Since the Labor Contract Law became effective in 2008, Chinese employers, including foreign-invested enterprises (FIEs) such as joint ventures (JVs) and wholly foreign-owned enterprises (WFOEs), have been required to enter into employment contracts with all employees, either individually or collectively. Failure to enter into an employment contract meeting the requirements of the Law within one month after the employee begins work subjects the employer to liability for twice the amount of wages to which the employee is entitled for the period in which there is no contract. Failure to pay an employee the compensation to which he or she is entitled is a breach of this employment contract, and the employer is subject to a lawsuit by the employee to collect the unpaid amounts or an order by the government labor department to pay the unpaid amounts. For more information about the requirements of the Labor Contract Law, see the Fredlaw article “China’s New Labor Contract Law” (January 2008) at https://www.fredlaw.com/articles/international/intl_0801_rl.html.

However, many foreign companies with Chinese operations are not aware that a failure to pay wages can also result in fines and imprisonment. Article 276(1) of the Chinese Criminal Law makes it illegal to:

  • avoid payment of a “relatively large amount” of “labor remuneration” by transferring property or escaping and hiding, contrary to an order of the “relevant government departments,” or
  • refuse to pay a “relatively large amount” of “labor remuneration” although the employer has the ability to pay, contrary to an order of the “relevant government departments.”

In either case, the penalty is imprisonment for up to three years and/or a fine. If the non-payment causes “serious consequences,” the possible jail time increases to up to seven years. If the crime is committed by an entity, the fine is imposed on the entity, and the responsible individuals within the entity are subject to imprisonment.

Article 276(1) became effective in May 2011, but it has not received a great deal of attention in the Western business community. However, a January 2013 interpretation of Article 276(1) by the Supreme People’s Court, the highest court in China, underscores the importance of this provision to employers and their management teams.

The Court’s interpretation includes five conclusions that may impact employers and their management teams:

  • An employer is considered to have avoided payment of, or refused to pay, a “relatively large amount” of labor remuneration if the non-payment is for more than three months and involves more than 5,000 yuan (about US$ 800) to one employee or more than 30,000 yuan to 10 or more employees – subjecting the employer to a fine and its management to imprisonment for up to three years.
  • If the delay seriously affects the basic living of workers or their families, if the employer uses threats or violence, or if the non-payment causes some other serious detriment, this will be deemed “serious consequences” and the jail time can go up to seven years.
  • “Labor remuneration” subject to the law includes not only salary, but also bonuses, allowance, welfare payments, subsidies, overtime and salary paid in special circumstances.
  • Hiding, destruction or alteration of accounting records, the employee register, or records of wage payments or attendance is regarded as “transferring property or escaping and hiding in order to avoid paying labor remuneration.”
  • The “relevant government departments” are the competent Human Resource and Social Security Department or other government agencies having jurisdiction.

According to the Court, from May 2011 through the end of 2012, 120 employers received criminal sanctions in 156 cases. Chinese media reports that the number of wage disputes has been rising significantly. For example, one report says Zhejiang Province (just south of Shanghai) experienced a 40 percent increase in wage disputes in 2012, resulting in 29 criminal convictions.

Foreign investors in China should take particular care to make sure that wages are being paid in a timely manner. The “responsible persons” subject to imprisonment are likely to include the general manager and the legal representative, and quite possibly members of the human resources or accounting departments, the board of directors or others who might be in a position with the authority to prevent or rectify the non-payment. Wage payments should be a priority even for a business in financial difficulty, since restructuring or liquidation of the business will not be possible if wages are unpaid, and since managers do not want to put themselves in the position of having to prove that the company lacked the ability to pay in order to avoid time in a Chinese jail.