China Employment Compliance and Audits: THE New Big Thing

China is serious about improving the situation for its workers. I repeat, China is serious about improving the situation for its workers.

I feel the need to repeat this because many foreign companies doing business in China believe decreasing economic growth will lead the government to favor foreign employers. Wrong, wrong, wrong. Foreign employers do not protest; Chinese employees do, and the Chinese government values stability above nearly all else.

Our China lawyers are seeing this play out in the following ways:

• The Chinese government (especially the tax authorities) are relentlessly pursuing foreign companies with China employees but no business registered in China. This started picking up in early 2015 and it went into overdrive just a few months ago. For more on this, check out this Forbes article, China’s Tax Authorities Want You, along with our own two part series, Donald Trump and your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. One of the reasons for this crackdown the desire to force foreign companies to retain employees 100% within the law, so that these employees will have fast and easy legal recourse against their employers for labor and employment law violations.

• China”s government, courts and administrative bodies are getting tougher on foreign companies that do not comply with China’s labor and employment laws. Like pretty much everything else related China’s employment laws, the extent to which this is happening varies by location. See China Employment Law: Local and Not So Simple.

• China employers that violate China’s labor protection laws will be named “and shamed.” Employers are also getting graded on their compliance with China’s labor and employment laws. I explain what this means below.

Beginning earlier this year, China enacted Measures for Announcing Major Violations of Labor Security and the Measures for Credit Rating Evaluation of Enterprise Labor Security Compliance. These measures evidence the government’s seriousness regarding employment law compliance and they give the government new powers to ensure compliance. According to the Supreme People’s Court, new labor disputes accepted by the Chinese court system totaled 483,311 in 2015, up a whopping 25 percent from the previous year. And I have no doubt that these numbers have been rising in a straight line upward ever since. China employees are getting smarter and more proactive about enforcing their legal rights against their employers, especially as against foreign employers.

The new measures include publicizing “serious” employer violations in newspapers and magazines and on TV. These public announcements will include the employer’s name, address, and registration code, along with the full name of the legal representative or key person in charge and the exact violation and fines or other sanctions imposed. Just imagine what this will do for your company’s reputation and your ability to hire new employees. Will individuals who have been named and shamed want to leave China? Will they have to do so?

In addition to naming and shaming, employers will receive A, B or C grades based on their compliance in various areas, including the following:

• rules and regulations
• employment contracts
• misuse of third party hiring agencies (a/k/a labor dispatch services)
• child labor laws
• overtime and vacation compliance

Employer grades will eventually be shared with various Chinese government agencies, including (it is widely believed), taxing authorities. In other words, if your company scores a C on its labor compliance, it may find itself at risk in all sorts of seemingly unrelated areas (beyond just fines for labor law non-compliance), such as income tax or environmental compliance. We expect China’s biggest cities with large numbers of foreign employers will get out in front of employer inspections and enforcement first and early.

Your job (pun intended) as a China employer is to get out in front on compliance as well. The best way to do this is to have an independent audit conducted on your employer-employee situation. As recently as a year ago, our China lawyers were rarely asked about “employer audits,” but hardly a month goes by these days without such a discussion. Foreign employers in China are seeing what is going on around them and they are reading the news. They recognize that the Chinese government now realizes there is lots of money to be made by fining foreign companies for failing to comply with China’s employment laws, while improving employee/citizen satisfaction at the same time. Our best employer audit clients are those who have already been fined, sanctioned or sued for employer violations. Our second best employer audit clients are those who know of someone in their own industry who has already been fined, sanctioned, sued or shut down over employment law compliance issues.

What exactly is an employer audit? An employer audit is little more than a review to make sure a company is complying with relevant employer laws (both national and local), all done with an eye towards reducing the company’s regulatory, liability and lawsuit risks. The nature of this review can range from focusing on one or a few employment law or compliance issues to a full on legal analysis of pretty much everything related to the company’s employer-employee relations. The review can range from just reviewing documents off-site, to one or more bilingual Chinese-English lawyers going to the employer’s facility(ies) for an on-site document review and to interview key personnel.

Employer audits begin with a review, but they virtually always continue with drafting or revising company documents and contracts and meeting with Chinese government officials to remedy problems found. There is no point in having your China employment law problems diagnosed without your then doing whatever you reasonably can to remedy them. See this Lifelock advertisement for a different (and much funnier) take on what I am talking about here.

Bottom Line. If you employ anyone in China, now is the time for you to get compliant. Compliance with China’s myriad and confusing and heavily local employment laws and regulations is no fun at all, but it sure beats your being named and shamed or fined or shut-down for non-compliance.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.