China Laws are Local and Don’t You Forget it

On August 4, 2010, the Dalian Labor and Social Security Bureau (大连人力资源和社会保障局) posted on its website a new list of requirements for foreign nationals seeking employment with Chinese companies in Dalian. The new requirements mandate that foreign individuals must prove the registered capital of their employer is greater than 3.0 million RMB (about USD $440,000). This new requirement applies without distinction between foreign owned (WFOE) and Chinese owned companies. By its strict reading, even the founder of a WFOE would not be permitted to hire herself if the registered capital of her WFOE is less than the minimum. In the same way, a small Chinese research and development lab in Dalian would be prohibited from hiring foreign workers under this new requirement. It was this Chinese example that caused me to become aware of this new requirement.

When we contacted the staff at the Dalian Human Resources Bureau, they told us there is no supporting policy, rule or regulation for this new requirement; it is based merely on the oral instructions of the bureau chief and the only documentation is what the Bureau has posted on its website. When we asked about the requirement’s application to employment by an owner of a WFOE or employment by a small research and development company, the staff indicated they intend to follow the requirements strictly and will refuse to allow any foreign employment in any company that does not meet the minimum capital requirement, regardless of the status of the company. When we commented on how this policy goes counter to Dalian’s stated goal to become a business outsourcing and software development center, the staff indicated that they don’t think about such things; they just do what their supervisor tells them to do.

Clearly this new rule is contrary to Chinese law. If enforced in the manner proposed by the staff of the Labor Bureau, it will have a negative impact on many small technology businesses in Dalian, both domestic and foreign owned, many of which my law firm represents due to Dalian’s closeness to my base in Qingdao. Frankly, this requirement seems so irrational I cannot even guess at the reason behind it. It is clearly bad for all Chinese companies, WFOE and domestic. No one is being protected, and everyone involved is being hurt.

Though I believe this requirement will not be imitated by other cities, the issue is uncertain. Dalian has previously been considered to be a very open city to foreign workers. If Dalian does this, we should expect other cities to follow suit. However, since the requirement is completely irrational, it is impossible say what will happen elsewhere.

The imposition of a threshold based on minimum capital does, however, illustrate that Chinese government authorities still do not understand the requirements of high tech companies operating in the research and consulting sector. We continually face the problem that Chinese officials judge companies solely on the size of their capital investment. Consulting and research companies often have very low capitalization since their resource is their staff and not their physical assets. Government officials often delay or even refuse to approve a consulting/research WFOE because the capital is low. This recent requirement by Dalian seems to be in that line. A manufacturing company with 3 million RMB in registered capital is a rather small operation. A consulting/research company with the same capitalization would be quite large.

However, none of the above explains why foreign workers are being targeted with this requirement (I do not call it a rule since it has no legal basis), so I still cannot think of any basis. No Chinese lawyer or official with whom I have discussed this matter has been able to provide any explanation either. The attitude here in Qingdao is: “The requirement is clearly illegal. Good. Perhaps it will convince more people to invest in Qingdao. “We don’t behave that way down here.”

Some of our clients have asked me whether the Dalian bureau will get away with this? The answer is: yes. The Dalian Labor Bureau can pretty much do whatever it wants in regulating foreign workers in Dalian and it is not unusual for local labor bureaus to have their own special requirements. Foreign workers have no power, so protests from the foreign workers have no impact. Only if there is an organized protest by Chinese companies will there be changes. To date, this has not happened, since small Chinese companies do not make extensive use of foreign workers. Small WFOEs are more likely to have a problem with all this, but they have little power and are usually ignored by the labor bureau. This sort of arbitrary change in long established rules is a fact of life in China and it adds to the uncertainty of doing business here.

The key takeaway from this is that now, more than ever, companies need to be mindful of the differing requirements and even “attitude” of China’s cities before determining where in China to locate their business.

Qingdao anyone?

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