China, common sense and the rule of law

When entering the labour market of the People’s Republic of China (PRC) foreign companies often receive “wise counsel” from local advisers that follows a strangely familiar pattern. According to this “advice” everything in China is so “different” that a company must put aside its experience in employing people elsewhere in the world and follow a few tried and respected rules. These usually involve allowing contracts to be drawn up that commit foreign companies to suffer more obligations than the other parties located within China; the paying of salaries well above those offered by local companies – and getting closely involved with local officials in the areas where the company wishes to set up operations. The term “closely involved” usually means generous hospitality and even quietly “donated” monetary ”gifts”.

The reality, of course, is that no such rules exist. Advisers are often just maximizing their personal advantage or those of their Guanxi contacts whist ,in fact, the Chinese central government is clamping down heavily on all forms of inducements in money or in kind offered to officials and politicians at all levels. Foreign companies need to tread very carefully when setting up operations because they will often be seen as both naive and affluent – making them potentially vulnerable to both petty and more heavyweight exploitation. If a company enters into the market via a representational office (or RO, the simplest mode of entry) they will not be able to employ staff directly and will therefore have to rely on a local agency to retain staff on their books and make payroll deductions. This involves a high level of risk as deductions may not be accurate and agreements signed with local agents could leave the foreign company responsible for any administrative errors that are made or unlawful actions undertaken.

Foreign companies in China are currently undergoing detailed official scrutiny and this means that every employee must be clearly specified on the payroll and correct tax and social security deductions regularly made – whatever local advisors have recommended. Self-employment is strictly unlawful in China and severe penalties exist for companies that have been using the services of such workers. Moreover official incentives that have been awarded to encourage inward investment to a particular province or city are not always secure as Beijing is calling in many such transactions and not allowing deals that do not meet strict criteria.

Although employees managed via a Chinese agent are technically on the agency’s “books” you should always assume that they are your direct employees and that you will be responsible for staff management, training and dismissal. It is also important that the bank through which employees are paid is carefully checked out as some foreign companies have been invited to deposit money in what appears to be a bone fide bank, but has either been a false front for other interests or far from solvent. Never accept any document – employment contract, agency agreement or otherwise – which has not either been drawn up by your company or a reputable law firm directly on your company’s behalf.

China has a huge labour market, its people are generally very honest and hard working – but there is often a huge disparity between the fortunes of those who invest and local people with whom they often feel forced upon to rely. The only rule that really exists is one of common sense. Do not trust anyone until they have clearly earned your trust, stop trusting anyone who proves to be dishonest in even the slightest way and if something seems overly risky or not right it is generally better not to proceed.

As a first step, inward investing companies should sign up to FedEE Global and seek our impartial assistance. We have the linguistic, cultural, remuneration and legal skills you need to establish a successful Chinese HR operation.