In January, a Polish expatriate, whom I’ll refer to as “Andrew” for confidentiality reasons, sought my assistance with a labor dispute involving his employee.
Andrew, who owns a modest factory in Dongguan, was entangled in a labor disagreement with his production manager, “James” for the sake of anonymity. Despite the numerous errors James committed on the job, Andrew, being the gentleman that he is, chose to address the situation with patience. He would have conversations with James, offering encouragement and motivating him to improve his performance going forward.
I have observed that expatriate employers from Europe and America tend to be more lenient and prefer to offer encouragement rather than penalize employees for their errors. In contrast, I believe that Chinese culture traditionally favors a stricter approach. From childhood, we often received punishment rather than praise from both parents and teachers, reflecting an educational system that has been in place for centuries. Corporal punishment, such as caning, was once a legally accepted disciplinary method, and it’s still practiced by some parents at home.
As a result, when confronted with Andrew’s more lenient management style, James failed to grasp the gravity of his mistakes. He even considered his dismissal to be unjustified.
The consequences were significant: the work suffered, and James’s errors cost the company a considerable amount of money. The firm had to reorder large quantities of raw materials to redo products as per client specifications, leading to a considerable waste of time and resources. Additionally, the financial strain of COVID-19 left the company in a precarious position, compelling Andrew to make the difficult decision to terminate James’s employment.
Andrew invited James for dinner to discuss his departure from the company in an amicable and peaceful manner, which James agreed to during the meal. However, instead of acknowledging his errors and their costly impact on the company, James chose to file a lawsuit against the company seeking severance pay.
James demanded a substantial sum as compensation, given his long tenure at the company. He had been with the organization since its inception, even before its official incorporation in China. Typically, severance pay amounts to one month’s salary for each year of service. In cases of unlawful termination, this amount can be doubled. However, legal precedent suggests that receiving double severance is challenging.
Immediately, it was evident to me that Andrew had indeed terminated James unlawfully. While James’s actions may have been morally questionable, the termination, as per Chinese law, was illegal. I advised Andrew candidly that compensation was unavoidable, but we could negotiate it down to a reasonable amount. Andrew was taken aback, having assumed the evidence of James’s costly mistakes would be ample justification for the termination. In Poland, James might have even faced legal action for such errors.
I will elaborate on the intricacies of termination later in the article. For now, let’s continue with the case at hand.
Upon reviewing the evidence and James’s allegations, we identified strategies to potentially reduce the penalty owed by Andrew’s company. James had been on the payroll of the Hong Kong parent company for the first two years while working in China. With the Hong Kong contract in hand, we were able to argue that those initial two years should not count towards his tenure with the Mainland Chinese company since the contract was with a different entity, one that wasn’t incorporated in the Mainland at the time.
We also played another strategic card—hinting to James that we could prolong the legal process for over a year, shut down the Mainland company, and Andrew could relocate his operations to Thailand or Vietnam. This was merely a bluff, but it proved effective in court. We made it clear to James that if he didn’t settle, he might end up with nothing, as we had legal means to extend the case indefinitely. We also mentioned that we had testimonies from clients about the errors made and could countersue for damages caused by him to the company.
Our strategy succeeded, and James agreed to settle for only a fraction of his initial claim, to be paid in three installments. This was precisely Andrew’s objective. He was dealing with cash flow issues, and his primary aim was to delay proceedings as long as possible to maintain liquidity. Andrew had instructed us to either settle for an acceptable amount or to drag out the case for at least a year to buy time for the company.
Andrew was extremely pleased with the outcome, as we had achieved both objectives: buying the company crucial time and drastically reducing the financial burden.
Revisiting the topic of employee termination, expatriates working in China should pay close attention, as the principles apply equally to both employers and employees. It is quite challenging to dismiss an employee without a comprehensive and well-documented set of regulations, which should be clearly outlined in both the employment contract and the employee handbook, complete with the employee’s acknowledgement through their signature.
Even with evidence of serious mistakes made by an employee, the employer must provide proper training and receive written acknowledgment of the error from the employee before proceeding with termination for repeat offenses. Crucially, these stipulations must be explicitly stated in the employee handbook, which the employee has signed. For instance, the handbook must clearly define that being 10 minutes late constitutes a breach of rules, and being late three times within a year without valid justification is a serious violation that could lead to immediate dismissal. Naturally, this would also require a reliable system to track and prove instances of tardiness.
The subject of employee handbooks is extensive. A thoroughly crafted handbook can exceed 100 pages and is a significant undertaking in its own right. We have prepared such comprehensive handbooks for international clients with businesses in China. These handbooks encompass everything from employee behavior (like mandatory handwashing before food preparation in restaurants), to dress codes (for sectors like consulting and hospitality, where T-shirts and sandals may be deemed inappropriate), to work ethics (which is particularly pertinent in the education sector, where teachers are expected to be exemplary figures for students).
The investment in developing such a handbook is negligible compared to the potential penalties incurred from employee lawsuits, making it vitally important to establish such a framework to avoid scenarios like the one discussed in this case. Chinese labor law differs significantly from the laws in many other countries and can be fraught with complications for both expatriate employers and employees. If you’re seeking advice on labor-related issues, whether as a foreign employer or employee in China, please do not hesitate to contact me for consultation.