China: Illegal Employment with Foreign Employee was found due to Failure to Obtain new Work Permit

Mr. Liu (the “Employee”) was an American citizen when he joined the company (“Company A”) and served as the general manager. Company A sponsored the employee to acquire the work permit for foreign workers. Later, the employee was transferred to work at Company A’s affiliated business (“Company B”) in a different city. Since then, Company B has paid the salary to the employee, but Company B did not sign an employment contract with the employee. After a few years, Company B terminated the employee for incompetency and misconduct.

The employee filed a labour arbitration dispute and initiated court proceedings against Company B, claiming wrongful termination. The people’s court heard the dispute and eventually dismissed the case based on the following reasons: i) foreign nationals are required to obtain a work permit to legally work in China; ii) when foreign nationals change employers in China, they shall either file to amend the information registered in the work permit or obtain a new work permit; iii) the employee worked at Company B with his work permit still registered at Company A, which shall be deemed as an illegitimate working arrangement; and iv) the employee did not establish a legal employment relationship with Company B and thus his claims, based on an employment relationship, shall not be supported.

Key Action Points for Human Resources and In-house Counsel 

China imposes fairly strict regulations on employment of foreign employees. Employers and foreign employees should pay attention to avoid illegal employment relations. If an illegal employment relationship is found, the employer can be subjected to administrative penalties and the foreign employee will be deprived of the protections stipulated in China’s employment laws and regulations.