China Employment Law Webinar: Questions Answered, Part 1

If you recently attended my webinar on China employment Law: What Your Company Needs to Know, first off, thank you. I hope you enjoyed it as much as I did.

As I mentioned at the end of the webinar, we received far more questions than I could possibly answer so I said I would write a blog post or two where I would answer the questions I was not able to get to during the Q&A session.
As promised, here is the first part of that additional Q & A.

Question: Can I legally hire part-time employees in China? I am specifically thinking about hiring engineers, designers, and consultants. What are some of the key things I should consider so as to ensure that the employment contracts I use are legal?

Answer: You can hire people part-time, but just as is true for full-time employees, you should have a written employment contract with all of your part-time employees as well. Just because China’s employment laws do not provide part-time employees with the full legal protections afforded to full-time employees does not mean you should not be using a full-fledged employment contract. Using such a contract will help protect your business. Such a contract should include, among other things, provisions on salary, working hours, employment term, paid leave, employee benefits, and termination. You should also have an agreement that covers trade secret and confidentiality. Please note (again) that to have employees, you need to have a Chinese legal entity as the employer. It is dangerous not to do this. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. In addition to the “usuals” I just mentioned, it is also important that your employment contracts be written to comply with the various local laws and rules that have become so prevalent in China. So for example, what is a good employment contract for Shanghai might vary from what would be a good employment contract for Beijing or Shenzhen.

Question: Are there any caveats regarding “non-competition clauses” for a US corporation having employees in their Chinese offices?

Answer: There are many. China employee non-compete agreements are complicated and foreign companies constantly get burned by them. For example, if you as an employer agree to a non-compete for, say two years (this is the maximum non-compete period you can impose under Chinese law), you have to pay your ex-employee for two years after he or she leaves for the non-compete, and this is true even if you no longer care about the employee competing with you. In our experience, about half the time foreign employers are better off not using a post-employment non-compete at all. The trick is figuring out which half your company falls in.

Question: We are looking to dispatch one of our Swiss employees to our subsidiary in China for a fixed period. What type of employment contract should be use?

Answer: It depends on the length of the fixed period. If it will be for a short term — say less than 90 days at a time — you can probably keep them as an employee of your Swiss entity. Otherwise, you probably will need to make them an employee of the Chinese subsidiary and treat them like China-based employees at that point. This answer can vary based on your country, the duration of the term, the number of terms, the time between terms, where this employee will be in China, and even the industry in which you operate. This area of China employment law/China tax law is half law, half intuition.

Question: Does an employee paid by a European company from Europe have to declare and pay Chinese social charges and taxes in addition to what they are paying in Switzerland?

Answer: If that person legally should be a China-based employee, then absolutely yes. During the webinar, I mentioned that it can be expensive and even dangerous to have “employees” without a company in China. This is that situation and if a company gets caught for having an employee without a company in China, it 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. One of our lawyers thinks some people deliberately convince their foreign “employer” to pay them off the grid so that they will always have that leverage against them and so that 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 in case I have not been clear enough, 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, when China is looking to raise cash due to the economic downturn.

Question: What can I do about an employee who is damaging our company’s reputation?

Answer: A lot depends on what the employee is doing to damage your company’s reputation and what you have done (if anything) already to address the employee’s misconduct. Have you documented everything this employee has done and the impact that has had? It would be good if you have. What you can do also depends greatly on what your employment contract and your company’s rules and regulations say. If you have everything in good order, you probably can discipline or maybe even terminate the employee. If you do not have everything in good order, it would probably make sense for you to get everything in good order and then look at your options with this employee. The last thing you want to do is discipline or terminate this employee when you are not in a good position to do so. Doing that will lead to lawsuits and attorneys’ fees and damages and penalties and it might even lead to you never being able to do anything about this employee.

Question: I am an online English teacher and I have an LLC. There are many schools in China that request my services online to teach English. Is there anything I need to do special about the contractual language or would a standard contract in English be suitable?

Answer: Without knowing in what country you have an LLC, this is a difficult question to answer. A foreign company contract with a Chinese company will differ from an employment contract, which will be between an individual and a company. Generally, we much prefer contracts with Chinese companies be in Chinese and in English, with Chinese as the controlling (official) language. This makes it more likely your Chinese counter-party will abide by the contract and this also increases your likelihood of being able to enforce the contract if it does not. Your contract should fit your situation and meet your needs and provide you with the maximum protection possible. For general information on China contracts, check out Why Good China Contracts are Still a Good Thing.

Question: I have a registered recruitment agency in South Africa and I would like to know what I can do to protect the legal rights of the people I place in China. Sometimes their employers breach the contracts or change the contract conditions.

Answer: In addition to making sure that those you place in China have good contracts with their China employers, your South African company should also have a good contract with the Chinese companies with which you are making placements. I urge you to read The Five Keys to A China Contract That Work.

Question: I would like to know if we could discuss dispatch workers as well, since many factories abuse these employees.

Answer: That is true. I am not sure what you want to discuss though, as there are many legal requirements regarding dispatched workers. One thing I want to say is that when you fill your positions, you first need to make sure the workers you plan to use can actually be hired as dispatched workers because if they cannot you may be deemed to have hired them directly as your employees. If an employer hires someone as a dispatched worker to circumvent China’s employment law, chances are the dispatch arrangement will be deemed illegal by the Chinese authorities and courts.

Please stay tuned for Part 2.