Labor Case Study: Work Permit Compliance for Foreign Employees in China

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By Allan Xu  Manager, Business Advisory Services
Editor: Alexander Chipman Koty
Dezan Shira & Associates, Shanghai

As part of our mission to provide business intelligence on the legal, tax, and operational issues of doing business in China, China Briefing presents a series of case studies based on the practical experience of professionals at Dezan Shira & Associates.

Scenario

A company hired a foreign worker, Mr. H., and signed him to a labor contract in June 2014. The company did not initially complete all the relevant employment procedures for Mr. H, so he started to work for the company while waiting to receive his work permit. The company managed to get Mr. H a formal work permit granting him official working rights in China in November of that year, after he had already been working for the company for five months.

Although the company procured Mr. H a work permit, he was unexpectedly fired in May 2015. When he was terminated, Mr. H was only paid severance from the date he received his work permit in November 2014. Mr. H thus took his former employer to court, arguing that he should be paid severance based on his tenure dating from when he started working for the company in June 2014.

In the end, the court ruled in favor of the company but ultimately punished both parties for breaking laws regarding foreign employment. Foreign workers are only allowed to work in China if they have a formal work permit, and are not allowed to work while applying for one. As such, Mr. H was working illegally between June 2014 and November 2014, and was therefore not eligible to receive severance compensation for his work during that period.

Although the company escaped paying extra severance to Mr. H, both were given significant fines for their offences. The company had to pay a sizable fee for illegally employing a foreign worker, while Mr. H was also fined for working illegally in China.

Professional Service_CB icons_2015RELATED: Payroll and Human Resource Services

Analysis

In accordance with Article 7 of the Labor Contract Law of the People’s Republic of China, an employer shall be deemed to have established a labor relationship with an employee with effect from the date of employment. Article 10 clarifies that where an employer and an employee have signed a labor contract prior to employment, the labor relationship shall be deemed established on the date employment begins, not when the contract was signed. However, this is not the case for foreigners working in China. As stipulated by Article 8 of the Administrative Regulations on the Employment of Foreigners in China, a foreigner may only commence work within Chinese territory after first obtaining a work permit and a residence permit.

Therefore, even though the foreign worker signed a labor contract with the company, the labor relationship with the company was not yet deemed to have begun, as the foreigner could only start working legitimately after obtaining the work permit and residence permit.

According to Article 80 of the Law of the People’s Republic of China on Administration of Embarkation and Disembarkation, foreigners working in China illegally shall be subject to a fine ranging from RMB 5,000 to RMB 20,000. Where the case is serious, the offender shall also be detained for a period of more than five days but less than 15 days and in addition to a fine ranging from RMB 5,000 to RMB 20,000. Persons who employ foreigners illegally shall be subject to a fine of RMB 10,000 for each illegally employed foreigner, subject to a total fine of not more than RMB 100,000. Illegal income, if any, shall be confiscated.

Hiring Foreign Workers in China

Employment Conditions

Any foreigners seeking employment in China shall meet the following conditions:

  • Aged 18 years or over and in good health;
  • Have professional skills and job experience required for the work of intended employment;
  • No criminal record;
  • Employed by a clearly-defined company; and
  • Obtain a valid passport or other international travel documents in lieu of the passport.

Employment Procedures

The Chinese government uses a licensing system for the employment of foreigners in China. This means that an employer shall apply for the employment permission if it intends to employ foreigners and may do so after obtaining approval. The licensing system for the employment of foreigners in China consists of three stages:

  • Application for the employment license for foreigners,
  • Application for the invitation letter for the work visa (Z-visa)
  • Application for the work visa at the Chinese embassy in the foreigners’ home countries;
  • Application for the work permit for foreigners; and
  • Application for the residence permit for foreigners.

Foreigners with an employment license must enter into China with a work visa and are only allowed to work within China after they obtain the work permit and the residence permit. In China, requirements may vary from city to city. For instance, in Shanghai, foreigners need to have two years of work experience to qualify for a work permit; whereas in Hangzhou, there is a stricter requirement of over three years’ work experience.


About
Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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