China: Asia Pacific Newsletter - March 2015

Clyde & Co's APAC Employment Newsletter publishes recent employment related updates and information in the region on a quarterly basis. In this issue, we have updates written by Clyde & Co's offices, associated offices and corresponding firms in China, Hong Kong and Singapore to provide you with an overview on various topical issues.

China requires work visa instead of business visa for certain short-term work tasks

As of 1 January 2015, with the implementation of the new interim regulations issued by China's Ministry of Human Resources and Social Security ("MHRSS"), China has further tightened immigration requirements for foreigners coming to China for short term work tasks.

Short-term tasks

The interim regulations are contained in the Circular Renshebufa [2014] No. 78 issued by MHRSS (the "Circular") and concern the visa/permit requiements and application procedures for foreigners' short-term work tasks. Under the rules of the Circular, if a foreigner comes to China for one of the following tasks for a period of up to 90 days (the "Short-Term Task"), he/she must obtain a work visa (i.e., Z visa) and other permits, instead of a business visa (i.e., M or F visa):

• Performing tasks including those involving technology, scientific research, management and general guidance with a China business partner;
• Conducting training or trials at a Chinese sports institution (this applies to both coaches and athletes);
• Filming (including advertisements and documentary films);
• Performing in fashion shows (including car exhibitions, photo shoots, etc.);
• Participating in foreign-related commercial practices; and
• Other tasks as identified by MHRSS.

The visa and permit application procedures for the above situations are summarized as follows:

Step 1: Applying for an employment license and work certificate in China

Step 2: Applying for a visa invitation letter in China

Step 3: Applying for a work visa (Z visa) through a Chinese embassy/consulate

Step 4: Applying for a residence permit (if staying in China for a period exceeding 30 days but no more than 90 days).

In respect of the above Step 1 and 2, the China partner (e.g., the business partner, the institution, the event organizer) will have to submit the application. The above procedures are estimated to easily take one month to complete.

If a foreigner stays in China to perform a Short-term Task for a period of more than 90 days after a respective entry, depending on the specific tasks to be performed, he/she must obtain different permits through a more complex process.

The Circular does not consider the following tasks to fall under the definition of a Short-term Task and an M or F visa is sufficient, provided that the recipient does not stay in China for a period of more than 90 days after each respective entry:

• providing maintenance, installation, commissioning, disassembly, guidance or training services related to the purchase of machines and equipment;
• guiding, supervising and inspecting a Chinese project won through bidding;
• performing short-term work at a Chinese branch, subsidiary or representative office established by a foreign company;
• participating in sports competitions (This applies to athletes, coaches, doctors, assistants and other related personnel. However, such competitions does not include those which require a participant to have a registration card issued following approval of the compentent Chiense authorities in accordance with requirements issued by the relevant international sports orgnization);
• performing work as a volunteer without pay or where payment is made by a foreign entity;
• participating in commercial performances which are not identified by the competent cultural authority as "foreign-related commercial performances".

If, however, a foreigner comes to China to perform an above mentioned task and stays in China for more than 90 days, an M or F visa will not be sufficient and depending on the specific tasks to be performed he/she must obtain different permits through a more complex process.

Beijing issued meeting minutes to clarify its 2014 opinion concerning labour disputes

In May 2014 the Beijing Municipal High People's Court and Beijing Municipal Labour Dispute Arbitration Committee jointly issued the second Beijing opinion concerning labour disputes (the "Second Opinion"). Please refer to our previous August 2014 newsletter for the key issues contained within the Second Opinion.

To clarify understanding of the Second Opinion, the Beijing Municipal High People's Court issued further meeting minutes (the "Clarification") on 5 January 2015. This Clarification mainly concerned issues surrounding employees' entitlement to double salary.

Entitlement to double salary

Chinese labour law requires an employer to conclude an employment contract in written form with a new employee within one month of work commencing. In cases of non-compliance, as of the second month of work commencing, an employee will be entitled to double salary for 11 months, and as of the 13th month of work commencement, an open-term contract will be deemed to be concluded between both parties. (This rule is also extended to contract renewal where the double salary entitlement will instead arise as of the very first month following the expiration of the previous contract.)

Double salary entitlement may also arise from an employer's failure to conclude an open-term contract despite being entitled to do so. (The situations where an employee may be entitled to an open-term contract include following two consecutive fixed-term contracts or long term service of 10 years, etc.)

No dual entitlement

When applying the above two rules for double salary, previously an employee could argue that he/she is entitled to double salary as of the 13th month of their work commencing as the deeming clause could be construed as that he/she is entitled to an open-term contract in written form.

The Clarification denies such an argument and prevents the double salary entitlement being claimed under the rationale that "deemed to be concluded" deems a written form open-term contract to exist.

No cap in certain situations

The Clarification confirms that, if an open-term contract entitlement arises from other situations (e.g., long term service), the double salary is not capped and the amount is accrued as of the first day when the entitlement arises until the day before the written form open-term contract is finally concluded.

Statute of limitation

The Second Opinion holds that, when applying the one year of statute of limitation to the double salary claims, the one year period is measured backwards from the date on which the claim is raised. The Clarification confirms that this period is counted per day instead of any other period. Moreover, it is the employer's burden of proving whether the period of limitation has expired or not.

MOHRSS called for public comments on the draft Rules of Mass Dismissal

On 31 December 2014, the Ministry of Human Resources and Social Security of PRC ("MOHRSS") published the draft Rules on Mass Dismissal by Enterprises (the "Draft") for public comment. The Draft clarified the procedures and the penalties for failing to follow statutory procedures for mass dismissal.

General legal framework for mass dismissals

Chinese law generally restricts employer's rights to individual and mass dismissals. Only under statutory situations such as bankruptcy, production and operation difficulties, etc. and by following statutory procedures, an employer may unilaterally dismiss 20 or more employees, or 10% or more of the total headcount.

Measures to be taken before implementing mass dismissals

According to the Draft, under statutory causes of mass dismissal, the employer shall first consult with the trade union or employee representative and take measures to avoid any dismissals or to reduce the number of employees to be laid off before implementing any mass dismissal.

Different measures shall be taken to avoid mass dismissals or reduce the number of employees to be dismissed, such as transferring employees to new positions and providing training to improve their skills where they are subject to a change in production or operating method, and taking measures such as providing on-the-job training, reducing working hours, adjusting salary, arranging working by shift, etc. in other statutory causes of mass dismissal.

Labour authorities will provide subsidies to the employer if they have succeeded in avoiding mass dismissals or have reduced the number of employees to be dismissed as a result of adopting effective measures.

Steps for implementing mass dismissals

The employer shall take the following steps before dismissing employees under statutory causes of mass dismissal:

Step 1: Explanation by the employer

The employer is required to explain the dismissals to the trade union or all employees (if there is no trade union) 30 days in advance. The explanation shall include the specific statutory cause of mass dismissal, the reasons the specific statutory situation has occurred and shall provide materials on the production and operation status of the employer as well as relevant supporting documentation. The employer shall further explain the extent to which the production and operations of the employer have been impacted by the specific statutory situation, the scope of impact (including to the various departments and positions, etc.) as well as the measures already taken by the employer to reduce the number of employees to be dismissed.

Step 2: Formulating the preliminary mass dismissal plan

As the second step, the employer is required to formulate the preliminary mass dismissal plan, which shall include the following contents:

• Specific statutory situation for mass dismissals;
• Scope of mass dismissal, the number and percentage of employees to be dismissed;
• Criteria on determining which employees are to be dismissed;
• Timing and steps for implementing mass dismissals;
• Method and standard for paying severance to employees to be dismissed.

Step 3: Listening to comments and publishing the mass dismissal plan

Upon completion of the preliminary plan, the employer shall distribute it to the trade union or the employees and is required to listen to their reasonable comments. Based on this, the employer may finalise and publish the mass dismissal plan and the list of employees to be dismissed.

Step 4: Submitting the mass dismissal plan with labour authorities

After finalising the mass dismissal plan, the employer is required to submit to the local labour authorities a written mass dismissal report, which must include the following documentation and information:

• Mass dismissal plan;
• List of employees to be dismissed, according to the mass dismissal plan;
• Supporting documentation proving that the employer has explained to employees the situation in advance, has listened to the trade union's or employees' comments (if there is no trade union);
• Whether the salary, severance and social insurance premiums can be paid in full in a timely manner (corresponding solution measures or plans shall be submitted), measures already taken by the employer to reduce the number of employees to be dismissed and stabilize their positions; and other matters as required to be reported by local labour authorities.

Step 5: Dismissing employees

The employer may only dismiss employees after 10 days from when it obtains the receipt issued by the local labour authorities.

The trade union or employees are entitled to request the employer to go through the corresponding steps if the employer fails to take Step 1 or Step 3.

Mutual termination under statutory situations of mass dismissal

In statutory situations of mass dismissal, if the employer terminates the employment relationship with employees by reaching a mutual agreement instead of implementing mass dismissal following the statutory procedures, the employer shall still inform the trade union or all the employees (if there is no trade union) 30 days in advance, and meanwhile report the number of employees to be dismissed to the local labour authorities.

Liabilities

According to the Draft, in cases of non-compliance by the employer with the Draft, the local labour authorities may order the employer to rectify their breaches. Penalties ranging from RMB 2,000 to 20,000 may also be imposed if the employer fails to rectify as ordered by local labour authorities.

Shanghai clarifies labour dispatch rules

To provide guidance on the application of labour dispatch related rules, on 31 December 2014, the Shanghai Municipal Human Resources and Social Insurance Bureau and Shanghai Superior People's Court jointly issued the Meeting Minutes on Application of Law on Labour Dispatch ("Meeting Minutes").

No impact on existing employment if limitations are breached

Labour dispatch is highly restricted by law. It only applies to temporary, auxiliary and substitutable positions. The maximum dispatched workforce is capped at 10% of the total headcount of the labour accepting entity. In cases where these statutory limits are breached, the Meeting Minutes specify that the non-compliance will not impact the effectiveness of the employment contract or the labour dispatch agreement. Moreover, no employment relationship shall be deemed to have been established between a dispatched employee and his/her labour accepting entity.

Jurisdiction over remuneration related claims

In general, for dispatched employees, the labour accepting entity is required to implement a remuneration distribution system for positions which are the same or similar to those previously held by dispatched employees. In case of non-compliance, the Meeting Minutes grant authority to the labour administration authorities to urge the labour accepting entity to implement the same system. The Meeting Minutes clarify that disputes over remuneration between the parties are still subject to the standard labour dispute resolution proceedings.

Return of employees to labour dispatching entity

Only under limited situations may dispatched employees be returned to the labour dispatching entity. These situations include the same causes for a dismissal under direct employment and additional particular situations for dispatch, for example the expiration of labour dispatch agreement.

Based on the existing rules, the Meeting Minutes provide the following further situations for the return:

• Expiration of the labour dispatch term;
• Termination of the labour dispatch agreement;
• Reaching a tripartite agreement on the return of a dispatched employee in advance or retrospectively between the labour dispatching entity, the labour accepting entity and the dispatched employee;
• Calling back of the dispatched employee by the labour dispatching entity due to the labour accepting entity's failure to perform its obligations;
• Reaching an agreement on returning the employee between the labour dispatching entity and the labour accepting entity before the de-registration of the to-be-closed labour accepting entity in case of closure of the labour accepting entity (e.g., due to bankruptcy, dissolution, etc.);
• The labour dispatch making rectification of its non-compliance following the administrative order.

Dispute over re-dispatch after returning the dispatched employee

Following an employee's return, the Meeting Minutes confirm that the labour dispatching entity and/or the labour accepting entity shall comply with the existing statutory rules, including re-dispatching the returned employee, paying severance where applicable, or dismissing the returned-employee if justified by law, etc.

The Meeting Minutes further clarify that if the returned employee disagrees to a reasonable re-dispatch, the labour accepting entity may handle the disagreement according to its internal rules and regulations, labour disciplines or agreement set down in the labour contract, etc. A dispute arising from this may be submitted to the labour dispute adjudication authorities, i.e., labour arbitration committees and courts.

Dispute over return of employees without sufficient basis

The Meeting Minutes provide that with reference to the Article 38 of the Labour Contract Law, the returned employee may resign without prior notice provided that the return is without sufficient basis and the labour dispatching entity does not re-dispatch the employee within a reasonable period following the return. The Meeting Minutes hold that the reasonable period will generally be considered to be one month. The employee's claim of statutory severance is also upheld by the Meeting Minutes.

Liabilities of labour dispatching entity and labour accepting entity

If the dispatched employee initiates a labour dispute against either the labour dispatching entity or the labour accepting entity, the Meeting Minutes require the other entity to be joined as co-defendant. Their liability shall generally be determined separately according to existing laws and regulations. However, where damage is caused to the dispatched employee by the labour accepting entity, the labour dispatching entity shall be held jointly liable.

Labour dispatch or service?

In practice, it is difficult to distinguish a service relationship from a labour dispatch relationship. The Meeting Minutes advise that the main points through which to distinguish the two include whether internal rules and regulations are applied to the workers and the extent of management of the workers. However, where a service recipient exercises certain management powers over the workers of the service provider, such as fire prevention, production safety, product and service quality and workplace order, the Meeting Minutes call for the labour dispute adjudication authorities to carefully assess the situation and not simply conclude that the legal relationship has changed (i.e., from a service relationship to a labour dispatch relationship).

The Meeting Minutes further guide the service recipient and the service provider to stipulate in the agreement the scope of management over the workers. As long as the agreement is not invalidated by the labour dispute resolution authorities, and provided that the service recipient's partial over-management has no determinant impact (which, however, is not further explained) on the nature of the relationship, it shall not be deemed that an employment relationship has been established between the service recipient and the workers, nor shall it be deemed that a labour dispatch has been formed. But the service recipient is required to make rectification, for example by limiting the scope of management.

Preparation for annual individual income tax declaration for 2014 in PRC

According to PRC tax regulations, indivdual taxpayers with an annual income of RMB120,000 or more shall file an annual indivual income tax (IIT) return with the competent tax authority within three months of the beginning of the next year. Therefore, time is running out to prepare the annual IIT return for 2014, the deadline for which is March 31, 2015.

Technically, for those expatriates who do not permanently reside in China, he/she shall file an annual IIT return with the competent tax authority if:

1. Their income received from China was more than RMB120,000 in a tax calendar year; and
2. He/she has not left China for more than 30 (thirty) days in a single trip, or more than a cumulative total of 90 (ninety) days over two or more trips in 2014.

Having said that, local practices may vary depending on the local tax authorities' specific requirements. For instance, other than the annual IIT return, foreign taxpayers in Jiang Su Province must also complete annual IIT clearance procedures via an online system by submitting a series of documents, including the tax-free allowance supporting documents. Such a requirement is irrelevant under the above mentioned criteria.

Although it is generally the employee's obligation to file the annual IIT return, in order to have a better control of the annual IIT filing status, practically, tax officials tend to require withholding agents/employer to collect related information and complete the IIT filing for their employees.

Therefore, Chinese employers are suggested to remind their employees, especially expatriates, to maintain sufficient communications with their tax bureau, and to prepare for the annual IIT filing. From an employees perspective, they are suggested to disclose all the income information required to be reported to the tax bureau, in addition to their employment income.

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