China Employment Law Webinar: Questions Answered

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.

China Employment Law Q & A Questions

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 are the Q & A’s.

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.

Question: I would like to better understand IP requirements for Chinese employees or contractors we hire: do work-for-hire copyright laws apply?

Answer: China does have laws on this, but they are not particularly clear nor well understood by China courts. It therefore is pretty much always much better for you to get this protection by entering into contracts with your employees that make clear your company will own the IP and set out your company’s requirements and expectations regarding the company’s IP. China’s courts understand and enforce well-crafted China-specific contracts. You mentioned contractors in your question and whenever I hear that I feel compelled to mention that there is virtually no such thing as independent contractors in China and believing otherwise is dangerous.

Question: Are there mandatory insurance rules to follow for the employer and the employee?

Answer: Yes. Each locale has different mandatory benefits which include mandatory social insurance. The common types of social insurance include maternity, unemployment, work-related injury, pension and medical insurances. China has recently stepped up its efforts to make sure all foreign companies are paying out all they owe in social insurance, so you do want to be sure you are doing this correctly.

Question: Is there any way to avoid the employer status by contracting the employees’ service? Would a recurring temporary contract work?

Answer: China puts people in jail and fines them a lot of money for treating someone as an independent contractor and for using temporary contracts to avoid China employee and/or tax requirements. China has also gotten incredibly effective at rooting out these violations. So I guess my answer is that you avoid these things unless you get an experienced China employment lawyer to confirm that you can retain someone as a temporary employee.

Question: Labor is a sticky wicket in China. We’ve taken the first step to reduce hours/salary for 90 days. Not without negotiation with each. The employee seems to rule. We may have to go again. How much can we count on FESCO for good information?

Answer: Just to be clear to everyone, FESCO is a well-known third-party hiring agency. They also provide HR-related services. My law firm’s employment lawyers work constantly with FESCO (and with various other third-party hiring agencies) and overall they tend to be fairly good, but this definitely varies by region and even by city. Many of the people at FESCO with whom we interact speak English well, but we sometimes need to “bridge the gap” between our clients and FESCO due to language barriers. Despite what I just said, you should not trust FESCO or any other third-party hiring agency because their only real goal is to do what is favorable for them and often that is harmful for you. I am not surprised that you would say employees seem to rule in China because the government does definitely favor them, but most of the time when employers have problems with their employees in China it is because they failed to lay the proper groundwork in their employment contracts or in their employer’s rules and regulations.

Question: Should employees in China be required to sign an acknowledgment form for Employee Handbook and company policies? What are the best practice suggestions for multinational employers to deal with anti-discrimination and anti-harassment in China?

Answer: As I noted during my talk, you should require your employees in China sign an acknowledgment form (in English/your native language and in Chinese — with Chinese being the controlling language) for your employee handbook and your company policies and potentially various other documents as well. In terms of suggestions to for a strong anti-discrimination and anti-harassment program in China, there is no one-size-fits-all. At minimum, your company policies on anti-discrimination and anti-harassment should both conform to all applicable Chinese national and local laws and also reflect your company’s culture and core values. In our experience, foreign companies usually get in trouble with their employees and with the Chinese government when all they do is translate their non-China-centric company policies into Chinese without modifying them to actually work for China.

Question: We are seeing many Belt and Road Initiative projects delayed due to COVID-19. Will this have long-term impacts on the future development of BRI and Chinese overseas workers?

Answer: I am not really qualified to answer this, but I do not see how it would not.

Question: What happens if an employer does not start the employee contract renewal process within the 6 months before the contract expires? Is there any risk for the employer? Is there any difference if the employment contract has been signed with a foreigner?

Answer: Generally speaking, an employer does not need to start the contract renewal process so far (6 months) in advance, although it usually does not hurt to start early. Normally, an employer just needs to start the contract renewal process a little more than a month before the contract is set to expire, unless there is a clause in the contract requiring the employer start the renewal process earlier. Specific requirements vary by location though and it is important you know what the requirements are for where you and your employee are located. An employer that continues to employ an employee under an expired contract can be subject to all sorts of problems and penalties, including a double wage penalty payable to the employee. There is not much difference if the employment contract is with a foreigner, except generally the foreign employee is not legally entitled to an open-term contract.

Question: Are China employers obligated to inform an employee regarding employment contract renewal and, if so, how long before the current contract expires must that employer notification be?

Answer: Like so many China employment law matters, the rules on employment renewals vary by locale. Most places require employers give notice of renewal/non-renewal at least one month before the current employment contract expires. Regardless of what local law mandates, our China employment lawyers typically recommend employers start the renewal (or non-renewal) process early because it is much easier to deal with this issue early on before the expiration of the current employment term.

Question: Will the non-compete clause be effective even if the employee has not received any compensation for the non-compete clause?

Answer: Do you mean the employee never received any non-compete compensation after termination of employment? Whether a non-compete will be deemed effective will depend on additional facts, such as what exactly the parties agreed on regarding the employee’s obligations, the duration of non-payment by the employer, as well as what the local laws say. Generally speaking though, an employer must continuously pay its employee for a post-employment non-compete agreement to remain in force. In addition, the employee may unilaterally terminate the non-compete agreement/provision if the employer fails to make its required non-compete compensation payments for three months or longer, so long as the employee performed his or her non-compete obligations up to that point.

Question: If a non-compete clause has been included in the employment contract, but the employee does not receive any compensation payment, can the employer trigger the clause effectively?

Answer: A lot depends on what the non-compete and the employment contract say. See also my answer to the question above.

Question: Can I engage contractors instead of employees in China?

Answer: Generally speaking, China does not allow for independent contractors. This means any individual must be engaged pursuant to an employment contract, and your Chinese company must fulfill all employer obligations stemming from such employment, including paying the employee a salary and making social insurance and other mandatory employee benefit contributions. If you do not have a legal entity in China, you cannot directly hire anyone there and the independent contractor approach will not work. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. There are some complicated work-arounds for this.

Question: We are a WOFE with four staff in Shanghai. We use FESCO to handle payroll and contracts. However, we have found FESCO to be slow and in many cases negligent. Aside from doing this ourselves, are there other options?

Answer: It is a little hard to comment on your situation without gathering up additional facts. In our experience, FESCO is generally pretty good overall, (though sometimes slow and always expensive) but this varies by location. If FESCO is not responding to you in a timely manner, you should request to speak to a higher-level manager, and you should also start looking at other HR service providers. Your options will also depend on your contract with FESCO. This goes without saying but you should never rely on FESCO for legal advice because they are not China lawyers, employment or otherwise. There are other options, but all are complicated and each have their own risks and rewards.

Question: Can a US company send its employees to China to perform some short-term work for its customers in China without getting any special visa?

Answer: It depends on what you mean by “special visa.” It also depends on other factors such as what the employees will do and how long they will work in China. This is not something you want to get wrong because China has since coronavirus been looking even harder for foreigners in China without the proper visa.

Question: I believe one of the latest China developments is the requirement for a business conducting CBEC to now establish a WOFE in China. I was a WOFE legal representative in China in 2009 for a German company. Can you touch on key changes since that time for someone becoming a legal representative again in 2021?

Answer: This is a very specific question and I do not have enough facts to even hazard an answer. I suggest you send me an email with your detailed questions. We will then review and get back to you with our initial thoughts.

Question: We have an employee who started out great but now is terrible. She is on an open-term contract though. Are we still allowed to terminate her?

Answer: Just because an employee is on an open-term contract does not mean she is untouchable. For example, you can unilaterally terminate an employee (open-term or otherwise) without having to pay severance if you can show the employee committed a serious wrongdoing in violation of your employer’s rules and regulations. With that said, terminating an open-term employee tends to be much trickier than terminating a fixed-term employee. Your options will largely depend on your employment contract with this employee and on your employer rules and regulations. Generally, if there is a no legally permissible basis for a unilateral termination, you will need to try to get it structured as a mutual termination (which requires a severance payment of at least the statutory severance amount) and she, as an open-term employee, will have a great deal more leverage in terms of severance negotiation.

Have more China employment law questions?

Please feel free to send them to us. And please feel free to send us any other China or international law questions because if I cannot answer them, there almost certainly will be another lawyer in my law firm who can.