Putting the China Employment Law Cart Before the Horse

China product innovation

Every month or so, a client comes to me in a panic with a “brilliant” idea for avoiding some short term problem. Examples abound:

1. One company with revenues of about $200 million a year was being sued for around $2 million by a hated competitor. The brilliant idea was to shut down the business during the slow season and reopen it as an entirely new business a month later so as to avoid having to pay any judgment. When I told the client that doing this would probably cost close to $2 million from a legal and tax standpoint and would likely not work in any event and would probably destroy his company’s truly excellent reputation, he quickly realized he had temporarily lost his mind.

2. One company came to me with over 50 offshore companies in complete disarray. Seems some international lawyer (presumably a very rich one by now) had convinced this company that these structure made sense from a tax standpoint. I asked if this incredibly complicated structure was saving them on taxes and their response was that they did not even know, but they did know it was a huge hassle and was costing them about $250,000 a year on corporate upkeep alone. My law firm’s corporate law team very quickly reduced the number of companies to four companies this client thanks us for this just about every year.

3. When China instituted its new Labor Contract Law earlier this year, about a half a dozen companies came to us with the idea of firing and then re-hiring their entire workforce, “just like Huawai.” My response to each of them was that they should think long and hard about the impact such a decision would have on their employees. I thought firing them would send a message that the company had no intention of keeping them for the long term and doing so would likely cause at least some to look for other jobs. I said I was not telling them what to do, one way or the other, but just suggesting they think of all of the possible implications of their actions. In the end, none of these companies did this.

UPDATE:
I will be sending out about a half a dozen “this is why you are lucky to have me as your lawyer” emails today, after just reading this paragraph from a new This is China post [link no longer exists]:

“Huawei are bad guys,” Paul said. Paul is European [and works for a Huawei rival]. “They fired so many senior people before the end of last year, to get around the new labor law.” The new labor law has it that employees must be paid one month’s salary for every year they have been with the company. Firing staff before the new year, then having them re-apply for jobs at lower pay grades is a way for a company in China to save loads of cash.
“We hired a lot of those guys,” Paul said proudly.

3 responses to “Putting the China Employment Law Cart Before the Horse”

  1. Great post Dan. I know exactly what you are talking about. People just tend to focus so much on one thing they forget everything else.

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