Not Knowing The Laws of China Will Come Back To Haunt you

Thursday, September 25, 2008 6:52

I have come to understand the basic fact of China that the less you know about China, and China’s laws are no exception to this. It is something that applies to those looking to enter (or expand) when making investment decisions and when looking at joint venture partners at the highest level, and how firms hire employees and pay taxes on the everyday operational level.

Where this is important, is that while there are plenty of examples showing the importance of this (McDonald’s wage, P&G recall, Danone’s trademark case, etc), there are still those who are operating at times by the seat of their pants… and it comes back to haunt them in ways that they never planned for.

A recent example of this comes from a close friend who has a small firm here. It is a start-up, and like many entrepreneurial efforts – the firm really was in “go go” stage from day one and doing little on the framework side. Initially, many employees operated under the honor code, and then they were brought onto 1 year contracts that met the old labor law… but, when he had a problem with an employee recently, all hell broke lose and a price was paid.

The basic scenario was that an employee was essentially stealing some IP for his own use, and violated his contract. My friend confiscated his computer, and then had him leave… and that was when the problem started.

Within hours the employees was demanding to have the work back (on the laptop) and 3 months severance otherwise he would go to the labor bureau.

It was pretty clear that what the employee had stolen the IP, but the problem was that my friend didn’t know the labor contract and essentially got head faked into a defensive stance where he was asking lawyers for advice on the fly. He wasn’t clear on how many months severance to pay, he wasn’t sure about the arbitration process, and he really didn’t have the ability (in his mind) to research and negotiate…

The employee was playing his weakness to his fullest advantage, and by the time the whole ordeal was over he handed over the work and the money in hopes to keep him quiet.

In the end, we all joked that he had just paid his tuition like everyone else, but a serious point was raised. there are certain things, laws in particular, that people need to feel comfortable knowing. there is nothing worse than being pushed around while trying to do the right thing, and not having a base of knowledge to stand on. Had he previously read through the labor law, or had he hired an office manager who knew the laws for him, the process could have been managed in a different way and the employee (former) would not have necessarily been rewarded for his aggression.

and.. if you are looking for resources on China’s laws, I highly suggest you go through my Resources page. China Law Blog, China Briefing, Environmental Law Blog, and others spend a lot of time on the regulatory side of China… and when all else fails, call a lawyer who knows the topics. Each firm tends to have a specialty so make sure and speak to an appropriate firm for your problems.

You can leave a response, or trackback from your own site.

3 Responses to “Not Knowing The Laws of China Will Come Back To Haunt you”

  1. Requiredname says:

    September 27th, 2008 at 6:32 pm

    Lets say that your friend was aware of all the laws. The important question would be, could he ABSOLUTELY PROVE that his employee “stole” the IP material? If he could not, than he could not have used it anyhow to fire the employee, according to the new regulations. And the employee would be on the right side.

    The main difficulty here for new companies, is not being familiar with the laws — as you mention, there are plenty of online sources now — but rather that they would have to invest considerably in legal and HR services to meet the minimum. The reality is, that in most cases the employer would have to pay anyhow, so this should be put into the budget. THIS is what new and small companies have to consider. HR costs are up not only directly, but also indirectly.

  2. Matt says:

    September 29th, 2008 at 8:41 pm

    Hi Richard,

    I like your line: “and he really didn’t have the ability (in his mind) to research and negotiate.” That “(in his mind)” part is critical, as it seems all too often we foreigners are quick to doubt ourselves too quickly. That’s due to not growing up in the place where you live and work, and feeling vulnerable as a result. There are plenty of people willing to lend a helping hand in these moments of self doubt, but if we take the advice – even of friends – too often, we sacrifice self reliance.

  3. Andrew says:

    October 3rd, 2008 at 6:10 am

    Richard,
    Our client here in China experienced almost the exact same situation you describe, except that the employee was obviously stealing money! Our client was nervous as the company is only registered in Hong Kong, and not official in the mainland where the employment was taking place. The employee refused to leave the office without being compensated, and the police needed to be called. The call here is diffuse the immediate situation as best possible, and make no promises or commitments, and then call a lawyer to find out your options. I find there is a new generation of young lawyers in China who are bright and understand transparency.

Leave a Reply