How to Terminate China Employees Legally

China employee non-compete

Though Western companies getting tripped up in China due to differences in legal systems makes for common fodder on this blog, in the employment law context the reverse often holds true. Far too often the international employment lawyers at my law firm get contacted by companies in trouble for assuming China employment law is completely different from their home country or for just not knowing employment laws well enough anywhere to give their employment actions much thought in China.

Let me explain.

In the United States, it is pretty common for employers to give fired or laid off employees a severance package, contingent on the fired or laid off employee signing a release of all claims he or she might have against the employer. It is surprising to me how so many employers seem not to realize that doing the same thing typically makes sense in China. It is possible “my numbers” are skewed, but it seems that my law firm gets more calls from employers asking us how to handle a recently terminated employee than we do from employers seeking our assistance on terminating an employee. When we do get requests to help with terminations, we usually do some brief research regarding the particular employee’s (or employees) possible claims against our client and then we work with our client to strike a deal with its soon to be terminated employees to ensure the employee will not and cannot sue our client in the future.

Another employment area where we too often see a strange disconnect is in withholding employee pay. I do not know US law very well on this beyond the following:

  • Virtually all states in the US treat employers incredibly harshly for not paying their employees.
  • In Washington State an employer that does not pay its employees will be liable to its unpaid employee for double the wages, plus attorneys’ fees. Maybe ten years ago, a friend of mine at a local startup tech company (that no longer exists) came to me because he was owed $19,000 in unpaid wages.  As a favor to my friend, I wrote a letter to his employer saying that employer needed to pay pay my friend the $19,000 immediately or risk having to pay him double, plus whatever attorneys’ fees he incurred in having to collect. I received a “screw you” letter from the company’s lawyer saying that my friend had been such a terrible employee and had so often failed to show up for work that nothing was owed to him. That made me mad and so we sued, seeking double damages plus attorneys’ fees. The company fought us for all of about two weeks and then fired their initial lawyer.  A new (much smarter) lawyer came on and called me all but begging to settle. That same day, we settled for $45,000.  The attorney wisely knew that fighting these cases makes no sense at all.

In some US states not paying an employee can even rise to the level of a criminal offense. Therefore, smart employers, virtually no matter what, pay their employees their wages.

China employers should be handling their China employees the same way, but too few foreign companies not realize this.

Twice in the six months, our employment attorneys have represented foreign companies threatened with lawsuits for not paying former employees wages owed during the employees’ tenure with the company. In both instances, the companies were justifying the non-payment of wages based on some allegedly horrible thing their employee had done while with the company. One of these companies also was trying to contend that a contracted-for yearly bonus did not constitute wages.

China has very strict laws regarding payment of wages and failing to pay wages can lead to criminal charges. So our advice is nearly always “just pay” and worry about everything else later or not at all. Unless of course the responsible parties within the company are so committed to their legal positions they are willing to risk having to argue for it from a Chinese jail cell.

We first wrote about paying wages to avoid a criminal sentence back in early 2011, in a post entitled, Pay Your Wages In China Or Go To Jail, back when China formally criminalized non-payment of wages:

The 19th Session of the 11th National People’s Congress revised China’s criminal code to provide that intentionally withholding wages is a criminal offense. A company that does this is subject to criminal fines and the responsible individuals are subject to imprisonment for up to seven years.

This is obviously a significant issue and we are not surprised by this law change.

We are frequently contacted by owners of China WFOEs experiencing financial difficulties. Very often the owner/manager reports that the company is behind on paying wages. Our advice always is to deal with the wage issue immediately because local officials will not allow a company to liquidate or restructure when wages are outstanding.

Now, our advice on wages is even more critical.

If you do not pay your wages, there is a good chance that you, as the manager/owner, will be charged with a crime and you could face seven years in a Chinese jail. Note also that this law change has retroactive effect. That is, if you failed to pay employees before the law was passed and that failure to pay continues, you are subject to criminal prosecution.

Article 276(1) of the China’s Criminal Code provides that willful withholding of employee wages is a crime. The elements of which are as follows:

a. The company has the means with which to pay the wages.

b. The company willfully withholds payment of wages by either refusing to pay or by intentionally transferring assets to escape liability for payment.

c. The situation is serious or the effects are severe.

Failing to pay wages subjects the company to a fine and persons within the company who are directly responsible are to a fine and imprisonment. Imprisonment is up to three years where the situation is serious and up to seven years when the effects are severe.

Back then we noted some issues that were unclear about the law, including the following:

1. How does a company demonstrate it does not have the financial means to pay? A simple statement will not work. In our opinion, the only way to ensure there is clearly no means to pay is to file for a formal petition in bankruptcy or to go through the complex economic based layoff system prescribed by the Labor Contract Law?

2. Who is directly responsible? For a normal WFOE, this will certainly include the general manager and the Representative Director. It will also likely include accounting or related personnel if they are actually responsible for making the wage payment decision. This almost certainly means this applies to the foreign Representative Director, even if that person is based outside of China and is not involved in day to day decision making.

We then concluded that the safe thing to do (of course) is not to “rely on these possible defenses to liability”:

You must take payment of wages seriously. You do not want to be in the position of making a defense after you have been arrested for a serious crime. Chinese employees have become very aggressive about ensuring their foreign employers pay their wages. This weapon will be added to the employee arsenal and we expect the weapon to be used aggressively.

In the past, we always stressed to our clients that if they were not going to pay their Chinese employees, they had better leave China before making that clear as we have been involved in a number of hostage situations involving non-payment of debts. We have also always stressed that their failure to pay those wages will almost certainly mean that their company will never be allowed back into China and many of those connected with the company will likely be barred as well.

We will now be telling them that if they stay in China or seek to return to China at some later date, they run the very real risk of going to the big house for a long time.

China continues to get tougher on employers that mistreat their employees and this is particularly true for foreign employers. If you have employees and you have never read China’s Labor Contract Law, I urge you to do so now.  If you want something more in depth on China’s labor laws, I recommend you read the book, The China Employment Law Guide.

Bottom Line: 
Get full releases from employees you terminate. If you owe employee wages, pay them. Do not mess around.  Do not try to be cute. Do not let your anger at your ex-employee cloud your judgment.

Any questions?

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