Saturday, August 1, 2009


Foreign Representative Offices Face Labor Disputes in China 

By Frank Hong
Long An Law Firm

Labor and employment controversy has always been the most significant risk of dispute for foreign companies doing business in China. The ongoing financial crisis coupled with the newly effective PRC Labor Contract Law, which mandates a whole host of rights for employees, has further exacerbated the situation. 

Many foreign companies, especially those in professional service sectors such as law, investment banking, insurance, and general consulting, usually set up Representative Offices in China in order to avoid the requirement of substantial registered capital for incorporation as Wholly-Owned Foreign Enterprises (WOFEs).

For example, in Shanghai (the economic center of China) there are thousands of representative offices of international financial and shipping companies, among other types of businesses. However, such foreign offices are not considered independent legal entities under PRC laws. As a result, the liability of foreign offices in China will transfer to the parent entity under a theory of respondeat superior.

In addition to this, foreign representative offices are legally required to employ Chinese nationals through qualified human resources agencies. This requirement dates back to a State Council Regulation issued in 1980 and has survived the legal reforms engendered by China’s accession to the WTO in 2001. Per the 2008 Labor Contract Law, Chinese nationals working for foreign representative offices must first enter into written labor contracts with a qualified human resources agency, which then assigns the employee to work at a foreign representative office. Consequently, there are no written labor contracts between Chinese employees and the foreign representative offices which are their actual employers. This peculiar tri-party relationship has led some foreign companies to argue that foreign representative offices cannot be parties to labor arbitration or litigation, which are mostly initiated by employees.

However, on March 3rd, 2009, the Shanghai Supreme People’s Court issued a set of judicial interpretations of the Labor Contract Law (HuGaoFa [2009] 73), which essentially provide that in Shanghai duly registered liaison or representative offices of foreign companies may be parties to labor arbitration or labor lawsuit, as long as the employees were hired through qualified human resources agencies. If on the other hand employees were not hired through qualified human resources agencies, the concerned foreign offices may still be parties to civil actions (as opposed to labor arbitration or labor lawsuit). Consequently, foreign companies, through their representative offices in China, will have to face the employee initiated labor arbitration or lawsuits in China.