How Does an FIE in China Become Criminally Liable for not Paying Wages?

By Steven Elsinga

Most foreign investors may not be aware of it, but as of 2011, employers in China may face prison sentences for not paying their staff. While some conditions need to be met before an employer is held criminally liable, understanding this law is important to keep in mind in case a company runs into financial troubles, or leaves China without paying its employees.

Definition of the Crime

When a company evades paying a “relatively large amount” of labor remunerations, either by transferring property or concealment, or by refusing to pay while being able to, the government will order it to rectify the situation. If the company fails to pay after being so ordered, the entity will be fined and the person(s) in charge of the company and those directly responsible for the crime will be fined and imprisoned for three years. This can be extended to seven years for serious cases.

Below, we discuss how the different elements of the penal clause are interpreted.

Definition of a “Relatively Large Amount”

For an individual worker, if wages haven’t been paid for three months and the amount exceeds RMB 5,000 to 20,000, then the employer will be criminally liable. This amount is set by the Higher People’s Court in each province, in light of the province’s socio-economic situation.

In addition, if ten or more workers fail to be paid and the amount is between RMB 30,000 and 100,000, the company will be liable. Again,  this amount varies depending on the province.

Wages include any payment the employee is entitled to under the labor contract, including the base salary, bonuses, allowances, stipends, reimbursements, commissions and payments for overtime and other special arrangements. However, it does not include stock options or payments in equity.

Transferring Property or Concealment

The Interpretation Statement issued by the Supreme Court in 2013 clarifies this as meaning 1) hiding property, going into false debts, false bankruptcy, a false close-down or transferring property by other means, 2) absconding, 3) concealing or destroying documents related to staff remunerations, 4) evading payment in other ways.

The courts will mainly look to see if the employer tried to hide assets or avoid contact with the labor bureau or the employees. This on its own will make the action criminal. The inability to pay is judged strictly as well. If the prosecutor finds that significant sums of money have entered or left the company’s or the individual’s bank accounts, this defense will often no longer be accepted.

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Rectification Order

Before a refusal to pay wages is seen as malevolent and punishable by law, the employee will need to have notified the labor authorities. The local Human Resources and Social Security Bureau (HRSSB) will inspect the situation and send a notice to the company to pay before a set date.

It is crucial to maintain contact with the labor bureau once it has sent such a notice. Previous cases show that, if the person in charge is no longer reachable by phone or has changed their phone number, this will constitute “Concealment”. That the company wasn’t able to pay the wages no longer matters at this stage, a recent case from the Qinghai province shows.

If the company fails to pay before that date, the labor bureau will hand over the case to the police and the prosecutor’s office. If the refusal is deemed a crime, the police will then move to arrest the people involved, and based on the evidence collected by the labor bureau, commence prosecution.

While the employee will likely offer evidence such as the labor contract, bank statement, social security records and pay slips, it is important to note that the burden of proof does not lie with the employee, but with the public prosecutor.

Persons Liable for Arrest

If the public prosecutor finds that a crime has been committed, the company will be fined. The people in charge of the company and those directly responsible for the act will face prison sentences. The law is quite vague on who will eventually be prosecuted. What is certain is that a formal employment relationship is not required, as the law was mainly designed to protect subcontracted construction and factory workers from the countryside, who often just get paid cash in hand.

Often the person who actually is to pay the employees will be prosecuted. This can be a manager, the head of HR, the contractor or the accountant. Often the legal representative is held responsible as well.

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Reduced or Increased Sentencing

The sentencing may be reduced or increased according to the circumstances. If the wages are paid prior to criminal prosecution, the case may be dropped. The sentence can be reduced or dropped if the employer pays before the case goes to court; a lenient sentence will be imposed if the wages are paid before the first court ruling.

However, the sentencing may be increased to a maximum of seven years if the refusal to pay has ‘severe consequences’ such as an employee being unable to take care of sick or elderly dependents, or the employee’s children are forced to drop out of school as a result. 

Conclusion

“The introduction of jail sentences for withholding wages from employees shows the provincial government’s dedication to safeguard the rights of employees and ultimately consumers of the local economy,” says Fabian Knopf, Senior Associate at Dezan Shira & Associates.

In order to maintain social order, the Chinese government is taking numerous steps to make sure large numbers of disgruntled workers don’t suddenly end up on the street. This can be seen not only from this law, but also from the fact that local governments often go as far as making up the shortfall if an employer suddenly stops paying wages. In the event of financial difficulty, the labor bureau will mostly be supportive, provided the company maintains a cooperative attitude. Simply packing up and leaving without paying the staff, however, is strictly dealt with.

“Although such a step may be considered extreme, and remind some of similar punishments in Singapore’s legal system, it’s also a further step in the development of China’s judicial system by empowering the courts to take action as opposed to opaque intra-government processes,” reminds Fabian Knopf. “Legal representatives and other key roles of companies in China should take note and ensure compliance with labor laws.”

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