How to Handle Compensation Claims in China

Last time we took a look at what foreign manufacturers need to know about China’s mandatory benefits, and this time around I’m going to walk you through how to handle compensation claims in China so that it’s a win-win for both parties involved.

The following blog is based on excerpts from the whitepaper entitled “Foreign Manufacturer’s Ultimate Guide to Hiring, Training, Managing & Firing Staff in China” which can be downloaded in its entirety right here!

How to handle compensation claims in China

Early on in my career when I set up my WFOE I realized that HR issues would be a challenge so I allocated a big chunk of payroll to hiring a top notch HR manager. You would think that having a professional HR manager would be enough to ensure that your HR policies and contracts would be kept up to date and that the company would stay out of trouble. I went so far as to explain to the HR manager that I know there will be gray areas, but error on the side of caution even if it costs more than operating in the gray.

I realized the HR manager was engaged in activities in violation of her contract, such as moonlighting on side projects and perhaps taking bribes. I terminated her employment. Despite a gracious severance package which was well beyond my legal obligations to her, the employee took things personal and wanted to create as much drama as possible. She reported me to the labor bureau and tax authorities for so-called contract violations and tax avoidance. Here claim was that our company didn’t pay our full contributions to local government for mandatory benefits and that salaries were under declared in order to avoid tax. The craziest aspect of the case was that during her time with our company, she was the very person responsible for ensuring our company was compliant with those very issues!

Long story short, I learned that our company, under the guidance of that very HR manager, had indeed been slightly under declaring tax and not paying full benefits in accordance with current regulations. As these regulations were recently changed and as the vast majority of businesses in China were way worse in their non-compliance, the local authorities were reasonable toward my company. After a diplomatic negotiation we settled on a one-time penalty of less than 10,000 USD and our company to this day retains our “top class local tax payer” status and “model employer” recognition with the labor bureau.

How to use an HR lawyer to protect yourself in China

Here are the 4 valuable lessons I learned:

The company will be held responsible for the mistakes of its employees.

If you do face an audit, having a written HR policy is so much better than having no written HR manual. Without a written manual, the auditors will assume you are not compliant in all areas!

HR managers are expensive. HR Lawyers are not. These days I actual save money and have a better compliance by NOT hiring an expensive HR manager. I hire a HR manager with reasonable experience at a reasonable salary package, then I spend a few 1000 USD once every year to have an HR lawyer do a full audit of my contracts, rules, SOP’s, templates…everything.

Here is some quick math for your reference:

20,000 RMB : “Top notch” HR manager monthly salary

10,000 RMB: “Solid” HR manager monthly salary

24,000 RMB: Full HR audit by a Top Notch lawyer. Once per year.

10K savings X 12 months = 120,000 minus 24,000 for the lawyer = 96,000 RMB in savings per year. That’s 480,000 RMB (about 75,000 USD!) in savings over the past 5 years.

China’s HR rules and regulations are constantly being changed or updated. The annual review by a reliable 3^rd party is essential.

That concludes post no. 4 out of 8 in my ‘hiring in China’ series. Stay tuned for the next post in the series where I’ll explain the situation behind work visas for foreign staff in China!