China: Not The Same Anymore!

Last Updated: 10 January 2017
Article by Michael Liu

As a practicing PRC attorney, I have seen a lot of changes since Jan. 1, 2008 when the PRC Labor Contract Law became effective. There are more labor disputes nowadays than 5 or 10 years ago. More labor disputes actually mean more labor arbitrations filed before labor arbitration committee and more litigation filed before People's Court for all the procedures including first and second instance and even enforcement. There are more and more employees hiring attorneys presenting them in all of the above-mentioned legal procedures. This is kind of new in mainland China. Another thing that I see is all the disputes actually happened not only just in SOEs or private Chinese companies, but also in foreign-invested companies including WFOEs and Joint Ventures, and the attitudes of Chinese employees have changed dramatically from feeling shame to file lawsuit against the company that one may have worked for more than 10 years to the kind of attitude that it is so acceptable and see labor dispute as a common thing. If they are not happy about certain decisions especially termination of the labor contracts, they would just resort to law and fight for their rights.

There are many things driving this trend and it is interesting to look into them. One of the differences in the old time, say 20 years ago, almost every single Chinese who has a so-called proper job, actually means a worker in the factory. Of course, when you say factory, it is mainly the SOEs - State Owned Enterprises. The workers actually know each other, and probably they may have some friends or relatives working in the same factory as well. At that time, the employees would feel ashamed if they do not obey the decisions of the company which actually provides everything for their family. Now it is different! A lot of employees probably never worked with SOEs before. Right after they graduate in China or overseas, they immediately start working for foreign companies. Or they have already switched different jobs, and they understand that labor dispute is the common thing. The relationship between employees and the employer is way different from the old time when people are way more attached together. Another thing that really drives the trend is how PRC Labor Contract Law has been promoted. Chinese government, labor arbitration committee and People's Court have sent out a lot of materials to teach the right of employees under the new Chinese labor contract law after January 1 , 2008. There have been a lot of efforts made to actually make the law known to the employees. This is why employees really understand the law with details, and it is not shocking that employees can speak for themselves even with legal terminologies: You do not have the right to do this, and I have right to do that. The very last thing I have seen to drive this trend is how the Chinese judicial system has been changed. They have built a new system for labor dispute called labor arbitration committee which is a "must" first step of the remedy for labor dispute. If there is a labor dispute need to be delivered to the formal judicial system, such dispute has to go through labor arbitration first. If one is not happy with this arbitration award, then (s)he can file litigation before the People's Court. After that, either party can appeal once. The labor arbitration fee was RMB 10 for the employee to file a case with the labor arbitration, and then it became RMB 5 later. Now it is for free! I think this may be another reason why there are so many labor arbitration cases.

In almost every case we have handled, the termination actually triggered all the disputes. The reason for the company to terminate is always the main dispute. If the labor arbitration award or the final ruling from the People's Court does not agree that the company has the proper reason to terminate such labor contract, the company may face very severe consequences. It could be the double severance pay. There is another new trend that the employees do not file a case against company to claim the money but asking for their job back. That is even worse! If the labor arbitrator thinks the termination reason is not proper at all, then the employer will have to take the employee back or pay more. This will challenge the authority within the company and create bad impact among other employees.

For U.S. companies, the FCPA issue has become a really big issue in the last 3 - 5 years due to the fact that some of the employees of the U.S. company in mainland China did not follow the laws. The laws here include both the Chinese laws and U.S. laws. The US SEC issues alert letters or warnings to companies to inform them that they suspect something was going on in the China operations. Upon that, the company starts internal investigation immediately and finds out the corruption activates. Then the company terminates these employees right away. Because of certain procedural issues, the company cannot disclose the evidence of corruption activities until SEC finishes the investigation and is satisfied with the result. It is very difficult for the company to argue the proper termination reason without presenting the evidence both in the labor arbitration and litigation procedures. This becomes a dilemma for U.S. companies in some cases.

Some advice for foreign companies going through a transaction

First of all, I would say you should hire professional advisor and local counsel for specific issues. But in general, a really good HR department is important.

Second of all, a lot of disputes can be avoided if the company has a good labor contract, a good employee handbook and a clear job description for each position.

Last but not least, I believe in good communication. It is important to let the employee know where the company is going and why the company makes this decision. It is very different to handle a small office with 20 staffs than to handle a factory with 200 workers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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