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Up to 7 Years in Jail for Not Paying Wages in China

Amendment makes company officers criminally liable for not paying staff

Employers in China who withhold workers' pay will face up to seven years in jail, according to an amendment to the nation's criminal code adopted at the 19th Session of the 11th National People’s Congress during late February.


According to reports by Xinhua news agency, the amendment targets employers who conceal assets or flee, and those who refuse to follow government labour department orders. For managers convicted in cases with "serious consequences" jail terms of three to seven years are in order, according to the new terms of the law. The amendment also includes provisions for fines, although the range of these fines has yet to be specified.


While the amendment is particularly targetted at employers who victimise migrant workers, and thus can be looked at as part of the government's overall push to protect the rights of workers and ensure a “harmonious” society, it also adds an element of risk for managers at any company, should the firm encounter financial difficulty and be unable to pay its workers.


The current Labour Law, which originally took effect in 1995, stipulates that local labour bureaus have the right to intervene in cases of wage default by companies, can order employers to pay wages, and can impose fines for cases of default. However, previously there was no legal stipulation to make defaulting on wage payments a crime.


Defining the Crime


The crucial elements of the amendment include revisions to Article 276(1) of the Criminal Code to make intentional withholding of wages a criminal offense. The amendment defines the crime as follows:


  1. The company has the means with which to pay the wages.

  2. The company intentionally withholds payment of wages by either refusing to pay or by transferring assets to escape liability for payment.

  3. The situation is serious or the effects are severe.

Freedom for Interpretation by Legal Authorities


While the law targets intentional nonpayment of wages, this should offer little comfort to companies who find themselves unable to pay their staff. Given that the legal system has previously shown a tendency to favour employees in disputes with employers, and considering that this amendment is being made specifically to protect worker interests, employers who do not pay wages can expect that the burden of proof for establishing that any such nonpayment was unintentional will be on them.


Companies should expect that the only solid defense for failure to pay wages would be that the company had filed for bankruptcy before it failed to pay wages.


Another issue of potential concern to employers who find themselves unable to meet payroll obligations is the third stipulation above, that “the situation is serious or the effects are severe.” This point is clearly open to interpretation by individual officials and once again, employers can expect that the burden of proof will be on them to prove that there were no serious situations or severe effects.


Potential Risks for Managers


While Chinese law has always included an element of personal responsibility for the legal representative of a company, this new amendment adds a criminal law element that did not exist previously. This addition of criminal penalties should be of particular concern to company managers, especially in the case that their firm is encountering financial difficulties.


In the case of managers who do not have direct financial control over the company, or who are dependent on funding from offshore entities of questionable financial standing, special attention should be paid to the company's timely payment of salaries and other obligations.


In the case that a manager is employed by a company that they know to be facing financial challenges, then the manager should consider seeking additional guarantees of the company's ability to meet its obligations, or they could be facing up to seven years in prison because of someone else's failure to meet their payroll.


Criminal Charges as a Weapon Against Employers


Managers should also be aware that the passing of this amendment provides another weapon to employees in cases where companies have a wage dispute with employees. Where employees previously might have relied on arbitration by the labour bureau to resolve a dispute about salary payment they will now have the option of bringing greater pressure to bear against their employers by seeking criminal charges that could result in fines or imprisonment for their bosses.


Greater Need for Timely Filing of Bankruptcy


For companies facing financial challenges the amendment to Article 276(1) of the Criminal Code means that, even more than was the case previously, they will need to file for bankruptcy at the first sign of severe financial problems. Cashflow problems that endanger a company's ability to pay their staff in a timely manner are simply too great a risk for companies operating in China, and pre-emptive bankruptcy filing will need to be filed before the first wage payment is missed.