Labor Disputes in China: Prepare for Aggressive Negotiating, Uncomfortable Concessions – Part Two

July 5, 2017 Posted by China Briefing Reading Time: 6 minutes

Op-Ed by Chet Scheltema

In Part 1, we detailed “lawful” ground for termination, and pressures in the Chinese labor dispute system to settle disputes by compromise.

As China undergoes economic transformation and shifts from an investment and manufacturing-led economy to a more consumption-based economy, labor restructuring and displacement will be a habitual occurrence of the “new normal”.

Foreign employers now need to become ever more skilled in navigating the Chinese labor law landscape. It is critical to find, and retain, experienced Chinese labor law practitioners to help your business prepare, and then respond to disputes that will likely arise.

Aggressive, bad faith negotiating styles

Courts in the US or EU typically make their records and decisions publicly available. There are reasons for doing so: one is that it is believed that publicizing punishable behavior serves as a deterrent. In China, lawyers will find substantially fewer public cases available, and one reason is because mediated compromise is favored, and issuing formal decisions is less common in such cases.

Because each party, typically, does not expect that a case will be carried to a formal judgement, with a clear winner and loser, and does not expect a public record of the dispute, in such a private context there may be increased potential for aggressive or bad faith behavior in negotiations.

In this situation, parties may have less incentive to negotiate in good faith, and they may believe there is more to gain from aggressive negotiating. But what are examples of aggressive behavior to enhance one’s negotiation position?

Threats to disclose alleged non-compliance

While all employers are familiar with cases where employees threaten legal action after termination, such threats in China may also be accompanied by a threat to disclose potentially illegal or incompliant activities of company. In other words, the disgruntled employee threatens direct legal action in arbitration, and threatens to report alleged non-compliance to authorities with the hope of instilling fear in its negotiating counterparts of a regulatory investigation.

Disgruntled employees may consider this tactic a good bet for shaking up the company’s negotiating team. This can position the employee nicely for a quick and lucrative settlement, which, of course, buys the employee’s cooperation and silence.

How seriously to take such a threat is for each company to determine. Most employees would presumably only be using the threat as a negotiating chip, not because they want to ensnare the company in official trouble, which could become counterproductive.

Steal the chops

Foreign employers may be less familiar with another tactic peculiar to China (and some other Asian countries): stealing the company’s chops as leverage in negotiations. It is a brazen and disruptive tactic typically available only to senior managers, who are normally the only staff who have access to the chops and the gumption to seize them for leverage, especially at a businesses with weak internal control systems.

Because the chops are needed for routine business on a daily basis, their loss can bring company operations to a halt and send the labor negotiators to their knees.

The resulting settlement normally entails the employee returning the chops in return for a severance from the employer. Businesspeople in China are unlikely not to have heard of unfortunate situations where money was handed across a table to a former employee in return for chops.

Along with the chops, key corporate documents, financial records, computers, passwords, or keys may also be vulnerable to seizure as leverage. And, yes, any such seizure of the corporate chops and records by a disgruntled employee is supposed to be illegal. For our purposes, the more salient concern is to note that there are few stories of employees being held accountable for this illegal brinkmanship. Instead, it can enhance their negotiating position and yield more substantial severance payments.

In some cases where law enforcement is consulted, the police may take a report, but may be reluctant to become involved, sometimes dismissing it as a commercial dispute. Consequently, the tactic of seizing the chops and/or other key assets as leverage seems to continue unabated.

Preparing for labor disputes

On a very practical note, employers should send all internal rules and regulations, such as the employee handbook, to the employees, including senior managers, during onboarding for his or her acknowledgement. Employers should document this process, obtain signed records from employees, and retain the records for later reference, according to evidentiary standards. Maintaining these records will allow a company to present a strong case to a mediator or arbitrator and improving their position in the dispute.

Likewise, firms should create systems of internal controls that clearly document the review and approval of decisions by relevant managers. Again, employers should draft these in accordance with evidentiary standards, as advised by labor dispute experts. Employers should apply this to senior management, in addition to less senior managers, often an all-too-overlooked gap in internal controls in China. Employers should not overlook the importance of such diligence.

Because senior managers present the greatest risk of substantial loss, employers should implement communication retention systems that extend from the least to the most senior managers. Such systems should allow for searching and documentation – including for information on sender, recipient(s), as well as any file transfers – according to evidentiary standards as advised by labor arbitration experts. There are often important records that document the misbehavior of senior managers; however, if these records cannot be accessed and presented to mediators or arbitrators, then the company’s negotiating position is substantially weakened.

Pre-empt disputes when possible

This is often a sensitive matter and difficult to implement in practice. Many employers find it difficult to reproach senior Chinese managers for failing to abide by internal controls to-the-letter, particularly if the organization does not have a strong compliance culture. Highly experienced and skilled Chinese managers may take offense at the application of such standards to both senior and junior employees.

But once employers sense a dispute is brewing, they should take pre-emptive action to document activity in a way consistent with evidentiary standards. Again, this is often very sensitive: if managers realize their communications and actions are being documented, they can become defensive the situation may deteriorate.

As discussed above, it is not uncommon for employees to sense a dispute brewing and to take their own preemptive actions. If the employee has access, they may attempt to obtain sensitive corporate documents or company chops as leverage for labor dispute negotiations.

Employers that have strong internal controls and HR administration, however, can mitigate the potential for labor disputes, and the aggressive behavior that is sometimes associated with their settlement.

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