Employment law in China: starting an employment relationship

Welcome to the latest episode of Gowling WLG's Employment Essentials podcast where we discuss the latest developments and challenges affecting employment law in the UK.

Jonathan Chamberlain: Hello everyone and welcome to this podcast on employment law and employing people in China. My name is Jonathan Chamberlain. I am a partner in the UK, Employment, Labour and Equality team here at Gowling. I am absolutely delighted to be here in the physical room with my partners from Germany and China, respectively Annette Knoth and Vivian Desmonts. If you would like to introduce yourselves so people can hear your voices.

Annette Knoth: Many thanks Jonathan. Indeed, great pleasure to be here with you. I am heading the German Labour and Employment practice in Frankfurt, and I am very curious to learn about the particularities of Chinese employment law today.

Vivian Desmonts: Thank you very much. I am Vivian. I am a French lawyer. I have been practising in China/been in China for over 20 years and I am delighted also to be with you today and thank you to the listeners for joining in.

Jonathan: Thank you both. Vivian, before we kick off about the specifics of starting an employment relationship in China. Can I just ask you to tell us a bit more about what is actually happening in China that is really relevant. Particularly for employees of overseas companies with operations in China. Set the scene for us!

Vivian: Thank you, Jonathan. For the last 20 years I have been working especially for British, French, German, Canadian companies doing business in China. Setting up subsidiaries in China. For sure, the last five years have been relatively challenging, I am not going to lie to you. We have been working a lot with European/North American companies on restructuring their subsidiaries in China. That includes laying off employees over there and during the Covid restrictions, there has been also, we have noticed for our clients, some disconnect between the local management of subsidiaries and the headquarters, so we have been quite busy with that.

What is interesting, and nothing is always black or white as you know, that is the same also for China. Just recently in 2024, we see a renewed interest of many – especially European companies I have to say, French, German and Finnish, Spanish clients coming to us, saying "ok, how can we go back to China?", since it is reopening and in many sectors such as in EVs, batteries, renewable energy but also food and beverage, education, higher education. This year in 2024, we are seeing more and more Europeans, British coming back to China – not necessarily for long-term expatriates' contracts, but also for shorter-term, few months. So, it is an interesting trend we are seeing now.

Annette: If I may pick that up Vivian. What would a foreign investor need to know how to send people to China and for Europeans always very important, what is about social security and tax, how does that work?

Vivian: Thank you Annette, so typically for global mobility strategy, when a foreign company – British/European wants to send expatriates to China, there is always four aspects to consider both in the home country and in the host country, for example in Germany or in the UK, first we need to consider in relation to employment law, the employment contracts in the home country and then in the host country do we need another local employment contract or not in China?

Then second aspect – immigration, as you may guess. That is always important in China, you need to have a working permit for any foreigner who is going to start working in mainland China and the
working permit is actually attached to the employer, so if the foreigner or the expatriate wants to change job in China, it will need to obtain a new working permit and it will be prohibited to start working, actually working in China before obtaining that working permit, so it is a really important piece of document.

The third aspect that companies need to consider when sending expatriates to China is taxation. Again, both in the home jurisdiction and the host country, like in China. For many countries including the UK, France, Germany, Canada and many other countries in the world, they have concluded what we call DTAs with China – double taxation avoidance agreements - whereby the expatriate will not need to pay individual income tax both in China and in the home country. So, the treaties exist from a tax perspective.

And then I want to finish with the fourth aspect that all international companies need to consider when having expatriates in China, is social insurance. China being a communist country, the social insurance rates are actually relatively high. Depending on the cities, it can go up to 30% or 40% of the salary per month. So that is substantial.

And contrary to taxation, for social insurance China has not signed many treaties with foreign countries, but I have to note that for Germany and China, they have actually concluded a social insurance agreement or treaty, so that German nationals working in China may contribute to their retirement in Germany instead of China. But some other mandatory social insurances, such as medical insurance still need to be paid in China.

Annette: I mean that is at least good to hear for German employers sending people to China.

Jonathan: Yes. Yes. Well at the time of recording this, we anticipate a new government in the UK within a relatively small number of days so perhaps we can get that as an agenda item for them.

Vivian, those are the things we need to consider when we are setting up the employment relationship. What would you say are the top issues that would surprise an overseas company employing people in China? What are the things that stand out as being unusual or problematic or they would not be expected?

Vivian: Typically, it will depend on if there is a subsidiary set up in China or not. Very often I see our clients/international companies – but not necessarily groups, also family-owned SMEs, that want to start a relationship with an employee in China without any entity or legal entity over there. They have some contractual relationship, perhaps the Chinese national would say, "yes, I can be your employee". So, the foreign company would send typically funds every month, not only for the salary, but also maybe some funds to purchase some goods in China. Believing that it is money of the company – the foreign company operating actually in China.

But if there is no legal entity or subsidiary set up in China, then that means all the money sent to that so-called employee in China is actually – that consultant or freelancers - own assets or money. For example, all the suppliers, the networks of suppliers that has been developed through that – actually consultant – it is not an employee legally, it is a consultant or freelancers, actually contacts of that freelancers, so if you are going to change that freelancer or consultant, you need to reboot everything and if, for example, that freelancer or consultant has purchased raw materials, assets, goods for you, well it is actually owned by him or her, instead of the foreign company.

Annette: Quite risky.

Vivian: So, this is very often a catchpoint. And too often we have companies coming to us saying, "oh, but we have sent hundreds of thousands of Euros or Pounds even to that manager/employee we have in China. We have been working for so many years and we do not understand how the relationship is broken, and we cannot contact that employee". I am sorry to say, very often, they are not employees that are under Chinese law, they are just consultants or freelancers. I guess that would be the same also in many other jurisdictions.

And then, the second angle is when our clients – British, French, German, European companies have subsidiaries, actually have set up an entity in China, to employ local Chinese staff members, then the top free advice I would say, I would draw the attention of the clients is, the importance of a written employment contract. This is really key according to Chinese employment law, all employers in China must conclude a written employment contract with several clauses which are mandatory on their working conditions with the employees, whether they are Chinese nationals or foreigners working in China. In case of violation, then the penalty is quite high for the employer who will need to pay double salary for each month of delay until there is a written employment contract concluded.

There is a maximum cap according to the employment law. Employment law contract provides that it is a maximum of 12 months of delay. So, if after one year of de facto employment relationship without a written employment contract for an employee in China, well after one year comes back to the employer, the subsidiary in China, and say, "well you know I have been working with you for more than a year, and still have not got a written employment contract. According to the law, you must pay me another year of salary immediately". That is very often the beginning of some relationship.

I remember for example one case for a Swiss-based client in the logistics sector, they hired a dual manager in Hong Kong and sent him to head their subsidiary in Shanghai and the first year everything was perfect, all good. And then after a year the relationship deteriorated and we found out it was because that dual manager knew perfectly his rights under the Chinese employment law and did not mention this obligation of the employer in China to his headquarters, but the headquarters should have also been advised by its own legal counsels or HR managers and we had to negotiate. And there was no maximum cap of the amount. Because it was a dual manager, you can imagine the salary was six figures high. Very expensive.

Annette: Wow. That sounds like a very good opportunity to double or triple your salary. And even much stricter than the EU regulation to provide written certificate about employment conditions. Well, the fines in Europe are much lower.

Jonathan: And in the UK. We have nothing comparable to that. That must come as a big shock to employers. Ok. Well, can we take it that that is the worst thing that can happen? Or what else do we need to know about?

Vivian: Very often, also we find ourselves advising clients on the working hours in China. Especially for smaller companies. They may imagine that in China, the Chinese workers you can make them work 24/7 without any limitation. That is not totally correct, far from it actually. Chinese employment law provides for 40 working hours per week and for the overtime, it is strictly regulated. It is capped to a maximum of three hours of overtime per day, maximum in case of emergency. If there is no emergency, then according to Chinese employment law, the employer is entitled to ask the employee only to work one extra hour of overtime per day. That is the law. Furthermore, per month there is a maximum cap of 36 hours of overtime. So that is not that much actually. Also, in terms of compensation, for the employees actually working this overtime, if the overtime is actually done during a workday, then the salary to be paid is actually 150% of the average salary of that employee. If the overtime is actually done during a rest day, weekly rest day such as on a Sunday, then it is double his salary. And if it is actually overtime during a Chinese public holiday, and in China we have 11 days of public holidays, then it is triple that employee's salary.

Annette: Wow! So, I would never have thought that there is any jurisdiction in the world that is less flexible than the German one on this.

Jonathan: And obviously from a British perspective, I am thinking well presumably your senior managers can opt out of this? Can they?

Vivian: It is not as simple actually or straightforward under Chinese employment law, and again we need to consider China is People's Republic of China, communist system. It does give a lot of rights to employees, and it does not distinguish the executives from the other staff members. So, executives, dual managers typically, or HR managers, they are themselves subject to this rule.

Annette: So, the same rules apply.

Vivian: However, what we can do in China, lawfully of course, is to agree with the employee for working on the comprehensive system, so for example, a block or volume of 2,000 hours or so per year or 1,000 hours per semester and that is more flexible. So then that manager may work for example 10 or 12 hours in a day, and it will be entitled to compensation by a day off. That will be lawful.

Jonathan: But there are still caps, there are still limits on this. You cannot just opt out?

Vivian: You cannot opt out directly. And then an additional requirement under Chinese law is that to agree on this comprehensive working hour system, you need to also obtain an approval – administrative approval – from the Bureau of Labour locally. So, it is case by case.

Jonathan: Here is a thing. In many countries, there is what the law says, and there is what happens in practice, ok. Are these rules enforced in practice? Do companies, do senior executives, work to these time limits.

Vivian: Yes, and when we actually come to termination with a senior executive or manager in China, this is often the topic which is the most discussed and negotiated between the parties for mutual termination and we will have this debate over time actually done by these managers if the employer did not obtain this administrative approval by the Labour Bureau on the comprehensive hour system. The manager would be entitled to ask for double pay or triple pay if they have done overtime during weekends or public holidays. The caveat is that in practice, my experience in Shanghai, the Shanghai local government and local courts are more employer friendly and when the salary is substantially higher than the average salary in Shanghai, so typically for managers/executives, then the local courts in Shanghai may be more flexible and depending on the wording of the employment contract with these managers, then we may have the employer not needing to pay this overtime salary.

Annette: So, is it safe to say that the authorities are not too active from their side to control the amount of overtime hours? Or is that depending on the region, where you are?

Vivian: It is depending on the region. Basically, everywhere else in China, apart from Shanghai, the authorities would pay attention to working hours, especially of the workers and in China of course we do have a trade union which is linked with the communist parties, so relatively powerful. The Labour Bureau is relatively strict and in case of complaint by any employee, then the Labour Bureau may demand the employer to change his working hour system and shifts for its factory, typically.

Jonathan: Wow. Well, fortunately we have already planned another podcast in this series on terminating employment relationships in China and I can see something already that is going to form a key point of the discussion we will be having then.

But. What else? We have had a couple of examples in terms of the written employment contract. We have talked about working hours. What would be your number three hot topic for employing people in China, Vivian?

Vivian: Recently in China, we have also a complex legal framework which is being built in relation to data privacy, data protection. Everything related to personal data, what we call personal information of employees in China and that is regardless of the nationality of the employees in China, whether they are Chinese citizens or foreign expatriates working there.

To make a long story short, we are working with a lot of HR managers in Europe, North America and also with their DPOs – data protection officers – on how to be compliant with Chinese, well basically the Chinese GDPR. That is how we call it and several laws including the cyber security law, the data safety law and the personal information protection law - the IPL - which has been in force in China since a few years now.

It is not so easy as you may think to collect personal information of employees in China and to transfer this personal information to the headquarters abroad, even to Hong Kong or to Singapore regional headquarters. That is still considered a foreign country from a Chinese legal perspective, so you need to have the proper documentation ready and that would include of course, written consent of the employees for the transfer of their personal information to another entity abroad.

Annette: You always need the written consent of the employee, which would mean that it is even stricter than the European GDPR! You have some options. In particular with respect to employment agreements, to have a justification to share data. So just to confirm Vivian, you have just said you always need the written consent?

Vivian: In most cases, you need written consent even for employees in China when it comes to transferring their personal information abroad and you are totally right Annette, many of our clients are surprised. They say, "but we are GDPR compliant!" So that is like the highest standard in the world, how can we not be compliant in China? Well, yes exactly, the legal framework in China is getting more and more complex and we are happy to advise them.

Annette: That is breaking news for me, I must admit! Because we Europeans indeed always think there cannot be any higher legal standard than the one we use in Europe, but it is...obviously not correct and…

Vivian: Right! Again, nothing is black or white. I am not saying that Chinese law is strict on all aspects, certainly not in terms of protection of the person's or the individual's rights, no GDPR will have higher standards, but in relation to compliance, documentation, access of the authorities on these daytime China, then yes, China's GDPR or data protection rules are certainly stricter.

Jonathan: Well Vivian, thank you very much. What is becoming clear to me, I do not know about you Annette, is that some of the old ideas that I had about employing people in China are completely wrong and we need to understand that it is very dangerous to make assumptions about how things work. I am very grateful to have you as an expert guide on the ground Vivian.

Annette: Indeed Jonathan, I cannot agree more. I mean very glad to have you Vivian and I also must say, I mean it is not as simple as I thought too, and very interesting information so thank you very much. And I know definitely whenever I have any question in respect to Chinese employment law, I should not just say, it must be easier than we know it here in Europe, we definitely need local advice, so thank you very much for that.

Vivian: Thank you, thank you both and very happy to be part of our firm's international Employment Group and happy to help.

Jonathan: Not at all. Thank you but I just cannot let it go to say, that I have just heard a German lawyer say that there is another country that is more complicated and difficult. So, I just want to mark that moment and now is a good time to end the podcast.

Annette: Let us see for the next podcast Jonathan if I can beat that.

Jonathan: Thank you both very much. Thank you.

Annette: Thank you.

Vivian: Thank you.

Thank you for joining Gowling WLG for this podcast. If you enjoyed this episode, be sure to check out our website at gowlingwlg.com for more useful insights and resources and do not forget to subscribe to ensure you join us for our next episode.