How to Avoid China Employment Law Problems

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With China’s economy in decline and so many foreign companies in China laying off employees, it should come as no surprise the Chinese government is cracking down harder than ever on foreign employers that do not comply with China’s employment laws and the number of employee lawsuits is correspondingly on the rise. We previously discussed this need for strict compliance in Want to Keep Your Business in China? Do These Things NOW:

If past performance is any indicator of future performance — and I firmly believe it is — we know well what foreign companies must do to avoid China’s problems going forward and we set out those things below. Before anyone panic (too much), let me just say that for the past decade or so, China has consistently gotten tougher on foreign businesses in China that are not operating legally there and though this announcement is a really big deal, it is more a change in scope than it is in kind.

In fact, two days ago, in How to React to a China Economy in Decline, I listed 8 things our international lawyers were seeing that indicate China’s economy is in decline. Item number one was the following:

The number of foreign companies getting into legal trouble in China. Whenever China’s economy slows, its government starts looking for foreign companies out of compliance with Chinese laws. It does this both to show its citizens that it is working on their behalf and to raise money by collecting on unpaid taxes, with interest and oftentimes steep penalties. In particular, we are seeing yet another increase in China going after foreign companies doing business in China without a WFOE. See Doing Business in China Without a WFOE: Will the Defendant Please Rise and China’s Tax Authorities Want You.

Correspondingly, it has become more important than ever for foreign employers to make sure they are complying with all of China’s national and local employment laws. See China Employment Law: Local and Not So Simple.

 Employer Rules and Regulations Are Key to China Employer Compliance

Since China ramped up its employment compliance enforcement of foreign employers our China employment lawyers have been hit with just a ton of complex employment law matters for foreign companies fighting off China’s employment problems. Two “common themes” jump out at us from these projects as the most frequently-needed services by China employers these days: employee terminations (especially of high-paid employees) and Employer Rules and Regulations/Employee Handbooks. The first should be obvious and not terribly surprising given what has been going on in China for the last six or so months. The second is because many employers now realize that to better manage their China workforce (or what is left of it), they need a clear and relevant and appropriate Employee Handbook that actually works for them and not against them, both for their existing employees and for their employee terminations. They need an Employee Handbook that lays the groundwork for how to make employment decisions that work under China’s employment laws.

For your Employee Handbook to satisfy these criteria, it must comply with today’s laws (not last year’s or a prior year’s laws) and it must comply with the laws of the locale in which your employees are based. In other words, using an Employee Handbook written for Shanghai four years ago when you now have employees in both Shanghai and Shenzhen is a recipe for disaster. Using an Employee Handbook for Shenzhen that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employee manual is another disaster waiting to happen. Oh, and one more disaster we keep seeing: Employee Handbooks created from a Chinese-language template that is not customized for the city or the industry or the employer and then is badly translated into English so nobody making the decisions really even knows what it says.

When our China employment law team is tasked with writing an Employee Handbook, the first thing we do is review our client’s existing employee rules/policies (if any) so as to better understand the client’s HR program and to be able to consider and account for our client’s HR goals. Drafting an Employee Handbook involves balancing our client’s HR goals with the realities and the laws and other requirements of its particular industry and locale. That is the proactive side of our Employee Handbook work.

The reactive side of our Employee Handbook work occurs when we are retained by a foreign employer in China with an employee dispute or a merger or a termination or a mass layoff or a government compliance problem. It is from those instances that we have learned how so many Employee Handbooks are either useless or affirmatively harmful.

We have handled countless China employment law matters where a bad Employee Handbook has cost foreign companies months of hassle and tens of thousands of dollars — sometimes considerably more than that. On the flip side, we have handled countless employment law matters where a well-crafted and enforceable Employee Handbook has meant all we employment lawyers needed to do was to confirm and slightly guide an employer’s previously made decision based on an applicable provision(s) in their Employee Handbook.

By way of example, we have handled situations where employers have wanted to terminate an employee for “not being a team player.” This is not a terminable offense under Chinese law, per se. But after we had gathered up all the facts regarding the employer/employee situation and reviewed the Employee Handbook, we found several instances of specific employee misconduct that would permit a unilateral termination without severance. Because it was obvious the employees had breached enforceable provisions of the Employee Handbook, their terminations went off without a hitch.

No Employee Handbook can cover everything, but it should be written to cover enough appropriate and enforceable catchall language to provide flexibility to act on most employee problems. A good Employee Handbook also sends a strong signal to your employees that you understand and respect how China’s employment laws work and this alone goes a long way towards preventing employee and government problems in the first place.

Bottom Line: Avoiding China employment law problems requires you have a relevant and timely and well-crafted China employee handbook. 

Chinese Law Requires Every Full-Time Employee to be Hired Pursuant to a Written Employment Contract

The Chinese government loves going after employment law violations because this 1) is popular with its citizens, 2) protects its employees, 3) generates hard currency for the government, and 4) quietly and legally retaliates against American (and Western) companies in the trade wars.  It’s a rare day when one of our China employment lawyers is not contacted by a foreign employer caught in this net. The key for foreign employers to avoid these expensive employer problems is compliance.

But just having a good employee handbook is merely step one. You need more. You also need a current and appropriate employment contract with each and every one of your employees. Like the employee handbook, your employment contract should work for you and not against you, and it must comply with all of China’s current national and local employment laws.

Chinese law requires every full-time employee be hired pursuant to a written employment contract and to have an up-to-date one during their tenure. It also makes sense for your part-time employees to have written contracts because their part-time employment contracts prove they are part-time employees. This contractual proof often becomes necessary because part-time employees love claiming they were really full-time employees all along and you now owe them lots of money for having failed to provide them with the required benefits that come with full-time employment.

When the China employment lawyers at my firm are tasked with writing an employment contract, the first thing we do is review the employer’s HR program and their employees’ situation to determine what terms and conditions should go in the employment contract and what should be left in the employee handbook. What will be the employment term? Will there be a probation period? What will be the employee’s working hours? How will overtime be paid? What sort of compensation package will employees get? What are the conditions (if any) for employees getting a bonus? How many vacation days will employees have? Will employees get additional paid time off in addition to vacation days and national holidays? A good China employment contract protects the interests of both the employer and the employees and does so within the laws and realities of the parties’ locale. See China Employment Law: Local and Not So Simple. Most importantly, a good employment contract helps guide both the employer and the employee in making good decisions and thereby reduces legal and government disputes.

A good employment contract coupled with a good employee handbook gives foreign employers greater freedom to act. China’s declining economy means many foreign employers want to lay off or terminate Chinese employees and our employment law team has been getting a lot of matters where foreign employers want to terminate an employee for “not working out. This is difficult to accomplish under Chinese law and nearly every time the dividing line between the employer that can do this and the employer that cannot has been the employment contract and the employee handbook and the interaction between those two documents.

We have had times where we could confirm the employee’s employment term was expiring soon and there were no laws requiring the employee to be retained and the employer was not otherwise required to enter into an open-term contract upon the contract’s expiration. In other words, a clean non-renewal notice could relatively easily achieve the employer’s goal and it did. In these situations, all the employer had to do was pay the employee statutory severance for not renewing the contract — a small cost compared to keeping them for another term and possibly converting them to lifetime employees. The terminations went smoothly. We have also had times where we have had to tell our client that terminating any employee was simply too risky.

What constitutes a good China employment contract? A good China employment contract must be written from the perspective of Chinese laws and from the laws of the locale in which your employees are based. In other words, you should not use an employment contract for a China-based employee that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employment agreement. You also should not use the same contracts for Shanghai that you use for Shenzhen.

Consider this: An employer and a Chinese employee sign an employment contract that provides that the employee can be terminated without cause so long as the employer pays a certain amount of severance. The employer employs the employee for a few years but then decides to lay off the employee and verbally informs the employee of its unilateral decision and its intent to pay the severance specified in the contract. The employee says, “I do not agree to the termination.” The employer refers to the provision noted above. The employee says, “yeah but that provision is illegal, so it is not enforceable against me.” The employer assumes the parties can contract around termination, but many China employment laws simply cannot be contracted away.

Employment agreements like this often cause big trouble for foreign employers, especially when they make an improper termination decision. Most of the time when our China employment attorneys are called in to help in this sort of situation, the employers do not even realize the extent of their problems because they think that by following their own employment contract they have done everything right. All this stems from the employer’s having failed to use a proper employment contract in the first place.

Last but not certainly not least, an employment contract, regardless of how well-written it is, must be current. If it is not current it could subject the employer (not the employee) to all sorts of risks and problems. I will discuss this in a subsequent post, but for now, just remember you should not have an employee on your payroll without a current written contract. If you have an employee whose contract is about to expire, you should consider whether you should renew the employee’s contract for another term.

Bottom Line: Avoiding China employment law problems requires you have a current China-centric and localized employment contract with all your China employees.

Employer Audits

To stay on the right side of China’s toughened employment enforcement and to avoid costly disputes with your employees, you need more. You need to be sure your company is in full compliance with China’s national and local employment laws and regulations and that your employment documents are written specifically to avoid government and employee problems.

If you have a company in China with employees (be it a WFOE or a JV or a Rep Office), you should periodically audit your employment documents and procedures to ensure your company is doing everything using best practices with its employees. With stepped-up Chinese employment law enforcement since the beginning of the US-China trade war, our China employment lawyers have seen a big increase in requests for employer audits. The bad news is that we have yet to do an audit for any company where we did not recommend a number of changes to minimize client risk. The good news is that in most instances, these changes have been both relatively easy and inexpensive to make.

One of the things about improper employment documents and procedures is that they usually do not harm employers until an employee leaves the company, and this is more true of China than of any of the other countries in which our law firm regularly operates. This is because China has so many tough requirements for terminating an employee and many of those requirements actually apply to employees that voluntarily leave as well.

I often wrote about the importance of never having an employee work for your company without a current and localized written employment contract. Consider the below example, which is based on a number of real cases our China employment lawyers have handled.

An employer wants to reduce its workforce and so it tries to negotiate a mutual termination with one of its employees. The employee’s first employment contract expired roughly a year ago and there is no current written contract. The employee does not want to be terminated for fear she will not be able to land a new job any time soon due to China’s declining employment market. Instead of accepting a quick settlement, this employee states that she will not agree to a mutual termination and she also lets her employer know that she cannot be terminated because the lack of a written employment contract makes her on an open term now. By not properly renewing this employee’s contract at the end of her initial employment term and then trying to work out a mutual termination, the employer has put itself at great risk of either litigation or a super expensive severance package or a lifetime employee.

I use this example because when we get into these situations late, there is only so much help we can provide. But when we get these situations early as part of an employer audit, we can work with the employer to get the employee to sign a new contract that will allow the employer to terminate the employee on more favorable terms at some later date.

Another common issue that can be avoided by reviewing your employment programs is overtime claims. Foreign companies often tell us that “overtime is common in China and China employees’ 996 schedules (meaning they work from 9 am to 9 pm, six days a week) is the new normal and everyone works overtime and nobody ever gets in trouble for this.” The only problem with this is that it is completely untrue. Chinese companies tend to get away with this, but foreign companies inevitably end up in expensive and time-consuming disputes with their employees regarding overtime.

We are not only seeing an increase in overtime claims brought by employees, we are also seeing a big increase in local government authorities cracking down hard on overtime violations as well. See How to Do Business in China Without Going to Prison.

Most foreign employers have no intention of violating China’s overtime laws and yet they frequently do, largely because these laws are incredibly complicated and most English language translations of them are woefully inadequate. For example, many foreign companies are unaware that they need prior government approval before designating an employee to work flexible hours (which allows them to avoid having to pay all or most of the overtime). It is not uncommon for foreign companies to adopt a home country’s working hours policy for China and expect that to work for China. It is also not uncommon for foreign employers in China to fail to properly document overtime. These are just some of the things you should have reviewed regarding your China overtime policies and procedures.

Another problem we often see in our employer audits is employers with beautifully written and enforceable employer rules and regulations but lack proper proof that their employees ever received those rules and regulations. A China employer that makes a disciplinary decision that cannot prove the disciplined employee ever received a copy of the company’s rules and regulations very likely will be sued by the disciplined employee and very likely will lose. To state the obvious, you should not wait until an employee termination to be sure you have good proof that your employees received your rules and regulations.  And just to dispel a prevalent myth, nearly all of China’s employment laws apply with full force regardless the size of your company. See China Employer Rules and Regulations: A Must Have No Matter Your Size. In many ways, the smaller you are the more important it is your employment documents and procedures are in full compliance. I say this because a lawsuit and settlement that costs $200,000 is a much bigger issue for a company with $2 million in revenue than for a company with $200 million.

Now is the time to get your China HR programs in good shape.

Employee Terminations

Even in the best of times, employee terminations in China are fraught with risk. A mishandled China employee termination (or even just the discussions surrounding the termination) can quickly cause you problems. China’s declining economy has weakened its job market and made both employees and the government more likely to fight back against any little termination mistake.

It is therefore critical that you perfectly map out and execute your China employee terminations. Better to be deliberate and correct than to act in haste and get even the smallest aspect of your employee termination wrong. You are far more likely to lose than save money by getting rid of an employee quickly.

For example, before you tell an employee that you will be terminating her or him you should first consider this fundamental question: What is the basis for the termination? In turn, the basis for the termination will determine the path you should take. Will the termination be a unilateral termination with a legally permissible basis or should you seek instead to settle with the employee and have the termination be a mutual termination? Your answer will determine how much severance you are required to pay (if any), which is a super important issue in China. There are other important issues that nearly always come up with China employee terminations, such as bonuses, overtime pay, compensation for unused vacation days, reimbursement for work-related expenses, and non-compete provisions. Ideally, you should consider each one of these before you even approaches an employee regarding termination. At the very minimum, you should not initiate an employee termination until you have determined the basis for the termination and the severance amount you will need to pay.

Consider this by now common scenario. A U.S. company is going through structural changes in multiple office locations in the U.S. and is considering laying off employees in its China office as well. Without China-centric termination agreements and without checking with the local labor authorities, the HR head at U.S. headquarters informs China employees of the company’s termination decisions but does not inform them of how much severance they will get. The terminated employees then file a labor claim. By not being prepared, the employer has made things much worse. If the employer had worked out mutual terminations with its terminated employees and secured signed mutual termination agreements with each of them, it likely could have avoided employee lawsuits and government hot water. If it had not been feasible for this company to negotiate a mutual termination deal with every terminated employee, it still likely could have avoided (or at least reduced) its legal difficulties by first consulting with its local labor authorities regarding a mass layoff.

Here’s another example. A foreign company believes one of its employees engaged in illegal activity. Without first checking its China employer rules and regulations and the employee’s employment contract and without making sure it has preserved tangible evidence supporting its belief that the employee engaged in illegal activity, the company unilaterally terminates the employee with no severance on the day it discovers the alleged misconduct. The employee will likely sue the employer claiming wrongful termination and it likely will win. No matter the eventual result of the lawsuit, it will likely be expensive and time-consuming. When our China employment lawyers are confronted with situations like this, we usually start by determining whether the employee’s conduct (and the circumstances) warrant a unilateral termination under Chinese law. In many cases, it does not. If the employer is not legally entitled to a unilateral termination, what usually (but not always) makes sense is a mutual termination. However, in some cases, even if a unilateral termination comes with risks (as it virtually always does), it may be the employer’s best option. Whether or not our client goes ahead with a unilateral termination, our goal is to provide our client with enough information so it can know its risks and can make a thoughtful cost-benefit decision on how to proceed.

Foreign employers in China tend to want to move quickly when terminating a non-performing or problem employee before the employee’s probation period has ended. However, in most of these cases, the probationary employee does not come within any particular grounds for termination under Chinese law that would allow the employer to unilaterally terminate. In these cases, the employer’s best option is usually to pay the employee severance in exchange for the employee voluntarily leaving (i.e., a mutual termination). And since this termination will be structured as a mutual termination, whether or not the termination occurs within the probation period is not important.

With these leaner times in China, we have recently been seeing foreign companies terminating one or more of their employees and then “hiring” them back as “consultants.” This is almost always fraught with problems. Before doing something like this, you should first answer why you want to terminate this person in the first place and why you want to “hire” her back as a consultant. Most importantly, you should be aware that China generally does not allow for independent contractors. Is there an alternative to terminating this employee? For example, when does her contract expire? Can you simply not renew her contract? If you do terminate this employee, is it really worth the risk to then bring her back as an independent contractor? Most importantly, might you not be better off just keeping this person as an employee, rather than taking the double risk of terminating her and then using her as an independent contractor? We have seen situations where the terminated employee eventually sues the employer both for the initial wrongful termination and for additional pay and benefits from the “independent contractor” stint. The employee alleges (almost always with a good basis to do so) that its consultant relationship should be deemed to be an employment relationship and seeks damages arising from the employer’s failure to treat her as an employee all along. These make for extremely messy and usually very expensive lawsuits.

Proceeding with prudence with any China employee termination will help you prevent legal and government problems and avoid HR hassles. Take the time necessary to ensure you have fully resolved all outstanding issues with the relevant employee to the extent you can and make sure you can check all of the “termination boxes” required by China’s local and national employment laws. The bottom line is that these days you cannot afford not to handle all your China employee terminations with extreme care.