State-Owned Enterprises' Cross-Border Employment Compliance

 Preface 

The compliance governance of enterprises closely revolves around various aspects of daily operations. For many Chinese enterprises going global, the hard-learned lessons often stem from issues related to labor and employment compliance. Instances such as non-compliant wage payments, failure to adhere to host country's working hour and leave regulations, and abrupt and unlawful dismissals can trigger individual and collective disputes, strikes, and crises involving group conflicts. In recent years, an increasing number of state-owned enterprises have joined the ranks of internationalization, while at the same time facing compliance issues associated with cross-border operations. Due to their distinctive characteristics, state-owned enterprises attract heightened scrutiny from certain countries. When managing labor and employment across multiple countries and regions, state-owned enterprises need to promptly grasp the compliance requirements of host countries or regions, so as to confront challenges, seize opportunities, and achieve sustainable development in the global business expansion.

 Chinese Regulatory Requirements 

 for Cross-Border Employment 

 Compliance 

Following the release of the Compliance Management Systems —Guidelines by the Standardization Administration of China (SAC) on July 1, 2018, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the Guidelines on Compliance Management for Central State-owned Enterprises (for Trial Implementation) in November. On December 29, seven departments, including the National Development and Reform Commission and the Ministry of Foreign Affairs, jointly issued the Notice on the Promulgation of Guidelines for Enterprises on the Compliance Management of Overseas Operations (hereinafter referred to as the Compliance Guidelines). In September 2022, SASAC released the Measures for Compliance Management of Central Enterprises. Compliance is critical for Chinese enterprises to operate their business.

The Compliance Guidelines explicitly point out that labor and employment compliance is a critical requirement for overseas investment, foreign contracting projects, and daily operations abroad. In practice, from the initial stages of an enterprise's plan to venture abroad, conducting project assessments, conducting business in the host country, establishing branch offices, and even realizing localization of employment in the host country, labor and employment compliance permeate every aspect of the entire process. This places exceptionally high demands on the requirements for enterprise management departments. In the compliance of overseas business operations, labor and employment compliance stands as a critically important aspect. Enterprises going global must adhere to the requirements set forth in policy documents from various ministries and formulate various specialized management systems. This includes emphasizing the management and training of expatriate personnel, strengthening compliance management for executives, personnel in key risk positions, and overseas employees. Enterprises must actively fulfill various reporting obligations, ensure effective overseas safety management, and comply with other compliance practices required by the host country. Setting higher standards for aspects such as sustainable development and fulfilling social responsibilities overseas is also imperative.

 Key Points of Labor and 

 Employment Risks 

 in Host Countries 

(i) Types of Employment Models

According to the Notice of the Ministry of Commerce on Strengthening the Classification Administration of Persons Stationed Abroad for Foreign Investment Cooperation[1], cross-border employment models are mainly associated with overseas investment, foreign project contracting and foreign labor cooperation. The labor legal risks and common disputes in different employment models are different. It is necessary to determine the location of the labor relationship and applicable labor law based on the specific assignment model. In the case of outbound investment projects, when an enterprise assigns internal employees from the corporate group to its foreign subsidiaries, both parties need to clarify issues such as the attribution of labor relations, salary payments, and social insurance contributions. In addition, cross-border employment by enterprises must inevitably involve localized employment. The localization of employees brings management challenges to enterprises. It is difficult to integrate local employees with Chinese enterprises, and it demands a higher level for overseas enterprises to achieve localization and internationalization of their operations and management.

Cross-border employment also involves the risk of confusing independent contractors with employees in terms of status. In practice, various countries have relevant laws, regulations, or judicial precedents that provide criteria for distinguishing between independent contractors and employees. The standards are generally consistent, focusing on the degree of control the employer has over the independent contractor and their services or products. Incorrectly classifying independent contractors and employees can lead to legal liabilities for the enterprise, such as losses in wages, bonuses, social insurance, etc.

(ii) Employment of Foreign Labor

The host country typically implements employment protection measures for its citizens, imposing various restrictions on the employment of foreigners. These restrictions may include requirements for company-registered capital, quotas for foreign employees, minimum wage standards for foreign employees, and educational and skill qualifications. Taking the example of the minimum wage requirement for attracting foreign labor, screening is conducted based on wage standards. This strategy is designed to attract high-end foreign talents, thereby fostering long-term development of local employees. Many countries also mandate enterprises to pay compensation to the government for employing foreign employees or conduct labor market test (LMT). Approximately two-thirds of Organisation for Economic Co-operation and Development (OECD) countries require employers to conduct labor market test before recruiting foreign employees. When enterprises fail to adhere to the regulations on the employment of foreigners, it often leads to illegal employment with severe legal consequences, including substantial fines, business suspension, and, in some cases, criminal liability for those responsible.

In the Philippines, restrictions on foreign labor are stringent, with many industries prohibiting the employment of foreign labor. In accordance with Article 174 of the Egyptian Companies Law No. 159 of 1981[2], the proportion of foreign employees in the formal labor must not exceed 10%, and their wages should not surpass 20% of the total payroll. Similarly, in Saudi Arabia, Article 26 of the Labor Law[3] stipulates that employers must maintain a proportion of Saudi nationals not less than 75% of the total labor. The Saudi government, in its efforts to increase the proportion of the local labor, has implemented the Saudization Policy [4]through the introduction of the Nitaqat (نطاقات) program. This initiative categorizes enterprises into different levels based on their industry type, labor force size, and the proportion of Saudi nationals in their labor force. The enterprise's level impacts its ability to obtain work permits and residency permits for foreign employees. Non-compliance with the ministry’s decisions regarding the prescribed Saudization rates for specific professions can result in corresponding fines for the enterprise. Regardless of the specific labor market protection measures, the core is the host country's requirement that enterprises progressively achieve a localized employment. Such localized employment not only aligns with the host country's requirements but also assists enterprises in reducing labor costs, effectively avoiding the high expenses and labor dispute risks associated with cross-border employment.

(iii) Signing of Employment Contracts

The host countries have different requirements for the signing of employment contracts, and special attention needs to be paid to the following aspects: 1) The form of employment contracts: Common law countries or regions usually do not mandate written employment contracts, but written employment conditions are required. Some countries require employers to sign written contracts with employees, such as Russia, Pakistan, Myanmar, Qatar, etc. According to Qatari labor law, employment contracts must be signed in writing and certified by The Ministry of Administrative Development, Labor and Social Affairs (MADLSA). The employment contract should be made in triplicate, with each party holding one copy, the employer and the employee, and the third copy being deposited with the Ministry of Labor. In Saudi Arabia, employment contracts for foreign employees must be in writing; 2) The language of Employment Contracts: Most countries do not mandate contract language, but the local language version of the contract needs to be submitted during the dispute resolution process. Some countries, such as Indonesia, Qatar, Saudi Arabia, Spain, Turkey, the United Arab Emirates, and others, stipulate that employment contracts should be in the local language; 3) The types of employment contracts: In the practice of many countries, open-ended employment contracts are commonly used. However, some countries have specific requirements, for instance, in Saudi Arabia, open-ended contracts are applicable only to Saudi nationals, and contracts for non-Saudi employees must have a fixed term. If no term is specified, the duration of the work permit should be considered as the contract term. The UAE has implemented a new Labor Law on 2nd February, 2022 (replacing Federal Law No. 8 of 1980) governing the private-sector’s employment relations, titled “Federal Decree Law No. 33 of 2021”, (hereinafter, the New Law) [5]. Under Article 8 of the New Law, open-ended employment contracts are to be abolished and replaced with employment contracts of a fixed term (No maximum term limit), which may be renewed on the same conditions with the consent of both parties for a similar period or less. Open-ended employment contracts are required to be gradually converted into fixed-term contracts within the stipulated period from the effective date of the New Law. Therefore, when engaging in cross-border employment, enterprises need to pay special attention to the varying requirements for employment contracts in different countries or regions. This includes considerations for the maximum duration and renewal frequency of fixed-term contracts, compensation for terminations within the fixed-term contract period, as well as any special provisions applicable to foreign employees.

(iv) Payment of Compensation and Individual Income Tax

Many countries adopt clear legal provisions to determine the employer's basic obligations in terms of salary and individual income tax payments. When formulating compensation packages, enterprises must pay attention to each country or region's minimum wage policies, especially those in nations like Australia, France, and the United Kingdom, where hourly wages are significantly higher than that in Chinese mainland. Enterprises are required to pay labor remuneration on time and in full, failing which can lead to severe legal consequences. For instance, in Qatar, failure to adhere to the wage protection system and pay employee salaries on time may result in fines of up to 6,000 Qatari riyals for each violation, and company management may face imprisonment.

In addition, labor laws in various countries typically mandate employers to fulfill statutory social insurance contributions. In certain jurisdictions, employers may face particularly strict obligations. Saudi Arabia's pension system generally mandates a contribution of 9.75% of the salary towards retirement funds, with the employer contributing 9% and the employee contributing 0.75%. In Indonesia, employers are additionally required to pay social insurance contributions ranging from 12.94% to 14.44% relative to the employee's salary.

(v) Management of Working Hours and Leave

Many countries and regions have strict regulations regarding working hours, overtime and leave, with some developed countries even prohibiting employers from contacting employees after regular working hours. The controversial 996 or 007 working hour systems prevalent in Chinese mainland may lead to scrutiny, corrective measures, or even severe penalties from labor authorities in foreign jurisdictions. In certain Islamic countries, there are special regulations on leave because of religious beliefs. For instance, in Saudi Arabia, during the month of Ramadan, working hours may be shortened to a maximum of 6 hours per day or 36 hours per week.

Countries have different regulations on the length of annual leave, and some countries impose requirements based on employees' years of service. For instance, in Indonesia, employees are entitled to 12 days of paid annual leave after completing 12 months of service. In contrast, in countries like Australia, employees are eligible for four weeks of paid annual leave from the year they start working for the enterprise. Additionally, enterprises need to be mindful of special paid leaves, such as in Saudi Arabia, where Muslim employees have paid leave for pilgrimage, and Indonesia has similar religious obligation leaves. Employers also have an obligation to facilitate employees who need to say prayers or perform religious rituals.

(vi) Anti-commercial Bribery and Anti-corruption

In recent years, there has been a heightened emphasis on anti-commercial bribery and anti-corruption compliance, both domestically and internationally. Countries engage in international cooperation to address issues related to commercial bribery and corruption by signing treaties or agreements to share domestic and international banking information, promote mutual legal assistance in criminal matters, and establish extradition systems. Additionally, the host country will also impose anti-commercial bribery and anti-corruption regulations. In March 2019, Saudi Arabia revised and expanded the scope of application of the Anti-Bribery Law[6] to include the private sector. The new law stipulates penalties for private sector individuals involved in bribery, including confiscation of illegal gains, a maximum of 5 years of imprisonment, and fines not exceeding 10 million Saudi Riyals. Repeat offenders will face double penalties. Bribers, intermediaries, and other participants will also be subject to corresponding penalties. If the individual's actions are aimed at benefiting a domestic or foreign enterprise, and they violate the Anti-Bribery Law, the respective enterprise will be prohibited from signing procurement contracts and executing related projects and activities. In November 2017, Saudi Arabia established the Supreme Anti-Corruption Committee, tasked with directly overseeing all government agencies and enterprises in which the government holds a minimum of 25% ownership. Additionally, in March 2018, the Saudi government announced the establishment of a new specialized anti-corruption department within the public prosecution authority, aimed at increasing efforts against commercial bribery and corruption. Cases prosecuted by these entities will be conducted under the direct supervision of the Attorney General, underscoring the significance attributed to corruption-related matters. The Saudi government has consistently enhanced its capacity to investigate and prosecute corrupt activities, strengthening its deterrent measures against illegal practices. The U.S. Department of Justice's release of the "China Initiative" identifies the investigation of Chinese enterprises suspected of violating the Foreign Corrupt Practices Act (FCPA) as one of its ten objectives. The trend of strengthening enforcement actions against Chinese enterprises is becoming increasingly evident. Chinese enterprises engaged in overseas activities should establish comprehensive internal control systems to prevent illegal and non-compliant behavior.

(vii) Risks in Trade Union Management

The management of overseas labor unions has become an unavoidable challenge for Chinese enterprises when going global. Many enterprises tend to overlook or passively address this issue, often leading to the outbreak and escalation of labor-management conflicts. In 2019, large-scale strike demonstrations organized by the Australian Council of Trade Unions (ACTU) occurred in 12 Australian cities, demanding higher wages and better job security. In 2019, the union of the Guinea branch of China Henan International Mining Co., Ltd. accused the enterprise of violating the Mines and Quarry Collective Agreement, the Labor Law and other regulations, and announced a strike to protest against poor living and working conditions. The enterprise and the employees eventually signed a memorandum of understanding, agreeing to meet 19 general points required by the employees, including paying family allowances and providing employees with appropriate health care services. Different from the idea of Chinese trade unions to build harmonious labor relations, most foreign trade unions play the role of planners and organizers in strikes, demonstrations and other activities, often triggering strike movements. If not handled carefully, they can easily lead to mass incidents and bring serious consequences to production and operations.

 Recommendations for 

 Risk Prevention 

 in Cross-Border Employment 

 for State-Owned Enterprises 

(i) Emphasize Preliminary Research

Overseas investment can be subject to a myriad of host country's labor laws and regulations. How to quickly and effectively understand and judge key issues, and provide valuable tips on overseas labor and employment, requires both the rich experience of professional institutions and the help of local lawyers. Conducting a high-quality legal due diligence in the host country is the first crucial step for Chinese enterprises to protect their rights when going global. Moreover, in the process of cross-border investments, it is crucial to emphasize labor due diligence, such as: 1) Succession and negotiation of employment and employment conditions: Comply with the legal provisions of the host country (region) to establish the corresponding processes for the transfer of employment relationships; 2) Employee benefits and personnel structure adjustments after post-merger: Review the target enterprise's existing benefit policies, insurance policies, and estimate labor costs in advance. Combine legal regulations to clarify provisions and processes for personnel structure adjustments; 3) Resignation and retention of target enterprise’s senior executives: Conduct a prior review of control changes clauses in management contracts, incentives or retention plans or medium and long-term incentives in the case of retention; review the golden parachute provisions in the contract, etc.

(ii) Improve the Level of Localization

In countries with policies promoting local employment, Chinese enterprises should strive to increase the proportion of locally hired employees in overseas subsidiaries. It is essential to strengthen training and management for local employees, enhance their job skills and business proficiency, reduce the number of expatriate employees as much as possible, and maximize the reduction of overseas security risks. While promoting localization, enterprises should adhere to a strategy of both "going global" and "bringing in" by recruiting local talents to participate in safety management, making full use of local government or third-party resources to establish a system for reviewing the employment of local employees to avoid the introduction of potential instability into projects, and preventing disputes or even collective incidents between Chinese and foreign employees. Simultaneously, it is important to legally sign relevant employment contracts with local employees, clearly defining rights and obligations, to prevent future labor disputes.

(iii) Respect Cultural Differences

Cultural customs vary significantly worldwide, and without thorough understanding, Chinese citizens and Chinese enterprises abroad may unintentionally violate religious taboos and legal regulations, leading to safety risks. For example, in Saudi Arabia, where the population is predominantly devout Muslims, there are numerous taboos. Saudi law strictly prohibits alcohol as well as drug use and drug trafficking. In Indonesia, labor laws also impose restrictions on alcohol. If an employee is found intoxicated, consuming alcoholic beverages, or using or distributing drugs, narcotics, psychotropic substances, or other addictive substances in the workplace, the employer has the right to unilaterally terminate the employment contract. Additionally, Indonesia's respect for religious beliefs is reflected in its hiring conditions and standards. such as prohibiting discrimination against employees with religious beliefs; requiring employers to provide mandatory religious leave allowances to employees, and any delay or non-payment of such allowances is considered a violation of the law.

When managing employees, it is essential for enterprises to suit measures to the local conditions. Adopting a Chinese model uniformly should be avoided, and instead, enterprises should implement customized management practices tailored to the characteristics of the host country's employees to avoid conflicts among the workforce.

 Conclusion 

Labor and employment compliance, as a crucial component of enterprise operations, constitutes an indispensable aspect for businesses expanding into international markets. For state-owned enterprises, given their distinctive characteristics, it demands particular attention. A comprehensive understanding of prevalent labor and employment risks in overseas operations enhances the enterprise's risk prevention awareness and emphasizes the significance of establishing a regulatory framework for labor and employment compliance.

Enterprises can proactively address these challenges by establishing dedicated compliance organizations, designing regulatory frameworks tailored to their specific needs, and enhancing training programs for employees to foster a compliance-oriented culture. Only through the comprehensive implementation of compliance measures, including organizational structures, regulatory frameworks, and cultural ethos, can enterprises establish a distinguished reputation for compliance excellence on the global stage.

[1] http://hzs.mofcom.gov.cn/article/zcfb/d/201311/20131100377079.shtml.

[2] https://www.gafi.gov.eg/English/StartaBusiness/Laws-and-Regulations/Documents/Lawno159oftheyear1981.pdf.

[3] https://www.hrsd.gov.sa/sites/default/files/2017-05/LABOR%20LAW.pdf.

[4] https://hrsd.gov.sa/ar/open-data/%D8%A8%D8%B1%D9%86%D8%A7%D9%85%D8%AC-%D9%86%D8%B7%D8%A7%D9%82%D8%A7%D8%AA.

[5] Federal Decree Law No.33 of 2021: https://u.ae/-/media/Documents-2022/Federal-DecreeLaw-No-33-of-2021.ashx.

[6] the Anti-Bribery Law: https://laws.boe.gov.sa/Files/Download/?attId=0f617e25-0191-40e1-bf4b-adbb010ed141.

Brief Introduction of the Author: 

Sophie Zhang

River Delta Law Firm

Apprentice Lawyer

Sophie Zhang, a Apprentice Lawyer of Overseas Labor and Employment Law Center in River Delta Law Firm. Graduated from Shanghai International Studies University with Juris Master. She currently focuses on labor laws and regulations and related practices in the United Arab Emirates, Saudi Arabia, Egypt and other countries. The working languages are Arabic, English and Chinese.Special statement: 

This article only represents the personal views of the author, and shall not be regarded as any form of legal opinion or advice issued by River Delta Law Firm or its lawyers. Articles of this official account shall not be reproduced without authorization.If you need to reprint, please contact operating personnel of this Wechat official account. 

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