How to Avoid China Employment Law Problems: Employer Audits

I am always writing how it has become more important than ever for foreign companies in China to have China-centric employment contracts and employer rules and regulations (aka employee handbook). But to stay on the right side of China’s toughened employment enforcement and to avoid costly disputes with your employees, you need more. You need to be sure your company is in full compliance with China’s national and local employment laws and regulations and that your employment documents are written specifically to avoid government and employee problems.

If you have a company in China with employees (be it a WFOE or a JV or a Rep Office), you should periodically audit your employment documents and procedures to ensure your company is doing everything using best practices with its employees. With stepped up Chinese employment law enforcement since the beginning of the US-China trade war, our China employment lawyers have seen a big increase in requests for employer audits. The bad news is that we have yet to do an audit for any company where we did not recommend a number of changes to minimize client risk. The good news is that in most instances, these changes have been both relatively easy and inexpensive to make.

One of the things about improper employment documents and procedures is that they usually do not harm employers until an employee leaves the company, and this is more true of China than of any of the other countries in which our law firm regularly operates. This is because China has so many tough requirements for terminating an employee and many of those requirements actually apply to employees that voluntarily leave as well.

I often wrote about the importance of never having an employee work for your company without a current and localized written employment contract. Consider the below example, which is based on a number of real cases our China employment lawyers have handled.

An employer wants to reduce its workforce and so it tries to negotiate a mutual termination with one of its employees. The employee’s first employment contract expired roughly a year ago and there is no current written contract. The employee does not want to be terminated for fear she will not be able to land a new job any time soon due to China’s declining employment market. Instead of accepting a quick settlement, this employee states that she will not agree to a mutual termination and she also lets her employer know that she cannot be terminated because the lack of a written employment contract makes her on an open term now. By not properly renewing this employee’s contract at the end of her initial employment term and then trying to work out a mutual termination, the employer has put itself at great risk of either litigation or a super expensive severance package or a lifetime employee.

I use this example because when we get these situations late, there is only so much help we can provide. But when we get these situations early as part of an employer audit, we can work with the employer to get the employee to sign a new contract that will allow the employer to terminate the employee on more favorable terms at some later date.

Another common issue that can be avoided by reviewing your employment programs is overtime claims. Foreign companies often tell us that “overtime is common in China and China employees’ 996 schedule (meaning they work from 9 am to 9 pm, six days a week) is the new normal and everyone works overtime and nobody ever gets in trouble for this.” The only problem with this is that it is completely untrue. Chinese companies tend to get away with this, but foreign companies inevitably end up in expensive and time-consuming disputes with their employees regarding overtime.

We are not only seeing an increase in overtime claims brought by employees, we are also seeing a big increase in local government authorities cracking down hard on overtime violations as well. See How to Do Business in China Without Going to Prison.

Most foreign employers have no intention of violating China’s overtime laws and yet they frequently do, largely because these laws are incredibly complicated and most English language translations of them are woefully inadequate. See China Law Online: It’s All Wrong. For example, many foreign companies are unaware that they need prior government approval before designating an employee to work flexible hours (which allows them to avoid having to pay all or most of the overtime). It is not uncommon for foreign companies to adopt a home country working hours policy for China and expect that to work for China. It is also not uncommon for foreign employers in China to fail to properly document overtime. These are just some of the things you should have reviewed regarding your China overtime policies and procedures.

Another problem we often see in our employer audits are employers with beautifully-written and enforceable employer rules and regulations but lack proper proof that their employees ever received those rules and regulations. A China employer that makes a disciplinary decision that cannot prove the disciplined employee ever received a copy of the company’s rules and regulations very likely will be sued by the disciplined employee and very likely will lose. To state the obvious, you should not wait until an employee termination to be sure you have good proof that your employees received your rules and regulations.  And just to dispel a prevalent myth, nearly all of China’s employment laws apply with full force regardless the size of your company. See China Employer Rules and Regulations: A Must Have No Matter Your Size. In many ways, the smaller you are the more important it is your employment documents and procedures are in full compliance. I say this because a lawsuit and settlement that costs $200,000 is a much bigger issue for a company with $2 million in revenue than for a company with $200 million.

Now is the time to get your China HR programs in good shape.

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.