Clients, potential clients and/or the press are always asking our China lawyers what foreign companies doing business in China need to know to stay out of legal trouble. Since a client recently asked me to speak at his company about the legal issues of which it should be aware, I formulated the below checklist. This list is meant as a starting point and it is in no way exhaustive.

  • Are You Operating Legally?  China has all sorts of requirements for doing business in China. The basic (non-technical) rule is that If you are going to be doing business in China for anything more than weeks at a time, you probably need to form a legal entity to do so. This entity can be a WFOE, a JV, or a representative office. It is important to note that some businesses that are perfectly legal in the United States or in Europe are illegal in China.
  • Do You Have a Good Contract?  It almost always pays to have a written contract and it is usually best to have this contract be in Chinese. Generally speaking, if something is not spelled out clearly in your contract, there is a good chance a Chinese court will find it does not exist. If you want your Chinese counter-party to abide by your contract, you will likely want disputes resolved in China.
  • Are You Protecting Your Intellectual Property? Your intellectual property (IP) registrations in your own country do not generally extend to China. To secure protection of your trademarks and patents in China you must register them in China. China is actually pretty good at protecting trade secrets covered by a contract calling for their protection.
  • Is Your Company Bribing Anyone?  The United States vigorously enforces its Foreign Corrupt Practices Act (FCPA), which penalizes improper payments to foreign officials by US companies.  In certain situations, US companies can be liable under the FCPA for payments made by their Chinese partner.  Canada and most European countries have their own somewhat similar corrupt practices acts, as does China.
  • Are You Complying With Customs Laws?  A company recently called me about my law firm drafting sales contracts for their technology product. My first question to them was whether the US would even allow them to export their product to China. This question had never even occurred to them, but it turned out that exporting their product to China would be illegal under US law. Years ago, I was approached by a client ready to ship product to North Korea that would have violated US prohibitions on doing business with that country. The client was simply unaware of the law. Some products (certain types of software are a good example of this) can be sent to China only with a validated license. On the flip side, many products require special approvals to be imported into China and some cannot be imported at all.
  • Are You Violating Any Antitrust/Tax/Environmental/Labor Laws? Sorry to group all of these together, but if I analyzed them separately it would take ten blog posts.  Just make sure that you recognize that doing business internationally and with China means that you must always be thinking of these things and that Chinese laws on these can be very different from those to which you are accustomed.

Did I miss anything?

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?

Last week, I attended co-blogger Steve Dickinson’s lecture on China labor law. Steve’s lecture was part of a truly superb Doing Business in China seminar put on by Global Nav. The thrust of Steve’s speech was that labor laws in China have changed, they are being enforced against foreigners, and they are very different from U.S. labor laws. In a nutshell, the biggest differences are that written contracts with all employees are required in China and firing an employee generally must be for cause. Neither of these are true in the United States.

Judging from the audience questions (and this was an extremely sophisticated audience), many were surprised by this and many had trouble understanding the full import.

A few days later, Steve and I were talking about this with the Chinese lawyers we work with in Qingdao. In explaining to them some of the cases we have handled for American clients who got themselves into trouble by improperly laying off Chinese employees, it soon became apparent to Steve and me that the Chinese lawyers were not grasping why these American companies were making these mistakes. They would ask questions like, “how could these American companies really believe they could lay off 100 people without first securing their approval and that of the government as well?” When Steve and I told them about US labor laws, the Chinese lawyers found them so bizarre, they actually laughed.

We told them of how there is a saying in the U.S. that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination). We talked about how one might fire an employee for wearing a green shirt. We told them of how most employees in the United States do not work under written contracts and how companies generally prefer not to use contracts. It took us at least a half an hour for us to give a basic explanation of employer-employee relations in the U.S. Even then, it was pretty clear that these exceedingly bright lawyers were still nonplussed.

It was a good exercise for Steve and me and it only reinforced why it is that Americans (the labor laws in Europe are not so wildly different from China) in China so often act on Chinese employment law matters based on completely false assumptions as to how things are really done there

For more on China’s Labor Contract Law, check out the following:


By: Dan Harris and Brad Luo

It has been a little over eight months since China enacted its groundbreaking new Labor Contract Law, which is just enough time to preliminarily assess its impact. The Labor Contract Law has already greatly impacted employee treatment in China and greatly impacted how Chinese employees view their rights. It also has increased employer costs, but less than publicized. The Labor Contract Law has caused some companies to go out of business and caused other companies to leave China for other countries less protective of their workers, but many of those companies were not terribly profitable in the first place. So far though, we have detected very little impact on Western companies doing business in China.

Before enactment of the Labor Contract Law, employee abuse was rampant in China and worsening. Labor disputes in China increased more than thirteen-fold between 1995 and 2006 and a large and growing number of these disputes erupted into public demonstrations. Most Chinese labor law experts viewed the existing labor laws and regulations as inadequate for solving employer-employee disputes and considered employees to lack basic legal protection. The Labor Contract Law was designed to give employees greater rights and easier enforcement of those rights so as to achieve the ultimate social policy of creating and sustaining a “harmonious society”:

This Law has been formulated to improve and perfect the labor contract system, to make explicit the rights and obligations of both parties of the labor contract, to protect the lawful rights and interests of laborers and to build and develop harmonious and stable labor relationships. (Emphasis added)

The Labor Contract Law gives workers a private right of action to enforce their own legal rights. In other words, employees may now sue their employers directly, without the aid of the state. Chinese labor departments and agencies still may assign administrative penalties for labor law violations, but granting a cause of action to Chinese employees has greatly minimized the role of the state in the employer-employee relationship and greatly increased the power of Chinese employees to handle their employment grievances on their own.

Chinese workers are not hesitating to seek to enforce their rights in the courts and they are flooding China’s court dockets with labor cases. Since last year, labor disputes have increased in Beijing’s Chaoyang District People’s Court by 106%, by 231% in Nanjing’s Qinhuai District People’s Court, 126% in Shenzhen, 132% in Dongguan and 92% in Guangzhou. This increase in labor law cases proves both that Chinese workers are aware of their new rights under the LCL and that they perceive themselves as having new rights worth enforcing.

With these new employee rights comes a corresponding impact on employers. This is particularly true of foreign company employers as enforcement of China’s laws has always tended to be stricter against them, both by the government and by private action. Many labor-intensive companies that manufactured in China have shut down altogether or have moved to lower labor cost countries like Vietnam, Bangladesh, or Cambodia. Though these closures and moves seem large in terms of the number of companies closing or leaving, these numbers are deceiving. Very few of the foreign companies that have closed down or left China appear to have been based in either North America or Western Europe; most were from Hong Kong, Taiwan or South Korea. The overwhelming majority of companies that have quit China of late were in very low level manufacturing (imagine a room with 30 workers and no real machinery) and were marginal or illegal operations even before the new labor law came down. Profitable Western companies are talking about expanding outside of China (the “China Plus One Strategy”), but they generally are not leaving. The reason for this is simple: China is better equipped than countries like Vietnam, Bangladesh, or Cambodia to manufacture all but the least sophisticated products.

Though factory closings and moves outside China have been rare, the impact of the new law has been widespread. In reaction to the new labor law, French supermarket giant, Carrefour, required most of its forty thousand strong Chinese employees to resign and then sign a new two-year contract on the eve of the Labor Contract Law becoming effective. Carrefour did this to try to circumvent the Labor Contract Law’s provisions requiring indefinite contracts, which make employee termination difficult.

Since enactment of the Labor Contract Law, foreign direct investment (FDI) into China has continued to increase; China attracted $42.78 billion in FDI from January to May 2008. A recent (post-Labor Contract Law) Ernst & Young survey indicated 44% of world business leaders still consider China the best destination for FDI. Many Western companies that were already meeting or exceeding the Labor Contract Law requirements are pleased with the new law because it is forcing their less employee-friendly competitors (particularly domestic Chinese companies) to spend new money to meet the new Labor Contract Law standards.

On a micro level, the new law has changed the way nearly every company does business in China. Smart companies in China now use written employment contracts, in Chinese, with all of their employees and maintain a written policy manual, also in Chinese, explicitly setting forth the various bases for employee termination. The written contract is necessary to avoid potentially huge penalties and the policy manual setting forth grounds for termination helps militate against having lifetime employees.
Emboldened by the new laws, local governments and unions are also stepping up their efforts to protect worker rights. In an effort to circumvent Article 42 of the Labor Contract Law, which gives existing long-time employees extraordinary rights when terminated, Huawei (China’s largest networking and telecommunications equipment company) secured “voluntary resignations” from of nearly all of its long time employees. Huawei’s plan was to enter into new written employment contracts with these workers, thereby making them brand new employees and thus easier to terminate under Articles 40-41. In response to Huawei, the Guangdong Supreme People’s Court and the Guangdong Labor Arbitration Commission jointly issued Guiding Opinions Regarding the Application of the Labor Dispute Arbitration Law & the Labor Contract Law, voiding the resignations.

The Labor Contract Law has also carved out a bigger and better defined role for Chinese labor unions and the unions are beginning to act on that. Articles 51-56 of the Labor Contract Law specifically authorize labor unions to enter into collective bargaining agreements with employers and all employees in China may join the China Federation of Trade Unions (ACFTU), which is controlled by the Communist Party and has around 170 million members. Unions can negotiate salary, working hours, holidays, and benefits, but they do not have the right to strike. The ACFTU recently reached collective bargaining agreements with Wal-Mart in several cities, gaining pay raises this year and next. By the end of 2006, around 50,000 foreign companies in China had entered into collective contracts in China and the ACFTU has made no secret of its goal to unionize nearly all foreign companies within the next few years.

Despite all the changes brought about by the Labor Contract Law and all the changes to come from that new law, Chinese employee rights are still lacking as compared to the West. But China’s efforts to move away from being a destination for foreign companies seeking super low paid workers will inexorably continue with little let up. Just as with so much else in China, foreign companies are getting out in front in terms of going along with what China wants to do to upgrade its labor relations. Domestic companies are and will continue to follow in terms of having to deal with unionized and higher paid employees. China wants to improve its labor relations in a way that creates harmony without disruption. It is moving towards granting workers greater rights and increasing unionization and that will continue. But these moves will come incrementally, not in big lurches.

What has the impact been on your business?

One of the things we keep hearing is that small and medium sized manufacturing companies that manufacture in or outsource to China will soon be leaving China, mostly for Vietnam. China’s increasing enforcement of its environmental and labor laws, coupled with its rapidly increasing wages and its “dangerous products,” will lead a whole slew of Western manufacturing companies to leave China for Vietnam.

I disagree.

In a post entitled, “Why Vietnam is not the next China. Logistics,” the All Roads Lead to China blog, written by China logistics guru, Rich Brubaker, posits that will not happen because Vietnam “is missing the infrastructure…. specifically its logistics infrastructure.” All Roads sees Vietnam as having a “looong way to go” on this front. He notes that “75% of all exports leaving Vietnam on a plane are garments (39%), footwear (25%), and handicrafts (10%)” and the only reason to export such products via plane is because the seaports are inadequate. 3.137 million TEUS (twenty-foot equivalent units) left Vietnam seaports in 2006 as compared with more than 20 million TEUs from Shanghai alone. Getting goods out of Vietnam is expensive and time consuming.

My own unscientific sampling reveals that in most sectors of manufacturing, Vietnam’s manufacturing capabilities are just not there yet. I have asked around ten of my firm’s manufacturing clients and five or six manufacturing/product sourcing consultants where Vietnam fits in the manufacturing picture. All the manufacturers said Vietnam is not ready to manufacture their product and all the consultants said something along the lines of, “clothing and rubber duckies, yes. Much more than that, no.” This is not to say big companies like Intel will not be establishing their own manufacturing operations in Vietnam, but it does say we should not expect a wholesale transfer of manufacturing from China to Vietnam in anything approaching the near term.

Population is another limiting factor. Vietnam has around 85 million people, as compared to China’s 1.3 billion plus. China has been “the factory to the world” for quite some time, during which time it built up both a physical and a human infrastructure for manufacturing. Despite this, China suffers from a shortage of skilled labor in nearly all manufacturing sectors and in certain of its regions, a shortage of unskilled labor as well. There is no way Vietnam has the human capital to inherit China’s many factories.

Lastly, none of the reasons typically given for a China exodus to Vietnam make all that much sense. Though standing alone, China’s rising wages and increasingly stringent enforcement of laws make manufacturing more expensive in China than in Vietnam, adding in things like transportation charges changes that equation for most manufacturing. Equally importantly, as foreign companies pour into Vietnam and as Vietnam becomes more developed, there is every reason to believe Vietnam’s legal system and wage rates will develop as well, just as it has done over time in China. There is also every reason to believe that as the quantity of Vietnam’s manufacturing increases, the quantity of defective and dangerous products leaving Vietnam will increase as well.

What do you think?  Is doing business in Vietnam more difficult in China and, if so, what makes it so?

Manufacturing outsourcing to both Vietnam and to China will continue increasing. Obviously, there will be many companies that choose Vietnam for their manufacturing who would have chosen China a few years ago. There will also be many who are in China now who will choose to expand their manufacturing operations in Vietnam instead of China. But China will remain the overwhelming choice for manufacturing and few companies manufacturing in China now will up and leave for Vietnam. Vietnam is not a panacea and it is not a replacement for China. Not even close.

What do you think?

A Chinese court in Heilongjang province recently awarded nineteen AIDS patients more than $1 million in compensation against those responsible for spreading the virus through contaminated blood (h/t to China Confidential).  According to Voice of America [link no longer live], Li Dan, who runs the China Orchid Project to help AIDS orphans, said, “One can now use legal channels to protect rights. This is an improvement.”

This further evidences the evolution of China’s legal system. In our original post of this series, China Law Evolving — Businesses Take Note, we talked about a case whose ruling “would almost certainly have been different ten years ago (even five years ago), even in Shanghai or Beijing.” The same is true of this AIDS case. China — and with it, its courts — is slowly moving from a policy of economic growth at any cost, to one where the “little guy” can get some protection. This particular case involves patient rights, but there have been other cases involving employee rights, environmental rights, and securities fraud. As we noted in the initial post, this evolution has and will continue to affect businesses in China:

What this means for businesses (particularly foreign businesses) doing business in China is the following:

  • Worker’s rights will increase.
  • China’s product liability and other tort laws will get tougher.
  • China’s environmental laws will get tougher.
  • Damages awarded in business disputes will increase.
  • The types of claims will expand and new causes of action will be accepted.

In our second post on this same topic, we talked about having “seen too many countries evolve more towards the American model of wide-open litigation not to believe China is also heading in that same direction” and counseled foreign companies doing business in China “to keep one eye on the law as it is and another on the law as it may be shortly.”

In our experience as China lawyers, most foreign businesses (at least the mostly American and European ones we represent) realize that Chinese laws are always evolving and they understand that it sometimes makes economic sense to try to stay ahead of the legal curve. There may be no point in designing a product to comply with this year’s Chinese safety standards if next year’s standards will make your product obsolete. Do you hire new workers in light of China’s proposed labor laws that will make termination much more difficult? On top of all this, foreign businesses in China are held to higher standards than their domestic counterparts.

You do not need to be a China attorney to succeed in business in China, but you do need to keep your eye on the laws relating to your business, more so than you do at home.

The other day I posted on China’s proposed new labor laws, in a post entitled, “China’s Proposed Labor Law: Going After Capitalists Like China, 1967.”  Got a great comment from Seoul super-lawyer, Brendan Carr, that is so good and so helpful, it deserves its own post.  So here goes, in Brendan’s own words:

Korea already has a Labor Standards Act (LSA) which confers job security like you’re describing the Chinese act wants to provide. Boy, does the LSA suck. Its primary and signal defect is the arbitrariness of having such a law in an environment where only the foreign companies, and big Korean companies, give a dang about compliance. Smaller Korean companies are beastly employers, but there are so many of them — and they have so many other legal problems — that it’s not worthwhile for authorities to police them. So instead they focus on the errant multinational, who “ought to know better” because of the famous foreign brand.

Free legal advice to foreign employers: Fixed term contracts should start off at 12 months. Never hire anyone on an open-ended contract, which is employment for life ab initio, or a contract longer than 12 months (you can’t enforce the longer period against the Korean employee anyway). And before that fixed term contract has renewed a second time, make a decision whether you feel comfortable having the employee around forever. Because that’s the legal position after that contract has renewed twice.

From a competitive standpoint, as we hear the giant sucking sound over here in Seoul, we can say Hell, yes, China — do it! as an equally bad labor law will level the employment-law playing field. But on an objective level, it sure seems stupid.

Four things (at least) worthy of highlight from Brendan’s comment:

  1. Tougher laws, without equal enforcement, are a way to camouflage discrimination against foreign companies. Korea and Japan are notorious for this.
  2. Laws do influence where companies locate. It would be great if China’s labor laws were as protective as those in Sweden, but if they were, countless companies now in China will indeed move to places like Vietnam, where the laws are even more favorable to employers than in China. What is best for the Chinese worker? I am not calling for 70 hour weeks or no minimum wage, but at the same time, there has to be a balancing.
  3. Good lawyers figure out how to use laws to their clients’ advantage and this means that laws relating to business rarely immediately succeed in fulfilling all of their goals.
  4. Brendan Carr should start a Korean Law Blog.  I know he is already one of the authors of Korea’s leading blog, The Marmot’s Hole, but I am serious.  Brendan?

What do you think?