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The author, K Lesli Ligorner, is a partner at Paul Hastings. Based in Shanghai, she chairs the firm’s employment and anti-corruption practices in mainland China.

Traditionally, many multinational corporations that have established operations in the PRC have paid little attention to the details of their employment policies and practices. These are important, however, because it is these very details which can determine whether an employer is justified in terminating an employee for misconduct.

Often it is only after a serious violation of the compliance policy that a company executive fumbles through its dismissal procedures, only to find that:

  1. there are no work rules at all,
  2. the employee’s employment contract has expired months (or worse, years) earlier, or
  3. there are no original documents (only copies), or
  4. all applicable documents were issued only in English, and some may even mention the law of a state in the USA.

Sound familiar? In fact, this scenario is all too common in China, particularly at the vast majority of smaller foreign-invested companies that never look too closely at the documentation they use to govern employment relationships. But the reality is that any one of these documentary deficiencies can prevent a company from justifying the unilateral dismissal of an employee. As a result, in order to get rid of a bad apple, companies must often swallow their corporate pride and pay an employee to leave. This can have a negative affect on employee morale and send the wrong message to the remaining workforce about how the company handles employee misconduct cases.

So what can companies do? First, recognize the value of stronger employment policies in addressing corruption or preventing dismissal of wayward employees due to poor or poorly communicated work rules. Businesses routinely adopt standard-form contracts from local labour authorities and fail to supplement them with robust agreements that incorporate provisions that enhance corporate compliance – anything from protecting against theft of intellectual property and proprietary information, to avoiding antitrust violations, to reducing the risk of corruption.

Compliance programmes at multinational companies can be improved by the adoption of a handful of basic precautions. Pre-hire backgrounds, the implementation and publication of binding work rules covering anti-corruption compliance, and the adoption of appropriate contractual protections and corporate policies can both reduce the risk of corruption and improve the ability to investigate, discipline and, if necessary, dismiss employees who run afoul of the company’s code of conduct.

Get it right from the beginning

Background checks and a careful review of a candidate’s list of prior employers can help minimize corruption. Not only should companies be sure to verify applicants’ CVs, they should also consider how to protect themselves when hiring a candidate who will regularly interact with government officials and/or with vendors, customers or suppliers. For example, does anyone review whether the applicant worked at a company that has announced it has been investigated for corruption? It is not uncommon for employees who have been dismissed following a corruption scandal or some other form of misconduct to seek a similar position in the same industry or in the same role, where they are quite likely to adopt the same unsavory business practices. Such individuals, if hired into a management role, may even try to populate their new company with corrupt associates and subordinates from their previous employer.

When hiring a candidate, it is critical that PRC-based employers build contractual provisions into employment agreements that give them maximum flexibility should an employee become involved in corruption. This is especially so because disciplining and dismissing employees in the PRC can be difficult. From a contractual perspective, this means employers should stipulate that violations of either PRC or applicable foreign anti-corruption laws will constitute grounds for termination. Any infraction of the UK Bribery Act or the US Foreign Corrupt Practices Act will therefore be equivalent to the infraction of any other work rule, whether or not it amounts to a violation of PRC law. The provision can be set out in the body of the employment contract itself, or as an addendum that is incorporated into the agreement.

Ensuring the company has internal rules and regulations in place is a rudimentary step, but one that is all too often overlooked in PRC subsidiaries. Work rules are typically compiled in an employee handbook (or other compendium of work rules). Those rules detailing corporate compliance policies should, according to the OECD’s Good Practice Guidance, outline specific procedures to address high-risk areas such as:

  1. gifts
  2. hospitality, entertainment and expenses
  3. customer travel
  4. political contributions
  5. charitable donations and sponsorships
  6. facilitation payments, and
  7. solicitation and extortion

These risk areas are particularly relevant in the PRC because providing gifts and business courtesies, as well as entertaining business associates and government officials, are both routine and culturally-expected behaviour. Clearly-defined corporate policies will prevent employees claiming ignorance of company policies that prohibit this type of conduct.

Employers should also be sure to provide employees with Chinese-language versions of all key employment documents, including the employment agreement, the employee handbook, and the code of conduct or other document that outlines the company’s anticorruption policies. Smaller companies often try to save money in this area on the basis that an employee speaks very good English. But in reality failure to provide this fundamental documentation in Chinese can create problems later if an employee claims he/she did not understand work rules communicated only in English. Because it is virtually impossible to establish positively that an employee did understand English-language instructions, a fact finder is likely to find such work rules do not bind the employee.

It is critical employers recognize they cannot institute new rules and regulations that may result in disciplinary action without going through the consultation procedure required by Article 4 of the PRC Employment Contracts Law. Because violation of any aspect of a corporate anticorruption policy or procedure ought to result in disciplinary action, implementing a new policy or procedure without performing the prescribed consultation raises the possibility of unenforceability should a violation occur. Compliance and human resources personnel must therefore work together to ensure all compliance policies are implemented in accordance with the law.

Companies that are unable to apply their work rules to justify summary dismissal in the context of a bribery violation will suffer negative consequences for both their compliance programme and employee morale. Few pills are harder for employees to swallow than watching a colleague – the same colleague accused of giving kickbacks and creating a potentially serious liability for their company – receive a hefty separation package instead of a one-page notice of unilateral termination, all because the company failed to incorporate effective employment policies into its anticorruption compliance program. The bottom line is that, unless all the pieces are in place, employers have little chance of justifying a dismissal in legal proceedings by showing the employee committed a serious violation of the company’s work rules.

Training crucial

Issuing reams of paper policies, however, is not enough. Proper training should take place during the onboarding process, which should be tailored to the position and risk level posed by the position(s) filled by the new employees. Ideally, both human resources and compliance personnel should work together to deliver effective and targeted training soon after new employees start with the company. Further, the training should include the appropriate “tone at the top” – and in the middle – and must convey the unambiguous message that bribery is inconsistent with the company’s culture. Training should also involve a review of those policies in the employee handbook that address the high-risk issues mentioned above.

Further, as with the key employment documents, training for native Chinese speakers should be provided in Chinese to ensure there is no confusion as to the content of the training and the message it conveys. Another benefit of providing training in an employee’s native language is that the employee will probably feel more comfortable asking questions if confused about what is said. After the initial orientation, the company should continue to provide training on a periodic basis, together with direct communications with employees so the message is repeated. Employers, particularly those in high-risk industries, should also consider providing “live” training for maximum efficacy.

While sheer size and geographic scope may dictate the use of electronic training programs for some employee populations, those who, for example, interact regularly with government personnel or employees of state-owned enterprises, may benefit more by live training, where they can ask questions and discuss directly tougher “hypothetical” cases.

At a minimum, this prevents high-risk employees from taking just 5 minutes to absorb a 45- or 60-minute online programme, or keying in answers without reviewing any of the materials because they know it is the act of completing the training and not the way in which training is completed that is monitored and reviewed. This is another intersection between a company’s employment policies and compliance programs that should be reviewed in order to ensure training is meaningful and not just a button-pressing exercise.

Finally, training should also include a system for employees to seek guidance, ask questions and, where possible, confidentially or anonymously report any violation of corporate policies or of the law via a telephone “hotline” or e-mail. It is common for employees not to read every section of an employee handbook. Failure to stress in training how employees can file a complaint, and that the company is committed to non-retaliation for doing so or participating in an investigation may result in employees remaining ignorant of these fundamental compliance program issues. As a matter of best practice, therefore, the policy should encourage all employees (and to require management, legal and compliance staff) to report any wrongdoing.

Some companies reward employees for reporting via personal thankyou letters and phone calls from top management in recognition of their efforts. Others specify that support of the corporate compliance programme should be included as a factor in determining base salary and bonus calculations.

Getting it right in the middle

Some companies do not extend training beyond the initial orientation process, but a robust compliance programme will also include ongoing instruction, monitoring and strategic “stress testing” of sensitive areas such as relationships with third parties and government officials. There are a number of simple steps companies can take to enhance compliance programmes. For example, they can implement a process whereby employees periodically certify they have received the company’s anti-corruption policy, have complied with it, and are not aware of violations by any other employee or third parties acting on behalf of the company.

Such certifications could be performed online, but are more effective in China if they are completed in hard copy because original hard-copy documents are more readily accepted and are more easily submitted as evidence in legal proceedings than electronic equivalents. Further, certifications mean employees are less likely to profit from withholding relevant information from the company. For example, when employees sense they are about to be terminated for poor performance or misconduct they often suddenly become aware of purported incidents of bribery and kickbacks by others. By failing to include such allegations in prior certifications, employees will be hard-pressed to explain prior omissions, which should help thwart efforts to blackmail the company for more money as part of a separation package or to avoid a unilateral termination.

In the event that an internal investigation becomes necessary, companies must be careful to comply with PRC rules governing employee data privacy. Best practices include building prospective language into employment agreements that permits an employer to search, copy and transmit employee communications held on company computers and other electronic devices. Employers should also consider providing employees with company-issued cell phones and personal digital assistants to ensure they can access all relevant data on those devices.

And depending on the level of control that a company wants to exert over corporate communications, employees should be discouraged – or prohibited – from using personal email addresses and personal mobile phones for business communications. Extracting email and text messages from an employee’s personal device is challenging even in jurisdictions where obtaining subpoenas for such data is routine. In the PRC, where such information cannot be subpoenaed and an employee enjoys a strong right to privacy, obtaining data from personal mobile phones is often impossible without using legally-questionable methods.

Getting it right at the end: termination

As previously mentioned, China imposes a number of obligations and restrictions on the employment relationship. Chief among these is the general requirement that, in the event of an employment dispute, both parties must submit to mandatory arbitration whose outcome, in practice, is heavily weighted in favour of employees, particularly where the employer is not a domestic Chinese company. Many employers seek to avoid this process through a negotiated settlement. If allegations of bribery are driving the termination, management should consider the potential for misuse (or the appearance of misuse) of severance payments.

If arbitration is unavoidable, many employers will want to keep the conduct of such proceedings confidential. A pre-negotiated confidentiality agreement or similar language in the employment agreement is easier to secure at the beginning of the employment relationship than at the end. Employers should be prepared for retaliation from employees facing termination and introduce solid whistleblower protocols to investigate allegations arising from disgruntled workers.

Risk assessments in employment documentation

Companies should also perform periodic assessments of employment documentation to identify various corruption risks the company faces. Depending on what is discovered by that assessment, human resources and compliance personnel will be able to identify and mitigate some areas of risk in the compliance programme and determine what areas require strengthening. For example, companies can verify basic employment processes and risks by checking:

  • is there a fully executed, current, written employment agreement for each employee?
  • are all agreements in Chinese?
  • are there signed acknowledgements for the employee handbook, code of conduct, proprietary information and inventions agreements for every employee?
  • has every employee received anti-corruption training (and does the company have a way to check this easily)?
  • did the training occur in an unreasonably short timeframe, rendering it meaningless?
  • do the finance personnel check, periodically or routinely, on the accuracy of invoices submitted for expense reimbursements?
  • are employees required to certify they are submitting genuine invoices for expense reimbursements?
  • are there periodic certifications of compliance with anti-corruption policies by each employee?

Through proactive planning around the intersection of employment and anti-corruption laws, multinational corporations operating in the PRC can bolster compliance programmes and lessen the risks attendant to doing business in what is a uniquely-challenging business environment. In practice, it is relatively simple to perform periodic audits of routine corporate employment policies and practices, a habit which will over time strengthen the company’s compliance programme. And as companies uncover new areas of risk, employment documentation and processes created over an extended period of time can be used to mitigate more and more of the dangers to which they are exposed.

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