A Checklist for Avoiding China Employment Problems

As we are in the third quarter of the calendar year, we are just starting to ramp up our employer-employee audit for our China clients. The importance of these audits has significantly increased over the years and with China experiencing a resurgence in COVID cases and a declining economy, our China employment lawyers are already seeing an uptick in disgruntled employees and the government cracking down on anything that might harm the economic well-being of China’s employees.

The below is not intended to be an exhaustive list of what you should be working on to bring your company into compliance with China’s employment laws, but it is a good starting point. Working through the below will not only give you a clearer picture of how things stand with your employment law compliance, but it will also help you map out what you need to minimize your regulatory/lawsuit exposure.

1. Employment contracts. Do you have a written contract with every full-time employee? What sorts of contracts do your part-time employees have? Are all your China employment contracts current? Are all your open-term employees on open-term contracts? Do you employ independent contractors who should be classified as employees?

2. Employer rules and regulations. Do you have an employee handbook for each of your China offices? Have you provided it to your employees and have they signed a Chinese language form acknowledging receipt? When was the last time you checked and updated your handbook?

3. Vacation days. Are your employees using up their accrued vacation time each year? If they refuse to take their vacation days, are you documenting it? If they are not giving up their vacation balance, can you arrange for them to use up such balance?

4. Working hours. Are you staying on top of your employees’ overtime? Are your employees designated to work under the alternate working hours system (such as the flexible working hours system) within the validity period as approved by the relevant employment authorities? If not, have you submitted a renewal application? Are you paying attention to the employees’ actual working hours and workload to make sure it accords with their respective working hours system?

5. Employee remuneration. Are you meeting the minimum wage requirements? Are you making salary payments on time and in full? Are you implementing pay cuts in a lawful manner? Does your bonus policy spell out how your company distributes bonuses to employees?

6. Social insurance and housing fund contributions. Are you making all mandatory social benefits contributions required by the local law? What about employees based in a different city from your office? How do you treat your expats?

7. Expats. Are you current on all paperwork for your expats? Are you providing employee social benefits as mandated by law? Are your expat employment-related agreements such as non-compete agreements in good shape?

8. Female employees, especially those who are pregnant or nursing or are maternity leave. Are you providing labor protections and accommodations as required by law? Are you providing the required maternity leave? Are your employees on maternity leave being paid what they should be paid during the entire period of their leave?

9. Employee terminations. Do you have a plan in place before you terminate an employee? Do you document all your employee terminations in writing? What about employee resignations? Do you have an off-boarding checklist? Do you timely transfer your terminated employees’ files and social insurance accounts? Do you perform all your obligations upon employee departure, such as providing a Proof of Termination of Employment Relationship document?

Just about whenever we write about China’s employment law, we get emails from foreign companies wanting to know whether these laws apply to them when they do not have a legal entity in China. That question is in many respects a whole new ball game because if you get caught for having an employee (or independent contractor) in China without having a legal entity/company in China, you will need to pay all back taxes and benefits, plus interest plus a large penalty.

Jail time is also possible for this as well. And here’s the kicker. China has gotten incredibly good at catching companies that do this. One of the ways the Chinese government does this is by monitoring bank accounts and payments incoming from outside China. It then offers the “employee” both immunity and cash for revealing everything. We have even seen people deliberately convince their foreign “employer” to pay them off the grid so that they will always have that leverage against their employer and so they can eventually rat them out for money, while having avoided paying taxes on their earnings (and getting a higher salary because of that) for years. Just to be clear, having an employee or independent contractor in China without having a legal entity (a WFOE or Joint Venture or whatever) is one of the riskiest things you can do, especially today.

How’d you do?