April 1, 2011
Fewer and fewer foreign companies in China are seeing the benefits of having a representative office (“Rep Office”) in China even though Rep Offices were considered at one point to be the most effective and least expensive way for foreign companies to establish a presence in the Chinese market. Some of our clients now want to convert their Rep Office to a wholly foreign owned enterprise (WFOE) because of the greater flexibility a WFOE offers; others want to downsize the Rep Office or shut it down.
Before you downsize or shut down your Rep Office it is in your best interests to comply with all applicable national, provincial and municipal Chinese laws, in particular Chinese labor laws when you lay off your Rep office employees.
Your legal obligations to the employees of the Rep Office arising out of, or relating to, the proposed lay off of those employees depends on how the Rep Office recruited its employees. If the Rep Office recruited its employees through a qualified foreign affairs service, then the relationship between the Rep Office and its employees is a labor relationship and the relevant laws and regulations for the protection of Chinese labor apply to any proposed termination of their employment relationship with the Rep Office.
If any of the following circumstances makes it necessary to reduce the workforce at the Rep Office by less than twenty (20) employees but 10 percent (10%) or more of the total number of the Rep Office’s employees, the Rep Office may reduce the workforce for the following reasons:
- (1) A restructuring pursuant to the Enterprise Bankruptcy Law;
- (2) Serious difficulties in production and/or business operations;
- (3) If the enterprise switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce; or
- (4) Another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them non-performable.
However, before the Rep Office can lay off employees, it must follow the following procedures:
- (1) explain the circumstances to its Trade union or to all of its employees thirty (30) days in advance of the proposed lay off date,
- (2) consider the opinions of the Trade union or the employees,
- (3) report the workforce reduction plan to the Human Resources and Social Security Bureau in the city in which the Rep Office is located.
The Rep Office may NOT terminate an employment contract if the employee is a pregnant female employee during her pregnancy, confinement or nursing period unless the pregnant employee has seriously violated the Rep Office’s rules and regulations.
An employee must be paid severance pay based on the number of years worked with the Rep Office at the rate of one (1) month’s wage for each full year worked. For the purpose of calculating the severance pay, monthly wage means the employee’s average monthly wage for the twelve (12) months prior to the termination of his or her employment contract. Any period of employment of not less than six (6) months but less than one (1) year shall be counted as one (1) year. The severance pay payable to an employee for any period of less than six (6) months shall be one-half of his or her monthly wages. The Rep Office may terminate an employment contract by giving the employee thirty (30) days’ prior written notice, or one (1) month’s wage in lieu of notice.
If the Rep Office terminates or ends an employment contract in violation of the Laws of the People’s Republic of China on Employment Contacts, the Rep Office shall pay damages to the employee equal to twice the severance pay due the employee calculated as set out above.
If the Rep Office did not pay social insurance premiums or provide a housing fund for the employee as is required by Chinese law, the employee may report either of these omissions to the local government authority which will require the Rep Office to pay social insurance premiums and provide a housing fund and may also impose a fine on the Rep Office.
Notwithstanding the foregoing, if the Rep Office negotiates a compensation agreement with the employee to be laid off, the amount of economic compensation payable by the Rep Office to the employee is not fixed by law.
If the Rep Office did not recruit its employees through a qualified foreign affair service, the relationship between the employees and the Rep Office is in the nature of a civil service relationship, and labor protection laws do not apply and there are no mandatory civil legal obligations on either the Rep Office or the employees.
Therefore, unless otherwise agreed to by the parties, the Rep Office is not required to pay severance compensation to the employee when the Rep Office terminates the employment contract with the employee. In these circumstances there are no legal restrictions on terminating an employment contract with a pregnant employee.
Furthermore, unless otherwise agreed to by the parties, the Rep Office is not required to pay social insurance premiums or provide a housing fund for their employees.
However, if the Rep Office did not recruit the employees through any foreign affair services, then the hiring is deemed to be in violation of administration rules and the government may impose fines on the Rep Office for illegal hiring. There has not been any clear guidance from either statutes or civil cases regarding the amount of the fine to which the Rep Office may be subject. The normal practice in Beijing, however, is somewhere between ten thousand Renminbi (10,000 RMB) to fifty thousand Renminbi (50,000 RMB).
Even though it appears to be cost effective to recruit employees illegally, when it comes to laying off the illegally hired employees of the Rep Office, you never know what fines or other penalties you may ultimately be subject to when you violate Chinese laws.
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