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Putting The China Labor Law Cart Before The Horse

By Dan Harris and Steve Dickinson

Every month or so, a client comes to me in a panic with a "brilliant" idea for avoiding some short term problem. Examples abound: 1. One company with revenues of about $200 million a year was being sued for around $2 million by a hated competitor. The brilliant idea was to shut down the business during the slow season and reopen it as an entirely new business a month later, presumably rendering the first business judgment proof. When I told him we would charge him at least $2 million to do all this from a legal and tax standpoint and asked what he thought doing this would do to his company's truly excellent reputation, he quickly realized he had gone through a moment of temporary insanity. 2. One company came to me with over 50 offshore companies in complete disarray. Seems some lawyer (presumably a very rich one by now) had convinced them these structure made sense from a tax standpoint. I asked if this structure was saving them on taxes and their response was that they did not even know any more, but they did know it was a huge hassle and was costing them a lot of money on upkeep alone. We quickly reduced them to three or four companies and they called me a few months later to thank us. 3. When China instituted its new Labor Contract Law earlier this year, about a half a dozen companies came to us with the idea of firing and then re-hiring their entire workforce, "just like Huawai." My response to each of them was to think long and hard about the impact such a decision would have on the employees. I thought firing them would send a message that the company had no intention of keeping them for the long term and doing so would likely cause at least some of them to look for other jobs. I said I was not telling them what to do, one way or the other, but just suggesting they think of all of the possible implications of their actions. In the end, none of these companies did this. I will be sending out about a half a dozen "this is why you are lucky to have me as your lawyer" emails today, after just reading this paragraph from a This is China post:

?Huawei are bad guys,? Paul said. Paul is European [and works for a Huawei rival]. ?They fired so many senior people before the end of last year, to get round the new labor law.? The new labor law has it that employees must be paid one month?s salary for every year they have been with the company. Firing staff before the new year, then having them re-apply for jobs at lower pay grades is a way for a company in China to save loads of cash. ?We hired a lot of those guys,? Paul said proudly.

Full post as published by China Law Blog on July 05, 2008 (boomark / email).