China Staffing Answers

For every roughly 100 China WFOEs and Joint Ventures (total) my firm helps set up in China, it does one Representative Office. Why so few Rep Offices, when it is generally agreed they are the easiest entity for foreigners to form in China? Because the inherent limitations on China Rep Offices mean they seldom make sense.

Rep Offices “represent” in China the foreign company back home. Rep Offices are not a separate legal entity; they are the China representative of the foreign company. Most importantly, they are not allowed to engage in profit making activities. Chinese law limits them to performing “liaison” activities.They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. They simply cannot earn any money in China or take any payments from a Chinese person or business for any reason.

NOTE: This post does not discuss branch offices for banks, insurance companies, accounting firms or law firms, all of which are permitted to engage in profit-making activities in China.

Rep Offices are pretty much limited to engaging in the following:

– Conducting research.
– Promoting their foreign company.
– Coordinating their foreign company’s activities in China.
– Other activities that do not and are not intended to generate a profit.

Because forming a Rep Office in China is faster, cheaper and easier than forming a Wholly Foreign Owned Entity (WFOE), companies oftentimes consider forming a Rep Office in China to test the waters there, with the intention of switching over to a WFOE once it becomes clear China will be viable for them. We generally discourage this because “switching” from a Rep Office to a WFOE is not really a switch at all. It involves both shutting down the Rep Office and forming a WFOE pretty much from scratch. Because the cost of forming a Rep Office, shutting down the Rep Office, and then forming a WFOE, will be considerably higher than just forming a WFOE, forming a Rep Office with the later intention of forming a WFOE seldom makes sense. Companies will usually be better off just biting the bullet and forming the WFOE straight away.

Other times, companies have come to my firm believing they need a China Rep office because they need a Chinese entity to sell their product into China. Oftentimes though, these companies can sell their product into China without having to create any in-china footprint at all.

There are definitely times where a Rep Office makes sense. By way of one example, my firm set up a Rep Office for a US company that sells US made equipment for around $2 million each. This company has no plans to start manufacturing its equipment in China so there would be no need to form a WFOE for that. It already had an arrangement with a Chinese company to repair its equipment sold into China, so no need to establish a WFOE for that purpose either. This company merely wanted an on the ground China presence to improve its sales and to let its customers and potential customers know it is serious enough about China to commit to having an office there.

There are three basic requirements for forming a Rep Office:

1. The most important requirement is that there must be a lease on an approvedspace for a period of at least one year beyond the approval date of the Rep Office. Care should be taken with this requirement, since many jurisdictions accept leases only from a small group of approved office buildings. Shanghai, for example, is one such jurisdiction. The lease must be registered, which can also cause problems in some jurisdictions.

2. There must be a designated Chief Representative who will manage the affairs of the Rep Office.

3. There must a foreign entity (typically a limited liability or a corporation) that the local office represents; private individuals and partnerships cannot establish a Rep Office in China. In addition, some jurisdictions in China do not allow newly formed entities to form a Rep Office.

The local approval authorities usually issue their decisions on Rep Office approval within around thirty days, at which point the Rep Office must do many of the other things typically required of businesses in China. However, in some areas, the decision can take much longer, depending on the whims of the local officials.

There are two major issues that make working with Rep Offices unattractive:

1. Even though Rep Offices are not permitted to earn income in China, they are nevertheless subject to taxation.There is a 10% tax on the GROSS EXPENSES of the Rep Office. If the Rep Office is large and has a number of employees, this tax can be quite high.

2. A Rep Office is not permitted to directly hire Chinese nationals. All hiring of Chinese nationals must be done indirectly through contracting with a Chinese employment agency such as DaCare Staffing. Recent changes in the Chinese labor contract law have made such contracts extremely unattractive. Rep Offices can directly hire foreign nationals.

The bottom line on Rep Offices is to think before you leap and not get seduced by their relative ease of formation. Every once in a while my firm will get called by someone who formed a Rep Office (usually through a formation company) within the last year or so who tells us they are now ready to “switch over” to a WFOE so they “can start making money” in China. These people believe this “switch” will involve little more than a one page notice of change and are shocked to learn that it will actually involve a shutdown and a new formation. Do not let yourself become one of “these people.”

Source: China law blog

Termination of employees in China definitely ranks among the things relatively smart American companies seem to get wildly wrong in China. And I intentionally said “American” here, not “Western,” because I think this problem is mostly an American one.

I have previously written on the cultural disconnect between China and the US when it comes to terminating employees:

Last week, I attended co-blogger Steve Dickinson’s lecture on China labor law. Steve’s lecture was part of a truly superb Doing Business in China seminar put on by Global Nav. The thrust of Steve’s speech was that labor laws in China have changed, they are being enforced against foreigners, and they are very different from U.S. labor laws. In a nutshell, the biggest differences are that written contracts with all employees are required in China and firing an employee generally must be for cause. Neither of these are true in the United States.Judging from the audience questions (and this was an extremely sophisticated audience), many were surprised by this and many had trouble understanding the full import. A few days later, Steve and I were talking about this with the Chinese lawyers we work with in Qingdao. In explaining to them some of the cases we have handled for American clients who got themselves into trouble by improperly laying off Chinese employees, it soon became apparent to Steve and me that the Chinese lawyers were not grasping why these American companies were making these mistakes. They would ask questions like, “how could these American companies really believe they could lay off 100 people without first securing their approval and that of the government as well?” When Steve and I told them about US labor laws, the Chinese lawyers found them so bizarre, they actually laughed.

We told them of how there is a saying in the US that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination). We talked about how one might fire an employee for wearing a green shirt. We told them of how most employees in the United States do not work under written contracts and how companies generally prefer not to use them. It took us at least a half an hour for us to give a basic explanation of employer-employee relations in the US and even then, it was pretty clear that these exceedingly bright lawyers were still nonplussed.

It was a good exercise for Steve and me and only reinforced why it is that Americans (the labor laws in Europe are not so wildly different in China) in China so often act on Chinese employment law matters based on completely false assumptions as to how things are really done there.

Americans: Just remember, no matter how capitalist China seems, it still, on at least some level, aspires to be a workers paradise.

China’s Labor Contract Law distinguishes between full and part time employees and this post is going to deal only with full time employee. This post is also going to focus only on the situation where the employer wants to end its relationship with its employee(s) and the employee(s) do not desire likewise, aka, unilateral termination.

Employers in China may terminate their employees without advance notice and without severance pay in very limited circumstances, such as when an employee has severely violated company rules, engaged in such a serious dereliction of duty or been so corrupt as to substantially damage the employer, established an employment relationship with another company, or become subject to a criminal investigation.

Because no law defines what constitutes either a severe violation or severe damage, it is essential for the company’s employee manual to spell this out. Termination for these reasons does not require payment of severance whereas pretty much every other termination does.

With at least thirty days notice (or by paying one month’s salary), an employer (at least in theory), may terminate employees for the following:

– An employee’s inability to perform his or her job after returning after the statutory medical treatment period for illness or a non-work related injury.

– Clear incompetence that has not been remedied by additional training or reassignment to a new position. Do not even think about this exception unless you have built up an incredibly good written record stretching back quite some time.

–There has been a “material change” in “objective circumstances” such that the employment contracted for can no longer be performed. I am not aware of “material change” or “objective circumstances” having been defined anywhere, nor am I aware of any company having won on these grounds. I am guessing that along the lines of a tsunami shutting down the factory will be required to win on this provision.

Terminating twenty or more employees or more than ten percent of the total workforce has its own, additional requirements.

The point of this post is not to set out in detail the rules for firings in China; it is to point out that there are many rules in China related to firings and that those rules are complicated and/or vague. Firings in China should not be done without real planning and legal analysis.

US rules do not apply.

Source: China Law Blog