Labour relations: Chinese companies and foreign employees

Disputes over determination of labour relationships between Chinese companies and foreign nationals assigned to work in China by their foreign affiliates are not uncommon. Once labour relations are established, the Chinese company may be exposed to the legal risk of employer liability.

This article summarises key points and provides practical advice to determine relationships, referencing adjudication practice in Jiangsu and Zhejiang provinces, and in Shanghai.

Key points of review

The adjudicating bodies in Jiangsu, Zhejiang and Shanghai mainly review such cases from the following three aspects:

Subject qualification. According to the Regulations on the Management of Employment of Foreigners in China, only after obtaining employment certificates for foreigners and residential documents can a foreign national become the subject of a labour relationship in China. Without the certificate, a foreigner’s claim to be in a labour relationship with a Chinese employer usually cannot be supported by a court.

This view has been adopted in a number of cases, such as Martin Buchmueller v Gestamp Automocion (2013) and Li Tianyu v Zhejiang Lianzhan Precision Fittings (2012). If a foreigner carries neither a work permit in China nor a foreign expert certificate, he or she cannot form a labour relationship with any domestic company.

Genuine intention of establishing a labour relationship. In judicial practice related to foreigner assignments, courts heavily scrutinise whether the foreign national and domestic company genuinely intend to establish labour relations.

In Yokota v Pinghu Mitakin (2010) and Komatsu v Yoneyama Kagaku Kogyo (2014) – both concerning Japanese employees assigned to Japanese-invested companies in China – the Japanese companies signed labour contracts with the employees before their Chinese affiliates, specifying in the assignment agreements that they were assigned by Japanese companies to work in China. On such a basis, the court held that no labour relations existed between the employees and Chinese companies.

However, in Martin Kovacik v KraussMaffei (2019), the foreign national and domestic company both acknowledged their labour relationship, which was then confirmed by the court. Therefore, the signing and sequence of domestic and foreign labour contracts, as well as supporting documents like assignment agreements, are important evidence for the adjudicating body to determine mutual consent.

Subordination between the parties. The physical and economic subordination of employees to their employers is an essential feature of labour relationships. Therefore, key factors to be examined also include: whether an employee actually works and receives remuneration from a company; whether the company directs and manages the employee; or whether the employee is subject to the company’s rules and regulations.

In terms of payment of labour remuneration, in both Simon Chan v VanEck (2019) and Kirill Pletnev v Arben International (2011), since the foreign nationals’ wages were paid by foreign companies, or it was explicitly stated in agreements that wages were paid by Chinese affiliates on behalf of foreign companies, the court denied a labour relationship between the foreign employees and Chinese companies.

Similarly, regarding management of foreign nationals by Chinese companies, the court again found, in Simon Chan v VanEck (2019), that the staff member was assigned by the foreign parent company to work for the domestic company, and was managed by the parent company, so no labour relations existed between him and the Chinese company.

Practical advice

To avoid being determined as having a labour relationship with assigned foreign nationals, Chinese companies may consider adopting the following methods.

Ensure that foreign nationals signed labour contracts and assignment agreements with foreign companies. The foreign company should enter into a labour contract with the assigned employee, clarifying that there is genuine intention between them to establish an employment relationship.

They should also sign an assignment agreement or relevant letter specifying matters regarding the assignment and attribution of labour relations. In addition, if the assignment is about to expire and requires extension, foreign companies should promptly extend it and obtain employees’ confirmation by signature.

Domestic companies should avoid signing labour contracts with foreign nationals. If a work permit is required, it is preferable to apply for it by submitting an assignment letter.

If a labour contract is mandatory to obtain a work permit, domestic companies are recommended to specify in the supplementary agreement that the contract is signed only to obtain the permit that allows foreign nationals to work in China, but does not imply a labour relationship between the two parties. In addition, domestic companies should guarantee that the duration of the labour contract does not exceed the foreign labour contract and assignment.

Foreign companies should serve as actual payers and contributors of labour remuneration, social security and other expenses. The actual payer and contributor of remuneration, social security and provident fund will affect the determination of a labour relationship.

Therefore, the authors suggest that such expenses be paid directly by the foreign company. If the expenses are required to be paid by the domestic company, it is better to explicitly stipulate in the assignment or supplementary agreement that the payment is made on behalf of the foreign company, and will be ultimately borne by it.

Standardise management of foreign staff. In practice, domestic companies are inevitably involved in the management of foreign staff. To gain a foothold for the domestic company in defending itself in possible disputes, the foreign company, as the main employer, may still consider adopting relevant practices.

These can include clarifying in the labour contract or job duties signed with assigned employees that: they are subject to the management of the foreign company; their work involves the business of both the foreign and Chinese companies; and they need to report regularly to their line supervisors in the foreign company.

In addition, in performance appraisals, agreements may be made with foreign employees to apply the appraisal system of their foreign company. Any adjustments or changes in positions and remuneration of foreign nationals should likewise be decided in the name of the foreign company.

Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng