How to Avoid China Employment Law Problems, Part 1

How to Avoid China Employment Law Problems, Part 1

With China’s economy in decline and with so many foreign companies in China laying off employees, it should come as no surprise that the Chinese government is cracking down harder than ever before on foreigner employers that do not comply with China’s employment laws and the number of employee lawsuits is correspondingly on the rise. We previously discussed this need for strict compliance in Want to Keep Your Business in China? Do These Things NOW:

If past performance is any indicator of future performance — and I firmly believe it is — we know well what foreign companies must do to avoid China problems going forward and we set out those things below. Before anyone panic (too much), let me just say that for the past decade or so, China has consistently gotten tougher on foreign businesses in China that are not operating legally there and though this announcement is a really big deal, it is more a change in scope than it is in kind.

In fact, two days ago, in How to React to a China Economy in Decline: The China Lawyer Edition, I listed out 8 things our international lawyers were seeing that were telling us that China’s economy is in decline. Item number one was the following:

The number of foreign companies getting into legal trouble in China. Whenever China’s economy slows, its government starts looking for foreign companies out of compliance with Chinese laws. It does this both to show its citizens that it is working on their behalf and to raise money by collecting on unpaid taxes, with interest and oftentimes steep penalties. In particular we are seeing yet another increase in China going after foreign companies doing business in China without a WFOE. See Doing Business in China Without a WFOE: Will the Defendant Please Rise and China’s Tax Authorities Want You.

Correspondingly it has become more important than ever for foreign employers to make sure they are complying with all of China’s national and local employment laws See China Employment Law: Local and Not So Simple. This post is part One in what will be a new series of roughly weekly posts laying out what foreign employers need to do to avoid the proverbial Chinese government knock on the door/employee lawsuit for failing to comply with Chinese employment law.

I start this series by discussing what you as a China employer should be doing with your Employer Rules and Regulations (commonly referred to as an Employee Handbook). I start this series with Employee Handbooks because these are such important documents under Chinese law and because their neglect so often causes major foreign employer problems.

Since China ramped up its employment compliance enforcement of foreign employers our China employment lawyers have been hit with just a ton of complex employment law matters for foreign companies fighting off China employment problems. Two “common themes” jump out at us from these projects as the most-frequently-needed services by China employers these days: employee terminations (especially of high-paid employees) and Employer Rules and Regulations/Employee Handbooks. The first should be obvious and not terribly surprising given what has been going on in China the last six or so months. The second is because many employers have now realized that to better manage their China workforce (or what is left of it), they need a clear and relevant and appropriate Employee Handbook that actually works for them and not against them, both for their existing employees and for their employee terminations. They need an Employee Handbook that lays the groundwork for how to make their employment decisions and that makes those decisions work under China’s employment laws.

For your Employee Handbook to satisfy these criteria, it must comply with today’s laws (not last year’s or a prior year’s laws) and it must comply with the laws of the locale in which your employees are based. In other words, using an Employee Handbook written for Shanghai four years ago when you now have employees in both Shanghai and Shenzhen is a recipe for disaster. Using an Employee Handbook for Shenzhen that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employee manual is another disaster waiting to happen. Oh, and one more disaster we keep seeing: Employee Handbooks created from a Chinese-language template that is not customized for the city or the industry or the employer and then is badly translated into English so nobody making the decisions really even knows what it says.

When our China employment law team is tasked with writing an Employee Handbook, the first thing we do is review our client’s existing employee rules/policies (if any) so as to better understand the client’s HR program and to better be able to consider and account for our client’s HR goals. Drafting any Employee Handbook involves our balancing our client’s HR goals with the realities and the laws and other requirements of the client’s particular industry and locale. That is the proactive side of our Employee Handbook work.

The reactive side of our Employee Handbook work comes in when we are retained by a foreign employer in China with an employee dispute or a merger or a terminationsor a mass layoff or a government compliance problem. It is from those instances where we have learned how so many foreign employers in China have Employee Handbooks that are either useless or affirmatively harmful for them.

We have handled countless China employment law matters where a bad Employee Handbook has cost the foreign companies months of hassle and tens of thousands of dollars — sometimes considerably more than that. On the flip side, we have handled countless employment law matters where a well-crafted and enforceable Employee Handbook has meant that all we employment lawyers needed to do was to confirm and slightly guide an employer’s previously made decision based on an applicable provision(s) in their Employee Handbook. By way of an example, we have handled situations where employers have wanted to terminate an employee for “not being a team player.” This is not a terminable offense under Chinese law, per se. But after we had gathered up all the facts regarding the employer/employee situation and reviewed the Employee Handbook, we found several instances of employee misconduct which would permit a unilateral termination without severance. Because it was obvious the employees had breached enforceable provisions of the Employee Handbook, their terminations went off without a hitch.

No Employee Handbook can cover everything, but it should be written to cover enough bases and to include enough appropriate and enforceable catchall language to allow you the flexibility to act on most employee problems. A good Employee Handbook also sends a strong signal to your employees that you understand and respect how China’s employment laws work and this alone goes a long way towards preventing employee and government problems in the first place.

Avoiding China employment law problems requires you have a relevant and timely and well-crafted China employee handbook. This should be your Step 1.


Elite Stage is a platform that provides One-stop business Solution for start-ups and foreign enterprises, founded by Venture Capital and Elite Stage Consulting Company, individual Lawyer Partners and Deloitte Auditors. For over 8 years, Elite Stage successfully assisted more than 800 companies from all over the world with their China market entry.

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