China: Should U.S. Employers Take Additional Precautions?

As the U.S.-China trade relationship and other political tensions surrounding the People’s Republic of China (PRC) mount, foreign companies find themselves with a different risk profile as to employees working or conducting business there. To manage risk properly, employers can step up visibility to their China operations and legal compliance and maintain awareness of latest enforcement practices. Below are a few ongoing developments to watch, with practice pointers.

Mobility

Non-Chinese citizens working in or traveling to China may face increased difficulties and risks. To protect themselves and their employees, companies may wish to audit their practices as to China-based expatriates and other employees who travel frequently there.

The U.S. Department of State’s January 2019 travel advisory urged “increased caution” when U.S. citizens travel to China “due to arbitrary enforcement of local laws as well as special restrictions on dual U.S.-Chinese nationals.” The advisory cites instances of U.S. citizens detained in China for alleged state security reasons. It makes special mention of naturalized U.S. citizens originally from the PRC, who may be at higher risk as to these practices.

China overhauled its immigration and work permit application system last year, creating uncertainties and barriers for some employers in obtaining work permits for their expatriate workers assigned to the PRC. The work-permit application process involves multiple steps including a police interview, and candidates (particularly those from certain countries) may be at risk of a late-stage rejection after they and the company have already invested substantial resources. The new rules—implemented through an online system—fast-track desirable candidates and delay or screen out others, complicating staffing decisions for overseas entities subject to anti-discrimination and “ban-the-box” laws. Currency manipulation has also emerged as a theme affecting benefit packages for staff accustomed to salary payment in foreign currency.

Relatedly, the government has imposed a crackdown on the widely misused “M” business-visitor visa. As background, individuals can apply for this category of travel document with a China entity’s simple invitation letter, allowing entry and exit for up to 10 years for non-work business purposes such as meetings and conferences. Many M-holders work and live in China in violation of the immigration laws—and to avoid detection, companies will payroll M-visa holders from abroad, or pay them as contractors, arranging for the individuals to leave and re-enter China every few months. Companies and individuals are now reporting passport seizures, on-site audits, and questioning at the border with a higher frequency than before.

Data Protection

Foreign-headquartered-companies have struggled with data security and privacy in China. This struggle, which has intensified, has employment-related implications. Compliance with China’s 2017 cybersecurity law remains a source of significant confusion, even as the Chinese government promulgates multiple circulars addressing the topic. U.S. businesses must also consider that the U.S. government considers China a top cybersecurity threat, as the U.S. Federal Chief Information Security Officer stated at a September 2019 cybersecurity summit. In the employment context, this means that companies must take seriously hiring, monitoring, and managing employees with access to sensitive data. Companies in certain industries identified in the cybersecurity law have an increased risk.

Employee data privacy is a developing area in China. While Chinese citizens derive certain privacy rights from the 2017 cybersecurity law, employers’ use of employee data was hardly the purpose. While China has issued some guidelines relevant to data privacy, obtaining employee consent to collection, use, and transfer of their data largely offsets that risk—so when a local manager or administrator says data protection prohibits a certain use or disclosure of data, this is not always to be taken at face value.

Employment Standards

For the most part, China’s primary employment statutes remain intact—but in the current global economic and political landscape, applying the employment-law standards presents a tricky puzzle for foreign employers. For example, in approaching employee disputes and alleged regulatory violations, courts and arbitrators often favor Chinese parties over foreign parties—this tendency is nothing new, but could become more pronounced in this climate, especially when the tribunals perceive that an overseas-headquartered company has applied its own country’s legal and cultural standards to Chinese employees. Employers can set themselves up for success by implementing employment policies, contracts, and trainings on the front end. Translating an employee-facing document into Chinese is important; otherwise, employers cannot expect to enforce it.

To offset the costs and risks of an uphill litigation battle, employers usually attempt to negotiate a separation with an employee. This is most often the recommended approach—at the same time, though, employers have more to lose if they are so scared of an employment dispute that they enable violations of their own conduct standards. Financial misconduct (such as falsified expense reports and kickbacks), for example, is difficult to prove to the satisfaction of a Chinese labor tribunal, but leaving an untrusted employee in place with a written warning is rarely the prudent option. Employers must further balance the negotiation approach with the precedent it sets by hefty payouts of employees suspected of unprovable misconduct.

Written by Bonnie Puckett of Ogletree Deakins

© 2019 Ogletree, Deakins, Nash, Smoak and Stewart, P.C.