Before entering into an employment relationship in China, you must sign a written Chinese Employment Contract, which should include a Dispute Clause. This clause will state where and how any potential disputes related to the contract will be resolved. For example, the clause may require that the parties work with a mediator, go to arbitration, or list a particular city or province where the lawsuit should be filed.

Whether you are the employer or the employee, properly negotiating a Dispute Clause is vital to protecting your interests in the working relationship. Where and how you decide to resolve your dispute could have profound effects on protecting your interests in the event of a hypothetical breach by either side. You should consider where the dispute will be resolved, which country's laws will apply, and how much costs you may incur in protecting your interests if a settlement cannot be agreed upon.

From the Employer's Perspective

As an employer in China, you will want to minimize the amount of compensation you may have to pay to your employee in the unfortunate event that the Employment Contract must be terminated. It is likely you have more negotiating power and sophistication in drafting the contract than your employee, but, it is important that you understand a few concepts when deciding how to draft the Dispute Clause in an Employment Contract.

The first major decision you will want to consider is the location, or venue, where the dispute will be resolved. If your only concern is minimizing the amount of compensation you must pay to your employee in the event of termination, you should consider drafting a clause that allows for disputes to be resolved in Chinese Courts. China's Labor Laws are arguably “employer friendly” when it comes to compensating an employee in the event that an Employment Contract must be terminated.

For example, there are clearly defined legal limits to how much severance an employee can receive from his or her employer in China.  These limits will depend on a few factors: 1) how long the employee has worked for the company; 2) the minimum wage in the municipality where the employee is working; and 3) how much the employee is receiving in compensation per month. Generally speaking, the longer the employee has worked for the company, the higher the employee's monthly salary is, and this should all translate to a higher legally guaranteed severance for the employee.

Regardless of these factors, the employee should not expect to recover more than a few months' worth of salary in the event the contract is terminated, especially if he or she has not worked in the company for more than a few years. Even if the employer terminated the contract without cause and the length of the contract extends for years into the future, China's Employment Contract laws will still cap the amount of legal compensation for the employee.   

If you do not trust China's legal system as a “non-Chinese” employer doing business in China, you can consider having a clause that allows for disputes to be resolved through Arbitration. Arbitration tribunals allow the parties more flexibility, freedom, fairness, confidentiality, and efficiency than a formal court venue in the event of a dispute. For example, if you and your employee are of different nationalities, Hong Kong Arbitration Court rules require that the arbitrator be of a nationality that is different from you and your employee, unless you and your employee agree otherwise. This will hopefully eliminate any bias or unfairness by a Chinese Court against a foreign employer in favor of Chinese employees. An arbitral award will also most likely be enforceable in China or your home country.

The next decision you will need to consider is which country's laws would govern the contract's content given the applicable circumstances; this should be listed in the Dispute Clause. As previously mentioned, China's Employment Contract laws are arguably friendly to the employer, even if it is the employer who breached the contract. In contrast, if you decide to have the contract interpreted by a court in a State or Country whose laws are more “employee friendly,” you could end up paying substantially more to your employee than what is stated in the contract. For example, in the US State of Arizona, an employer could be liable for treble damages (triple the total awarded compensation), if the employer violated a state employment law. Furthermore, by stating which country's laws should govern, the parties would not have to litigate this issue in the event of a breach. Thus, it is very important to state your intentions as to which country's laws will ultimately decide the amount of compensation in the event of a dispute.

The last major issue to consider is the amount of out-of-pocket costs you will be willing to incur in resolving the dispute. Factors one should consider while deciding how to proceed on this issue are as follows: How far is the Court or Tribunal from your current location? How long do you want to spend litigating any potential breach? You will also want to consider the costs of hiring local counsel in the jurisdiction where the dispute may be resolved, and you must also investigate the costs for filing a claim. As previously mentioned, Arbitration Tribunals offer flexibility and efficiency, but they will most likely come with much higher court costs. A formal court proceeding may cost less, but the procedures can be complex and the time the court spends making its decision can be comparably lengthy to Arbitration.

From the Employee's Perspective

In the event of termination of an Employment Contract, an employee's interests will typically conflict with his or her employer. An employee will most likely want to maximize the amount of compensation and reduce his or her out-of-pocket expenses in securing a severance. With this in mind, it is also important for the employee to negotiate a Dispute Clause that will protect his or her interest, without jeopardizing the employment.  

Most of the issues concerning a Dispute Clause in an Employment Contract were discussed above, and those issues will also apply to the employee. However, one thing that an employee must pay special attention to is the amount of out-of-pocket costs that will be incurred in trying to protect his or her interests in the event that the employment contract is terminated. If the Employment Contract is terminated, the employee will most likely have lost his or her salary. Additionally, from the outset of the relationship, an employee will most likely have less capital, less negotiating power, and less legal sophistication than the employer.

Therefore, as a potential employee, you should speak with your own employment lawyer, so you understand your rights in the event of termination – and, what you should document during your employment period to ensure that you have potential defenses in the event of unfair termination. You should also, to the extent possible, ensure that you have emergency savings funds to support you if things go wrong – or start one, if you are seeing signs of potential termination with employment. That way, in the event of a dispute, you will be prepared to endure a potentially lengthy and costly process to protect your rights.

While it can be exciting to negotiate new employment relationships for both the employee and employer, both sides should consider what may happen in the event of a break down in this mutual relationship and there is an eventual breach.  

An experienced lawyer in Chinese employment law will be able to help you navigate the Dispute Clause, regardless of the role you play in the employer-employee relationship. Every employer and employee will enter into this relationship under their own set of circumstances and interests. Thus, both sides should seek counsel before signing any agreements. Before signing, pay close attention to the Dispute Clause, as it will most likely be the first place a Court will look in the event there is a breakdown in an employment relationship.