Despite the increasing restrictions on using employee dispatch companies for hiring of “your” China employees, our China lawyers have seen very little by way of a slowdown in smaller companies choosing to go that route, especially if doing so will allow them to delay having to form a China WFOE that much longer.

The legal issues for foreign companies that use employee dispatch companies are not terribly complicated, with one exception.

The way the whole system works is that you as the foreign company sign a contract with the employee dispatch company for it to hire as its own employee an individual or individuals you would like doing work for your company. The better dispatch companies generally have pretty good contracts for this and so our role as attorneys for our foreign clients is mostly to point out the provisions at which our clients have some negotiating power.

The complication arises in the contract between the employee dispatch company and its/your employee and it is here where we see the most mistakes being made. The employee dispatch company drafts its employment contract with its/your employee to protect and benefit itself, without any real regard for you.  In most respects, your interests are fairly well lined up with the employee dispatch company and so for the most part it is a good thing that most of these companies draft good China employee contracts.

But when it comes to your intellectual property, you need to account for the fact that your employee dispatch company does not care at all. And when I say, “at all,” I mean at all. Your employee dispatch company does not care if its contract with its/your employee protects your IP and your employee dispatch company does not care if its contract fails to protect your IP.

For this reason, you have to care and you have to be the one to make sure that the employee contract reflects this. If you want to be sure that the employee does not end up owning your intellectual property, you need to make sure that the employee contract is clear on this. If you want to be sure that your employee signs a contract that reduces the likelihood of he or she running off with your trade secrets, you need to make sure that the employee contract has provisions for that.

Cause if you do not make sure that your China attorneys do this, nobody else will.

There is some truth to an old expression about China employees, “once hired, never fired.” Terminating a Chinese employee is rarely going to be easy, but if that employee is on probation, you do have a better chance of not getting sued for doing so.

China does allow probationary periods for Chinese employees, but only if done right. The maximum term of the probationary period depends on the term of the employment contract. If the employment contract is for between three months and one year, the probationary period can be for up to one month. If the employment contract is for between one year and three years, the probationary period can be for up to two months. For fixed-term employment contracts of three years or more, and for employment contracts with no fixed term, the probationary period can be for up to six months.

If the employment contract terminates upon completion of an agreed assignment or if the employment contract is for less than three months, there can be no probationary period.

An employee may be subject to only one probationary period with the same employer and this holds true even if the employee leaves that employer and then rejoins it.

Any probationary period must be set forth in the employment contract. If an employer enters into a separate agreement with its employee for a probationary period, the probationary agreement will be void and there will be no probationary period and the employer will be deemed to have entered into a fixed-term contract with the employee. This is done to prevent an employer who becomes unhappy with its employee from putting that employee on probation after the hiring.

My firm’s China lawyers draft all China employment contracts in Chinese as the official language (and in English as a translation for our clients) because we have heard instances of Chinese courts refusing to recognize English language employment contracts after finding that the Chinese employee did not fully understand them. We consider English language employment contracts in China to be the equivalent of a Chinese language employment contract in the United States; they make no sense at all.

Just received an email from a friend stating/asking the following (note that I have changed some elements of the email to strip it of any even potentially identifying information):

I am heading off again to work for a few years at our China Rep Office.  My new employment contract with the head office says that [foreign country] law will apply.  Will it?  And what if there is a conflict between [the foreign country] law and China’s laws, which will control?

We get this question far too frequently and we have seen way too many employment contracts written as though U.S. law (it was actually not a U.S. company in the above instance) applies all around the world. The reality is that if you are working for a Chinese company in China (be it a Rep Office, a WFOE, a JV, or whatever), Chinese law is going to apply to your employment relationship.  I know of no country that would allow otherwise.  I mean, imagine if a United States subsidiary of a Pakistani company were to claim in a U.S. court that it should not be required to pay overtime because their contract with the employee calls for Pakistani law and Pakistani law does not provide for that, or that it can discriminate against women because there is no such law prohibiting that in Pakistan?  Even if the employee at issue were a Pakistani citizen, there is absolutely no way in the world a U.S. court would go along with any of those arguments.  In fact, the argument is so bizarre I am not even aware of anyone ever having made it.

Any employer-employee relationship between a Chinese company and an employee working in China is going to be governed by China law, no matter what the contract says.  So in China there would be no conflict of laws because Chinese law would simply apply. This is why we also advocate for drafting China employment contracts and employee manuals with Chinese as the official language.  Chinese courts and Chinese administrative bodies are the only rightful jurisdiction for China labor law disputes stemming from employment in China (yes, this is true for expats too) and so it only makes sense to have these documents in the language they are sure to understand.

Here is a more interesting/complicated related question: what would happen if a U.S. company had a contract with a U.S. citizen and that contract provided that the U.S. citizen would go work at the U.S. company’s WFOE for a few years and that contract called for application of U.S. law.  Now as I have said above, no Chinese court would apply anything but Chinese law to this relationship, but what would happen if the U.S. citizen were to flip around and sue the U.S. company in a U.S. court for failing to abide by some particular U.S. law?  I do not know the answer to this question (any U.S. employment lawyers out there), but I can tell you that if it were to benefit my client, I would argue that Chinese law applies and I think I would prevail on that.  But, I can also tell you that if it were to benefit my client, I would argue that U.S. law applies.

Anyone know how a U.S. court would rule?

Just read a great post on China HR by my friend Ben Shobert.  The post is wrongly titled, “The Unique Human Resource Challenges in China’s Healthcare Market.”   The post is wrongly titled because the challenges are universal to those doing business in China and are in no way confined to just the healthcare sector.  Beyond that though, Shobert nails it.

Shobert starts his post by talking about how difficult it is to find good people for China’s healthcare industry, to which I say “join the club.”  He then goes on to set out the six lessons he has gleaned from extensive interviews with healthcare executives on the ground in China on managing China HR.  What Shobert calls “six lessons for senior care operators, developers and investors as they build their Chinese businesses” but what I call the basics of China HR.

Either way, here goes:

1. Limit the Role of the Expat. Shobert notes that the facilities that have struggled in China have had expats “front and center.”  He goes on to say that he has yet “to speak with a player in the senior care field who does not wish they could find a local Chinese senior executive or facility manager who ‘knew the business.”  He then notes that the next hope is “to find a good expat who knows China and can navigate the cultural challenges of building an organization up from scratch.”  But the lesson is that the sooner you can transition to domestic talent, the better as having expats leading your China business in perpetuity “sends a message to your staff about their upward career mobility.”  Shobert then rightly calls for the following expat-local hiring balance:

The top levels of your Chinese organization are symbolically powerful, and it is in your interests to have a strategy intentionally designed to move western expats out of the top back home once your operations have stabilized. Susie Bates, a UK HR practitioner who has been operating in China for the past 30 years, has worked with the United Healthcare group and has seen first-hand the HR challenges specific to healthcare businesses in China.  On the point of limiting the role of expats, she offered this thought, “My recommendation for companies entering this newly blooming sector is that each key role is assessed against an ‘import’ scenario, and where the skillset is undeniably unavailable in China, overseas hires need to be made with the proviso that anything up to 50% of the role be set against identifying, training and developing the next generation in that role.”  In other words, if expat help is necessary, make sure everyone knows it is short-term, and that an explicit deliverable of the assignment is to find a local replacement.

Good advice for any industry.

2.  Where to Find the Talent

Shobert’s advice here is to “recruit from several different schools, not all of which are where the best students go.  Find out which ones are most adaptable to your model and culture.”  Not being an HR person myself, I’m just not sure this differs much from just trying to get the best people you can while making sure they will be a good fit for your particular company.

3.  A Balanced Compensation System

Pay well, but try not to pay the most in your industry.  Incentivize your employees. Offer perks and do not underestimate the importance of the annual staff party.

Okay, but as an employer, here is my serious question.  Do employees in China (or anyone else) really want things like staff parties and company lunches or health club memberships or would they not just prefer the money? Which is going to provide more ROI for a company?  Or is it not really an either/or situation?

4.  A Clear Ladder to Climb

Not surprisingly, “everyone” with whom Shobert spoke “consistently emphasized” the benefit of companies in China providing their employees with “a clear ladder to climb.” One interviewee stated you need to “make certain employees understand their upward career path, and always dangle the next carrot in front of them.”  Shobert than notes something that I too have noted:

This lesson may seem so obvious that it does not need to be offered, but in my experience, this has been one of the more common frustrations Chinese employees offer as the cause for their exit.  I attribute this mistake to the tendency by western companies to assume that the large numbers of potential workers in China insulates them from having to put in place best practices like having a clear career ladder for their domestic employees.  While having a big population to draw from is accurate, the pool gets much smaller when you talk about qualified staff.  The more you want and need to hold onto existing talent in China, the more important having a clear career path available to them, against which they are being measured and managed for becomes.

5.  The Training Quid pro Quo

Shobert’s fifth lesson, is what he calls the “Training Quid pro Quo”  and that is that training and development need to be provided to employees in a way that if the employee leaves the company early, the company gets back at least some of its costs:  “A standard model is a ratio-tied pay-back if the employee leaves early – e.g. within 3 months of completion 90% paid back; 6 months 75%; etc. etc.”  This is actually legal in China and is one of the few (actually the only one that pops into my head right now) instances where a company can seek money back from a departing employee.

6.  Build the Facility as Much for Staff as Customers

Think about your own people in building your facility:

[T]hink about the location of your facility in terms of where your staff is going to be living.  If your facility is hard to get to, that is going to present a major retention problem as the industry evolves.  In a country like China where a hotven find a way to offer company training via podcasts with incentives for staff to listen and complete quizzes, adding further value to these incentives.

Being the lawyer that I am, I would add one more thing. Be sure that all of your employees (including your expats) have written and signed employment contracts, in Chinese, and be sure that you have a comprehensive employee manual, in Chinese, explaining company policy and each and every grounds for firing.

What do you think?