Career Advice Legal Case studies for employers

China syndrome: The minefield of mainland labour laws

Published on Friday, 01 Mar 2013

The Problem

For many businesses – especially those at the beginning of their journey into China – a key part of their business strategy is often to send talented senior leaders to work in the China arm of their organisations for a period of time. This helps to ensure that company culture is embedded in the new or developing China business and also seeks to satisfy the career demands of talented, ambitious employees who view spending time in the mainland as a key part of their own individual development.

Historically, however, organisations have given little thought to the way they structure the employment-law arrangements for mobile staff spending time in China. The vague idea that local Chinese law does not apply to expats continues to prevail.

For companies used to being able to bring employment contracts to an end “at will” in countries such as the US, the complexity and inflexibility of terminating an employee in China can be an unexpected and unwelcome shock.

In a similar way, the relative flexibility of Hong Kong’s employment-law regime is very different from the approach adopted under mainland legislation, which is legally challenging and is often applied in a myriad of different ways across the country as local practices prevail.

The Solution

There are a number of very simple things to bear in mind whenever you are thinking of moving staff.

Always think through the worst-case scenario at the outset. The star performer you are considering for a critical role in your China business could turn out to be a poor strategic planner. You may not have time for them to get on the same page as the rest of the business. Or perhaps they are not compliant with your expenses policy and are consistently over-claiming. If so, what options are open to you?

Then think about what law will prevail when managing or terminating the employee. One of the biggest issues that arises in China is that the local management team uses a local contract to get a visa for the foreign national. There is no such thing in employment law as a contract “just for visa purposes”. If an individual is given a local contract at any time, for any purpose, this will give them the right to claim the protection of Chinese labour law.

Even if you choose a foreign law to govern the China employment contract, you will invariably not avoid the application of local statutory protection. You need to be prepared that the employee may simply have dual employment rights and can pick and choose the most appropriate legal jurisdiction to suit their circumstances.

You also need to think broadly and consider whether the employment arrangement could create inadvertent obligations for the foreign company. One of the key issues with sending individuals on secondment to China is the risk that it could expose the foreign employing entity to an argument that it has created tax liabilities for the foreign company through the activities of the seconded employee. Steps can be taken to minimise the risk of this occurring, but these require some up-front thought and planning.

Finally, consider what action you will be able to take if the employee goes to a competitor and uses your intellectual capital in an unfair way. Have your really considered what you will do in such a situation and how you could limit the damage to the business?

The Postmortem

We all know about the demands of globalisation and the importance of Asia, and China in particular, as many businesses look outside of their challenged home markets for growth.

Just as people are critical to business success, they can do enormous harm in terms of reputation and morale, as well as tangible harm through anti-competitive behaviour. While having robust contractual documents and being informed of the potential risks will not necessarily prevent things going wrong, it will give the organisation a better place to start.

Pattie Walsh is a partner and head of DLA Piper’s Asia-Pacific employment pensions and benefits practice, and has a particular focus on multi-jurisdictional employment work. DLA Piper is a global law firm with 4,200 lawyers located in more than 30 countries throughout the Americas, Asia-Pacific, Europe and the Middle East

EDITOR’S NOTE: The information in this article should neither be relied on as legal advice nor be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.