Understanding China’s New Employee Inclusion Rule: What Foreign Companies Need to Know

China is updating its rules for companies and one big change is how they involve employees in decision-making.

Starting July 1, 2024, companies with over 300 employees must include employee representatives in their management teams. This is a departure from the old rule, which mainly applied to state-owned companies. Now this will impact not only local companies but also foreign enterprises, including those from the DACH region (Germany, Austria, and Switzerland).

Here’s what DACH companies operating in China should consider:

1. Differences in Corporate Governance: In DACH countries, employee participation in corporate decision-making often occurs at the supervisory board level. However, China’s requirement for employee representation on the main management board is a departure from this norm. DACH companies need to adapt their governance structures accordingly.

• Implications for Joint Ventures: DACH companies involved in joint ventures in China may face particular challenges. For instance, if a joint venture currently has an equal number of directors representing each partner, accommodating an additional employee representative could upset this balance. This might require renegotiating agreements or reconfiguring governance models.

• Democratic Election Process: Unlike in some DACH countries where employee representatives may be appointed, Chinese law mandates a democratic election process. Ensuring that the chosen employee representative possesses the necessary qualifications and understanding of the company’s operations is crucial.

• Consideration of Cultural Differences: DACH companies should be mindful of cultural nuances when implementing these changes. Open communication and collaboration with Chinese partners and employees can help navigate any misunderstandings or resistance to the new requirements.

• Exploring Alternative Structures: Given the potential challenges, DACH companies may explore alternative structures, such as establishing separate supervisory boards to accommodate employee representation. However, this approach may require careful consideration to ensure fairness and effectiveness.

• Opportunities for Collaboration: Despite the initial challenges, embracing employee participation can lead to improved employee morale, better decision-making, and enhanced corporate social responsibility. DACH companies can leverage this opportunity to foster a more inclusive and sustainable business environment in China.

In summary, DACH companies operating in China must prepare for the implementation of the new employee inclusion rule by understanding its implications, addressing potential challenges, and embracing opportunities for collaboration and growth in the evolving Chinese business landscape.