China Contracts: Not Quite Legal Usually Means 100% Illegal

In China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous, I wrote about how our China employment lawyers are seeing increasing instances where expat employees working in China are having their salaries “split” by their Chinese or foreign company employers. I also noted how doing this constitutes tax fraud and is illegal and dangerous and how the Chinese government is going hard after those who commit it, especially American companies — there is a trade war going on between the United States and China right now, remember!

But much of that post was on how we are also seeing a big increase in Chinese company employers hiring expats with the promise that they will get paid 30 percent in China and 70 percent in Hong Kong or some other country and then never paying the 70 percent.

I described this as the perfect crime that is actually no crime at all:

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

That post also highlighted email we have used for those who admit to having entered into a split payment employment arrangement:

What your employer has done here is 100% illegal and it puts you at risk. Both you and them are engaging in tax fraud but all that should matter for you is that you are engaging in tax fraud — assuming your employer actually pays you outside China, which they often do not. Your employer may claim otherwise but there is no doubt about this. You are supposed to be paying China income taxes on all of your earnings attributable to your work as a China expat employee. Plain and simple. But under this arrangement (again, assuming you do actually get paid outside China what you have been promised) you will not be doing that. If I were you I would go to my employer and insist it change this payment plan and if it does not, I would consider getting a new job, and fast. Just this week I wrote here how China is — in response to the US-China trade war- – stepping up its hunt for Americans violating China’s law just as you are doing. Do you really believe China would not love to call out and penalize Americans right now for tax evasion?

Good article.  A friend of mine working for a large Chinese tooling and injection molding company had something similar happen last week.  Contract with HK company, but worked in China under a China biz visa.  Employer didn’t honor contract (after 10+ years of employment) by not paying 2017 commissions and not paying severance for termination.

Since friend didn’t have HK work visa he can’t sue in HK.  Obviously no recourse in China either.

This email is completely accurate and it nicely sums up the problem. The expat was working illegally in China because he did not have a China work visa (a/k/a a Z visa) and because he was not working for a legal Chinese entity. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. And yet he wasn’t legally working in Hong Kong either (even though his employer was a Hong Kong entity) because he wasn’t in Hong Kong at all. So he didn’t get paid what he was owed and he had no recourse.

I cannot tell you how many times I have had to remind people that having a contract that seems sort of legal is not even close to the same thing as having a contract that is really legal and actually enforceable. See China Contracts: Make Them Enforceable Or Don’t Bother. The big difference is that most of the time it is just flat out impossible to sue on a contract that is not truly legal. In other words, a less than fully legal, truly enforceable contract is no contract at all.

Lesson learned?

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.