. The only thing you own is the physical object. You do not own anything else.”
  • The foreign outsource product manufacturer tells you: “We did the mold design work so we own the mold design and we registered a design patent in the molds. It does not matter that you paid us for the molds because we invented them and our design patent proves that and protects us. You can use the molds for production at a different factory but for that you must pay us a royalty fee.” This royalty demanded is so high that you cannot economically have your product produced at a third party facility. Many country’s laws (especially in Asia) legally support this argument.

The honest foreign outsource product manufacturers make the situation clear upfront. The product buyer pays for having the mold made but that payment does not give it any ownership interest in the molds. The foreign outsource product manufacturer does the mold design work and it owns the molds and you have no right to move the molds to any other factory. Some manufacturers will say that you are free to make new molds at your new factory, but some will assert ownership to the mold design and not allow you to have copies made. In other words, the foreign outsource product manufacturer  is essentially telling you upfront that it intends to hold you hostage by not allowing you to go anywhere else to have your product made. This ensures the foreign outsource product manufacturer of being free to raise its price or deliver your products late or produce defective products. You are pretty much trapped with no real leverage for dealing with these issues.

Why does a foreign product buyer sign a contract that relinquishes its product to its foreign outsource product manufacturer? Sometimes it is because the contract is in a foreign language they don’t understand and do not get translated. Other times it is because they simply do not understand what they are signing, no matter the language. Just about every week one of our international manufacturing lawyers will get contacted by someone who has fallen prey to one of these contracts.

Product buyers/product designers need to protect their molds and their mold designs. The simplest way to do this is with enforceable written contracts that provide these protections. At the most basic level, the key is to recognize when a foreign product outsource manufacturer is seeking to position itself so as to be able to hold your molds “hostage” and to act accordingly.

China manufacturing lawyers
China manufacturing risks are sky high right now.

For the last couple months, a team of our lawyers (a/k/a the PPE team) have been working nearly nonstop on helping companies, charities, and even countries navigate the purchasing of Personal Protective Equipment from China. As we have written extensively, this is a risky business.

For some of what we have written on sourcing PPE from China, we encourage you to check out the following:

And for more on what we have to say about the risks of buying PPE, please check out the following news articles as well:

Most recently, in Face masks, ventilators with fake certificates pushed by scammers as demand for Chinese medical supplies booms, AsiaOne interviewed one of our PPE lawyers, Steve Dickinson, on the risks of buying from Chinese suppliers:

While some do sell viable – if overpriced – products, others sell junk. “They’re not concerned about whether the products perform or not … and they can disappear overnight,” Dickinson added.

Dickinson said claims of special ties with manufacturers were common. So were convincing certificates that turned out to be fake, invalid, or issued to a different company.

Offers to quickly ship high-volume orders in return for cash upfront were frequent, too.

Scam sellers typically dissuade buyers from contacting the manufacturer or conducting other forms of due diligence, such as visiting warehouses where products are stored, he said.

Of nine medical goods suppliers with whom significant product inquiries were made for this story, all but one – a face mask producer in the eastern province of Anhui – provided documentation made out to different companies.

They all claimed business ties with manufacturers allowing them to sell their goods to foreign buyers, but only one produced a contract showing the manufacturer had given them permission to do so.

But this post is NOT going to focus on PPE. I merely led off with PPE because that industry has so clearly and unquestionably become rife with blatant rip offs. But here’s the thing; huge swaths of other manufacturing industries in China have become rife with blatant rip offs as well. Having your product made in China — whatever the product — has never been riskier.
Ordering and paying for something from China and then getting nothing in return or something not at all like what you ordered is happening left and right these days and yet many companies are oblivious to this.These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they at first claim they will remedy the problems and why they so often continue to make that claim. The reasons are usually two-fold. One, sending even really bad product is less likely to lead to criminal charges than sending no product at all. If the police come by the Chinese fraudster can say, “I sent them the product they ordered. It’s not my fault those Americans/Europeans/Australians are so picky.” Two, by stalling they can keep their scam alive for much longer. They’ve paid for advertising and for a website and they’ve even bought the really bad product (be it spoiled fish, baking powder or bottom of the line window awnings) and they want to maximize these expenditures.

Whenever China manufacturing sees  a big decline in their demand — as is happening right now — YOUR risks of getting nothing or getting junk instead of what you ordered goes way up. China’s manufacturing industry is hurting worse than I’ve ever seen it in my twenty or so years of dealing with China. First it got hit with the trade tariffs, which led to foreign companies looking to move their manufacturing elsewhere. Then it got hit with the coronavirus in China, which caused many factories to generate little to no revenue for many months. Then it got hit with the coronavirus outside China, which has caused worldwide demand for Chinese products to plunge and has caused even more foreign companies to want to move their manufacturing out of China. To sum up, times are pretty miserable for most Chinese factories these days and they know this and they are grabbing for what they can as fast as they can.

The below email (modified slightly so as not to reveal anyone) is pretty typical of what our China manufacturing lawyers have been seeing in greater numbers these days (modified to hide any possible identifiers):

My regular Chinese supplier of widgets never re-opened after the coronavirus. So I then placed an order for 50,000 pieces and they are of the wrong material and they are warped and the sections that are supposed to open freely do not operate correctly because of the wrong material. I spent hundreds of thousands on developing this product and and they will not give that back to me even though they told me they were going to rework the products because they knew there was an issue. Now I have all this product that is useless that I cannot sell and I am paying storage it because I expected I would be able to return it.I’m out so much money and yet still trying to get a new product to market but that is proving really difficult because I have been hurt so badly financially. And then last week I learned that they are selling the product we worked on developing together and that product does not have any of the problems with the ones they sent me. Is there anything you can do to help me?

My response to these sort of emails is always to ask to see a copy of their product development contract so I can determine who actually has the right to sell the product and a copy of their manufacturing contract to see whether the foreign company has any recourse for the (deliberately) poorly made product. Most of the time the company has neither, which usually (but not always) makes doing anything at all to help them just too difficult and expensive to warrant undertaking.

Much of the time, the big frauds are committed by a non-existent company or by a company that is in dire financial straits. Let’s face it, thriving Chinese companies don’t need to steal people’s money and they almost never do. So at the very minimum, you should make sure that the company to which you will be sending the money is actually registered as a company in China and licensed to make and sell the products you plan to buy from it.

How can you reduce your chances of your new or existing China product supplier taking advantage of you? The following will help. A lot.

  • Be careful when establishing business relationships with a new company. Do as much due diligence as you can. Send people you trust to do a site investigation of the manufacturing site.  Do a site inspection on goods before payment. Make sure the company exists and is legally able to conduct the business for which you will be paying it. Make sure that it is doing at least okay financially. We do this sort of due diligence work all the time for our clients and in the last few months, nearly 40 percent of the time we have recommended they seek out another supplier.
  • Use a contract that actually works for China and that sets forth clearly what you are buying and what happens if your China supplier fails to comply. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts that Work.
  • Know the market price of whatever it is you are seeking to purchase before you purchase it. Do not trust a company that gives you an unreasonably low price quote. That company likely will either steal your IP or never send you what you ordered or both.
  • Consider a small trial order to reduce your risk. The problem with this though is that many scammers will provide you with a good trial and then scam you when you order the full amount. But if you combine this with a contract that works for China and proof that the company actually exists and is operating legally, you will be lowering your risks.

All this begs the big question. Has Sourcing Product From China Become TOO Risky? I will be addressing this issue in detail at a June 10 webinar put on by The International Trade Association of Greater Chicago and the Hong Kong Business Association of the Midwest. Go here for more information on that webinar and to register.

 

 

Register HERE today!

A company’s decision on whether to remain or leave China is driven by many considerations. This decision should be a business decision, tempered by legal considerations, of which there are many. Join international business attorney Dan Harris and Pacific Enterprise Capital International’s founder and managing director Michael Sacharski as they examine this issue from both the legal and business perspectives.

This International Trade Association of Greater Chicago with the Hong Kong Business Association of the Midwest sponsored webinar will take place on Wednesday, June 10th from 10am-11am PDT. The webinar itself will be approximately 60 minutes, with ample time for questions at the end.  Join Dan Harris and Michael Sacharski as they help you better understand whether or not you should continue to do business in and with China.

Register HERE today!

Tickets:

  • Members of International Trade Association of Greater Chicago with the Hong Kong Business Association of the Midwest: $35/ticket
  • Non-Members: $50/ ticket

The End of Hong Kong

Whatever the Chinese Communist Party waxworks expected after the Hong Kong handover, the massive July 1, 2003 protest against proposed “national security” legislation was surely a warning about the limits of Hongkongers’ tolerance of authoritarian rule. The proposed legislation was the Hong Kong government’s response to Article 23 of its Basic Law, which requires the city to

enact laws on its own to prohibit any act of treason, secession, sedition, subversion against the Central People’s Government, or theft of state secrets, to prohibit foreign political organizations or bodies from conducting political activities in [Hong Kong], and to prohibit political organizations or bodies of [Hong Kong] from establishing ties with foreign political organizations or bodies.

As CNN noted back in 2003, Hong Kong’s “normally apolitical middle class [was] spurred into action by fear the new law [would] give the government similar powers to suppress dissent that exist in mainland China.” The proposal was scrapped, and it’s probably no coincidence the following decade was characterized by a relatively soft touch by Beijing (with the flip side being a largely conciliatory attitude from Hongkongers). For a while, it appeared that the CCP was heeding this warning, made by a pro-democracy legislator in 2003:

If they are not listening this time, the next demonstration will be more hostile, the anger has been demonstrated. There may be riots in the future.

It is against this backdrop that the National People’s Congress’ (NPC) announcement that it plans to impose “national security” legislation on Hong Kong must be viewed. Not only is Beijing about to touch Hong Kong’s most electrified third rail, but it will do so in the most provocative way possible, at a time when tensions are running higher than ever. Rather than “just” having Hong Kong’s legislature enact a Hong Kong law on the subject (as Article 23 requires), the NPC will impose a “tailor-made” Chinese law on Hong Kong, by adding it to the annex of Chinese laws that apply in the territory. As China’s Global Times helpfully explains, this approach “needs no approval by Hong Kong’s Legislative Council” (though we may still see another push to have Hong Kong pass its own legislation).

By the way, keep in mind that the NPC’s annual meeting is taking place — in parallel with the Chinese People’s Political Consultative Conference’s (CPPCC) annual meeting — as the COVID-19 emergency is still subsiding. The meetings (collectively known as the Lianghui) were originally scheduled for March, but were postponed because of the public health crisis. Admittedly the Lianghui are a big deal, and China is also keen to project an image of post-coronavirus normalcy. However, it cannot be ruled out that the CCP moved things along a bit faster than it would have otherwise in order to send its message to Hong Kong sooner rather than later.

That message is a crystal-clear warning to Hongkongers regarding their behavior. As a mainland source cited in the SCMP said, the CCP “can no longer allow acts like desecrating national flags or defacing of the national emblem in Hong Kong.” The NPC’s move makes it clear that Beijing is ready to intervene more directly if things in Hong Kong don’t go the way it wants.

Here is a taste of what the new law could bring to Hong Kong, courtesy of Article 15.2 of China’s National Security Law:

The state shall prevent, frustrate, and legally punish any conduct that betrays the country, splits the country, incites rebellion, subverts or incites the subversion of the people’s democratic dictatorship . . . and prevent, frustrate, and legally punish any penetration, destruction, subversion, and secession activities of overseas forces.

A sweeping mandate like this will give Chinese authorities and their Hong Kong lackeys plenty of legal cover to go after pro-democracy protesters, irrespective of whether the protests are peaceful or not. Currently, Hong Kong protesters must be accused of an underlying offense, such as rioting or unlawful assembly. But in the dystopian Hong Kong that is to come, any protest in favor of democracy will by definition be unlawful. Indeed, any statement calling for democracy in Hong Kong is, at its core, a call to subvert the dictatorship.

Hongkongers are rightly seeing this development as the existential threat that it is. If they were concerned about the possibility of being extradited to China, imagine how they feel about the prospect of China’s repressive apparatus coming to them. As pro-democracy legislator Tanya Chan poignantly put it, this “is the saddest day in Hong Kong history.”

Yet, as sad as it was, the days ahead could be much sadder. In all likelihood, the NPC’s announcement will spur at least some of Hong Kong’s protesters to go back to the streets. A popular slogan during the ongoing protests has been, “It was you who taught me that peaceful marches are useless.” The NPC’s move does nothing to dispel that view. Moreover, the more militant elements within the protesters have surely envisioned and prepared for renewed strife, and may be well be ready to raise the ante.

In turn, an emboldened Beijing’s countermove to escalation by protesters could make Hongkongers’ worst nightmares come true . There have been concerns about overt intervention by Chinese security forces for some time now, but yesterday the risk of that happening greatly increased. Up until now, the CCP could point to the constraints imposed by the “One country, two systems” governance model in the face of domestic calls to quash Hong Kong “traitors.” Going forward, it will be hard to square any hesitation with the NPC’s fighting words. Moreover, the proposed law provides for the overt presence of Chinese security organs in Hong Kong, which would facilitate repression and incite new tensions.

Back in August, in Hong Kong for International Business: Stick a Fork in It, my colleague Dan Harris warned about a series of changes for the worse the city could expect. Among those changes, he predicted the following, all of which have already come to fruition and are expected to accelerate:

  • Companies will move their Hong Kong bank accounts elsewhere: Just today, our China team discussed the sudden, en masse decampment to Singapore banks by Chinese companies with whom our clients deal.
  • Travelers will choose somewhere other than Hong Kong as their Asia stopover: Even before COVID-19, Hong Kong airlines like Cathay Pacific were seeing their numbers slip.
  •  Companies [will] decrease or eliminate their hiring in Hong Kong: The unrest was one of the factors that led to the closure of my erstwhile local bookstore, part of a Singaporean chain.

As tension increases in Hong Kong, the time for foreign businesses and individuals to act is now, as difficult as that might be given the continuing restrictions due to COVID-19. In August, we suggested the following:

(1) consider places like Singapore and Bangkok as your Hong Kong replacement, (2) implement plans for evacuating your Hong Kong personnel, (3) cease using Hong Kong arbitration clauses (except with Hong Kong companies), and (4) avoid going there unless truly necessary. If corporate responsibility or data protection are at the core of your business your Hong Kong decisions are more pressing.

Even more urgently now, contingency plans that envision unrest not seen in Hong Kong since World War II must be developed. Imagining PLA troops patrolling Nathan Road may be hard for some, but as I lived through the euphoria of democrat Anson Chan’s election victory in 2007, I could not have imagined walking down a blocked-off Nathan Road just seven years later, let alone witnessing the takeover of the Legislative Council chamber 12 years later.

Things are going to get ugly. More than ever before, I hope my prediction is way off. But hope is not a strategy and the strategy for most companies should be to leave.

Listen above or stream on SpotifyApple PodcastsGoogle Play or Stitcher!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are proud to announce our new podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

Every Thursday, Fred and Jonathan take a bite-sized look at legal and economic developments in locales around the world in an effort to decipher global trends in law and business with the help of their international guests. No topic is too big, too small, too simple, or too complicated. They will be covering continents, countries, regimes, governance, finances, legal developments, and whatever is trending on Twitter.

In Episode #6, we discuss current developments in the EU with Shannon Brandao, an international politics and law specialist and American attorney based in Belgium. We cover:

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz@harrisbricken.com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

We’ll see you next Thursday for another discussion on the global business environment, this time with guest Dr. Rodolfo Perdomo as we discuss Uruguay and its impact on the international cannabis trade.

International lawyers

Had a long conversation with an old friend the other day regarding layoffs. This friend is an international attorney for a big company (not in employment law) that is going through layoffs throughout the world. My friend was bemoaning this fact and together we bemoaned how complicated it is for international companies to manage a global workforce because the laws are so different around the world. We also, of course, bemoaned the horrible economic situation companies and people are facing pretty much everywhere.

A lot of what we discussed was how easy it is to terminate employees in the United States and how that has negatively impacted the United States during the pandemic. We talked of how some European countries (Denmark for instance) had essentially paid employers to keep their employees on reduced salaries. We both liked that because it meant far fewer unemployed and thus far fewer people with no income but for unemployment compensation, which typically does not last long. But then we talked about how the United States had stepped up by boosting unemployment compensation by $2400 a month and how there are even some people in the United States making more on unemployment than they did while working, but that is also because the minimum wage in some U.S. states is so low. For example, Georgia’s minimum wage is a shockingly low $5.15 an hour.

Then we talked about how the United States is one of the few countries with “at will employment” which means essentially that employers can, with some exceptions terminate an employee for a good reason,  a bad reason, or no reason at all, but because of lawsuits, it is common for employers to pay severance in return for the employee agreeing not to sue.

Then he told me how in Malaysia, employers virtually always select employees for layoffs based entirely on the “last in, first out” principle — the newest employees are the first to be terminated. He then talked about the pros and cons of such a system. He said this made layoffs relatively simple and non-contentious, but this also meant that really good employees with relatively low salaries are let go while mediocre employees with higher pay are forced to be kept on. So Malaysia has chosen clarity and simplicity over efficiency, but then again, clarity and simplicity can be seen as their own efficiencies.

And then there is China….

In China, the rules around layoffs and terminations are incredibly complicated and they even can vary tremendously by locale. It is also incredibly common for terminated and laid off employees from foreign companies to sue their former employer and prevail based on some incredibly picayune national or even local rule. You failed to get your employee to sign the termination notice? The termination is invalid. You terminated your employee and then paid for unused vacation time, rather than the other way around? Your termination is invalid? You terminated your employee for stealing and that is not a terminable offense listed in your Employee Handbook? The termination is invalid. We together made up these examples and neither of us know if they are real or not, but the fact that they very well might be should be reason enough for you to be ultra-careful with your China terminations. See China Employee Terminations: Unilateral is Tough.

We ended up agreeing that operating internationally will always be complicated and how it is never possible for any company to have extensive in-house knowledge regarding the specific laws of every country. Rather, the key is knowing the right questions to ask before making big decisions and knowing the right people to consult for localized legal expertise. We then

On the employment law front, we essentially agreed that the big questions to ask before engaging in employee layoffs are the following:

  1. Are there any laws or statutes or even local rules that specify the selection criteria for layoffs?
  2. Are there any laws or statutes or even local rules that specify which employees might be protected from being laid off?
  3. Do your employees have a collective bargaining agreement and, if so, what does it say about layoffs?
  4. Do your employees have written contracts (in almost all countries they should) and what do those say about layoffs?
  5. Do you have an Employee Manual or a Company Handbook or a set of Employer Rules and Regulations and, if so, what does that say about layoffs and what does that mean for your particular country?
  6. Are there any employees that should for any business reason not be laid off and if you do not lay off those employees will that require you to not lay off other employees that you would like to lay off and how will all this impact your layoff decisions. In other words, it is important that you not forget the ramifications to your business of who you lay off.

In other words, this stuff is complicated wherever you are.

Update: A Mexico-based lawyer friend of mine just sent me the following from the New York Times Briefing today:

Much of the rest of the world — including Australia, Britain, Canada, France, Germany and South Korea — has followed one strategy on coronavirus stimulus. Governments have temporarily paid the salaries of workers in order to prevent millions of layoffs.

The United States has taken a different path. It created a complicated mix of different stimulus policies, including loans to businesses and checks for families. This approach doesn’t appear to be working: The U.S. has had a sharper rise in unemployment than other countries. Many jobless Americans have also lost their health insurance — in the midst of a pandemic.

China employment lawyersSince the beginning of the COVID-19 outbreak, China has released and updated countless national and local employment laws to deal with rapidly changing circumstances. In the United States and the EU, best practices usually dictate that you update your company’s employee handbook at least once a year and even more often if there have been substantial employment law changes. The same holds true for China and with all of the recent employment law changes, it is time again for an update to your Employer Rules and Regulations (the common name for an employee handbook in China).

Though the coronavirus and these new laws have complicated things for foreign employers in China, they do not mean you must relinquish everything to your employees. Even China’s most pro-employee locales still allow employers to unilaterally terminate an employee for a serious breach of the employer’s rules and regulations. However to quote the Chinese old saying, “to do a good job, an artisan needs the best tools.” What this means in the China employment law context is that if you are going to terminate or even just discipline one of your employees, you must first be certain of the following:

  • Your China company’s Employer rules and regulations clearly and concisely and in both Chinese and in English spell out your company’s disciplinary measures.
  • Your company’s rules and regulations and your methods for implementing those rules and regulations comply with all applicable China employer requirements.
  • You checked all applicable laws and practices and your company’s disciplinary measures are legally enforceable.
  • You have good written proof (like a receipt) that your employees received your employer rules and regulations.
  • You clearly documented your employee’s violation of your rules and regulations.

Of course you also need to dot the i’s and cross the t’s with respect to the actual termination but that’s a topic for another day.

We have discussed many times that pretty much all employee terminations in China are difficult, and even more so now with China’s heightened concerns about the economy and unemployment. So why bother with even attempting a unilateral termination now? Because if you have an employee who is stealing from you or crushing company morale or damaging your company’s reputation, for example, you don’t have much choice. And of course there are also those companies that have been hit so hard financially by the coronavirus crisis that they effectively have no choice but to terminate employees.

A common example our China employment lawyers have been seeing these last few months is the situation where a foreign company has legally reopened its China operations post-COVID and one or more of its employees refuses to return to work without any legal basis for doing so. Provided you have fulfilled your employer obligations under the applicable law — such as sending the employee a reminder about returning to work (this usually requires you looking to your local laws and regulations regarding what you must do before you can make the termination decision), you can discipline or terminate the employee for serious wrongdoing without having to pay any severance. However, you still need to follow your own employer rules and regulations regarding absenteeism.

We have found that foreign companies with the fewest employee problems in China tend to have the following in common:

  • They have a robust China HR team, either in China or outside China, typically in both places.
  • Their HR people in China and at their worldwide headquarters collaborate often; they talk often and they share in the decision-making process.
  • They maintain an enforceable, practical and up-to-date employee handbook in English (or the native language of the company’s key decision-makers) and in Chinese they can read and understand and rely on.
  • Their other employment-related documents, including their employment contracts, are in both Chinese and English and they coordinate with their employer rules and regulations.

Bottom line: If you have not recently checked and updated your China employee handbook, now is the time to do so.

If you want to know more about how to handle employment law matters in China, I urge you to attend my free webinar on June 23. For more about this webinar and on how to sign up, please go to FREE WEBINAR – China Employment Law: What Your Company Needs to Know.

China Employment Lawyers Beijing

The Beijing High People’s Court and The Beijing Labor and Personnel Dispute Arbitration Commission together recently released a set of Answers to Questions Concerning the Application of Law in the Trial of Employment Dispute Cases During the Prevention and Control of COVID-19. Below are some highlights from these Answers.

The following principles will be used in handling employment dispute cases:

  1. Rule of law.
  2. Safeguarding employees’ rights and interests. Supporting the survival and development of employers. Equally protecting the rights and interests of employees and employers. Guiding employees and employees through these tough times together. Promoting “win-win” solutions between employees and employers in resuming work and production.
  3. Stressing the importance of negotiation and mediation. Encouraging and supporting employers and employees to resolve wages and other employment-related issues through consultation, with an emphasis on mediation. Dealing with employment relations in a flexible manner.
  4. Swiftly handling disputes and streamlining proceedings. Maintaining the stability and harmony of employment relations in Beijing.

Notice the theme here? Flexibility and harmony and mediation, as opposed to fighting and litigation. Now on to some of the specific questions and answers.

What if an employer extended a job offer to an employee before the Chinese New Year holiday and agreed the employee would commence work right after the holiday period but the employee was unable to start per the agreed start date due to the pandemic? When did the employment relationship commence? The parties establish an employment relationship as of the employee’s actual start date. However if the employer has already arranged for the employee to provide labor in a flexible way, the day the employee starts to provide labor will be considered as the employee’s commencement date.

What if because of the pandemic the employer is not able to execute or renew a written employment contract with the employee and the employee demands double wage payments for the employer’s failure to use a written employment contract? If the employer can prove it proposed to the employee that the employee execute or renew the written contract and that its failure to enter into a written contract was caused by coronavirus-related circumstances beyond the employer’s control, the courts will not uphold the employee’s double wage claim.

The employer and the employee may mutually agree to execute a written employment contract in electronic form. The parties must use data messages which can be considered written and electronic signatures considered reliable under the PRC Electronic Signature Law and other applicable laws and regulations. The employer needs to make sure that the generation, transmission, and storage of the electronic employment contract actually meets the requirements of the Electronic Signature Law and other applicable laws and regulations and that the electronic employment contract is complete, accurate, and not tampered with. In addition, the electronic employment contract must comply with the PRC Employment Contract Law regarding employment contracts. If these requirements are met and the employee claims its electronic employment contract is invalid because it is not a written contract, the employee will not prevail and the employer will not be hit with a double wage penalty.

If an employee in a probation period is unable to return to work due to reasons beyond his/her control and the employer is unable to assess whether the employee passes the probation period through flexible methods, the employer and the employee may mutually agree to defer the probation period without violating the Employment Contract Law (which provides that the employer can only impose one probation period on the same employee). The period during which the employee is unable to work is not considered part of the originally agreed upon probation period and therefore the above approach will not be considered as an extension of the originally agreed probation period.

If the actually performed probation period (after deducting the period affected by the pandemic) exceeds the originally agreed probation period, the employee can demand the employer make up for the wage difference for the time period beyond the originally agreed probation period and pay damages for such period according to the Employment Contract Law.

The 2020 Chinese New Year holiday was extended by three more days: January 31, February 1 and February 2. If the employer required a standard-hour employee to work during those three days, the employer may first arrange compensatory time off and if compensatory time off cannot be arranged, the employer must pay overtime at a 200% rate. For an employee under the comprehensive working hours system, the employer first needs to subcontract the hours worked on January 31 and February 1 from the total number of statutory standard working hours for the applicable comprehensive calculation period, and then determine if any overtime pay is owed to the employee. An employee under the flexible working hours system is not eligible for overtime pay if he/she worked during those three days.

If the employer arranges for the employee to work from home or to work flexibly during the period of pandemic prevention and control, it will generally be deemed to be full attendance on the part of the employee, and the employer cannot lower the employee’s remuneration without the employee’s consent.

If an employee is confirmed or suspected of having COVID-19, infected but asymptomatic, or has come into close contact with a confirmed or suspected COVID-19 patient, how should the employee be paid during the quarantine treatment/medial observation period? The employer may choose not to pay the non-guaranteed portions of the employee’s remuneration such as performance-based compensation, bonuses and commissions, and attendance-based car/meal subsidies but must pay base salary and other guaranteed portions of the normal wages and in no event can it pay less than the local minimum wage. If the employer arranges for the employee to work flexibly during such period, the employee shall be paid his/her normal wages.

If the employer suspends production/operation, the employer must pay the employee wages in accordance with the standard provided in the employment contract within a wage payment cycle. If it goes beyond a wage payment cycle and the employee provides labor, the employer and the employee may agree on adjusting the employee’s wages but those wages cannot be less than the local minimum wage and if the employee does not work, the employee must be provided basic living expenses at a rate of no less than 70% of Beijing’s minimum wage.

If the employer can prove that the employee’s being subject to quarantine treatment/medical observation is because the employee failed to obey the government’s pandemic prevention and control measures, and the employee is unable to work during such period, the employer can treat such period as personal days and handle it accordingly. Note that this pretty much requires the employer have a set of enforceable rules and regulations that covers personal days.

What are the wage payment requirements for the employee unable to provide normal labor during the period of delayed resumption of work or unable to return to work because he/she is affected by the pandemic? First, the employer may arrange for the employee to use annual paid leave and other available leave and adjust the rest days in the 2020 calendar year and pay wages accordingly. Alternatively, the employer may negotiate with the employee regarding adjusting the employee’s wages, but it cannot pay the employee less than the local minimum wage. If the employee’s absence is shorter than one month, and neither of the above options are available, the employer may choose not to pay the non-guaranteed portions of the employee’s remuneration, such as performance-based compensation, bonuses and commissions, and attendance-based car/meal subsidies, but it must pay the employee’s base salary and other guaranteed portions normal wages and it cannot pay less than the local minimum wage. If the employee’s absence is longer than one month, the employer must pay the employee according to the Beijing Wage Payment Regulations. Employees stuck in Hubei Province must be paid basic living expenses in accordance with a Beijing government notice implemented in March.

If an employee is sent on a business trip and then is unable to come back to Beijing due to pandemic prevention and control, the employee needs to be paid his/her normal wages during the period of absence. If the employer suspends production/operation, the above rules regarding wage payments during suspension of employer production/operation will apply.

Pursuant to the Beijing government’s February-14 notice on further clarifying requirements for people returning to Beijing during the pandemic prevention and control, an employer may treat as personal days the time of an employee who travels outside Beijing for personal reasons and is subject to quarantine upon return and is unable to work during the quarantine period.

If the employee needs to stay at home to care for a child, the employer may arrange for the employee to work flexibly (e.g., putting the employee on leave and adjusting rest days within the 2020 calendar year) but must pay this employee his/her normal wages. Alternatively, the employer may negotiate with the employee regarding adjusting the employee’s wages, but these wages cannot be less than the local minimum wage. If the above does not work, and the employer’s leave program (such as annual paid leave and any other available leave, including any employer-provided additional leave) has been exhausted, the employer may choose not to pay the non-guaranteed portions of the employee’s remuneration, such as performance-based compensation, bonuses and commissions, and attendance-based car/meal subsidies, but it must pay base salary and other guaranteed portions of the normal wages and in no event can it pay less than the local minimum wage. If the employer suspends production/operation, the above rules regarding wage payment during suspension of employer production/operation will apply.

Note that regardless of the situation, the employer is virtually always required to pay the employee some compensation, which is usually at least the local minimum wage.

What if the employer suspends production/operation because of the pandemic or the employee is unable to return to work due to the prevention and control of COVID-19 and the employer arranges for the employee to be on standby without the employee’s consent? This sort of arrangement is valid because the employee’s standby status is a result of the pandemic, and not the employer’s fault. The parties are encouraged to reach agreement regarding putting the employee on standby, but the employer is not required to obtain the employee’s consent in this situation.

During the period of prevention and control and delayed resumption of work, if the employer arranged for the employee to take annual paid leave and/or other employer-paid leave without the employee’s consent, such an arrangement is still deemed valid because the employer may make such an arrangement according to its business needs. The employer is though expected to take into consideration the employee’s preferences but it is not required to get the employee’s consent.

If an employee submits a resignation letter and the employer fails to process the resignation on schedule due to the pandemic, can the employee retract his/her resignation? Once delivered, the resignation takes effect and the fact that the separation procedures have not been completed by the expected time because of the pandemic does not affect the validity of the resignation.

If the employer fails to have a good understanding of COVID-19-related policies such as those relating to wage payments and employee benefits, resulting in underpayment or omission of payment to the employee, can the employee terminate the employment contract and demand statutory severance on the basis that the employer failed to timely pay employee remuneration in full? The short answer is no, but only if the calculation standard concerning the remuneration during the pandemic prevention and control is not clear and the employer and the employee reasonably disagree on such calculation standard and it is necessary to go through labor arbitration/court to determine whether the employer indeed owes wages to the employee and under these circumstances it can be deemed that there is no malicious intent or gross negligence on the part of employer. In other words, it is a lot smarter and safer to spend the time getting your wage payments right the first time!

If the employer does not provide protective equipment such as masks or disinfectants to the employee who returns to work during the period of pandemic prevention and control, can the employee terminate the employment contract and demand statutory severance on the basis that the employer failed to provide adequate labor protections? The short answer is no, unless the employee’s position or work is related to medical care, pandemic prevention and control etc. and the employer is required by law to provide protective equipment but fails to do so.

If the employer resumes production in compliance with the law and the employee does not want to return to work, the employer may unilaterally terminate the employee for wrongdoing without severance only if it can produce evidence to show that it has reminded the employee regarding returning to work or attempted to persuade the employee to return to work or the employee refuses to return to work without justification.

If the employee intentionally conceals infection or suspected infection of COVID-19 and refuses to cooperate with health checks, or compulsory quarantines or treatments, or the employee refuses to abide by or accept the government’s pandemic prevention and control measures, causing significant social impact or serious consequences, the employer may unilaterally terminate the employee for wrongdoing without severance.

Bottom Line: Beijing is trying hard to balance protections for both employees and employers during these trying times. That being said, if you are an employer in Beijing, be very careful in dealing with the new complications that come with heightened employer and employee protections. Needless to say, these complicated new Beijing employment rules will be keeping China employment lawyers busy for a long time.

If you want to know more about how to handle employment law matters in China, I urge you to attend my free webinar on June 23. For more about this webinar and on how to sign up, please go to FREE WEBINAR – China Employment Law: What Your Company Needs to Know.