Labor Law Specifics and Risks of Doing Business in Asian Markets

Asian Labor Law: Why a single template fails

Asian countries often have even stricter administrative rules to protect local workers. If a foreign national works long-term on Czech soil, Czech law provides a minimum standard that cannot be bypassed. Similarly, when you sign a contract with a Chinese employee, it is not just a formality, but a binding agreement subject to local laws.

Our attorneys in Prague at ARROWS realize that this subject matter is much more complex in practice than it appears at first glance. Individual steps have hidden exceptions and procedural details in the real world. For companies with a long-term presence in Asia, it is therefore essential to understand not only the basic rules but also their practical application.

China: Double salary for unwritten contracts and the myth of flexibility

The Chinese Labor Contract Law is clear and requires a written contract for full-time employment. If you hire an employee without a written contract, you must draft one within one month. Otherwise, you face the obligation to pay the employee double their monthly salary as a penalty for each month of delay.

If a Chinese employee keeps the contract for more than a month without signing, you must resolve the situation quickly and demonstrably. If a year passes and the contract is still not signed, the law assumes that an open-ended contract has been established between the parties. For the employer, this means significantly more difficult termination options.

Probationary period and fixed-term contract chaining

Chinese law allows for a probationary period, but with clear limits based on the length of the contract. For contracts shorter than three months, a probationary period cannot be agreed upon at all. During the probationary period, the employer may only terminate the relationship if they prove the employee does not meet the recruitment criteria.

A fundamental difference compared to the Czech Republic is the chaining of contracts. If you sign a third consecutive fixed-term contract with the same employee, an obligation to conclude an open-ended contract automatically arises. Legal protection against dismissal is very strong in China.

Overtime and the illegal "996" regime

Standard working hours in China are 40 hours per week, and overtime must be properly paid. In 2021, the Chinese Supreme Court declared the "996" regime—working from 9 AM to 9 PM, six days a week—illegal. Today, it is considered a serious violation of the law.

Overtime hours require premiums of 150% on a working day, 200% on weekends, and 300% on public holidays. If you do not pay these premiums to the employee, you risk fines from local authorities and retroactive wage claims. Our Czech legal team handles situations where underestimating these payments leads to class-action lawsuits.

Vietnam: Bilateral agreement with the Czech Republic and strict administration

The Vietnamese Labor Code requires a written employment contract in two originals. In Vietnam, bureaucracy is very formal; stamps and correct forms are a necessity for smooth operations.

A specific obligation in Vietnam is the mandatory reporting of employees to local labor offices and registration for social and health insurance immediately upon commencement. If you fail to register, you face fines and problems during tax audits.

The Czech Republic has a Legal Assistance Treaty with Vietnam, which facilitates the service of documents. This can be an advantage in the event of a legal dispute, but it cannot be relied upon exclusively. Our Prague-based attorneys specifically focus on compliance with Vietnamese regulations and are familiar with this historical background, which you can use to your advantage.

Minimum wage and working hours

Vietnam has a minimum wage system divided into four regions, with an increase occurring as of July 1, 2024. In Region I (Hanoi and Ho Chi Minh City), the minimum monthly wage is set at 4,960,000 VND. In Region IV, the amount is lower.

If you do not pay employees at least this wage, you face sanctions and the obligation to pay the difference. Working hours are limited to 8 hours per day and 48 hours per week. Vietnamese law also strictly regulates the annual overtime limit, which is generally set at 200 hours.

Japan: Employee Subordination as a Key Criterion

Japanese employment law in practice may differ from the text of the contract because courts assess factual subordination. If a person works under your supervision and is economically dependent on the income, the court will reclassify the relationship as employment regardless of the contract's title.

Subordination and economic dependence are stronger arguments in Japan than formal documentation. Japanese employment law is highly protective of employees, and dismissing a permanent employee requires meeting strict conditions established by case law.

Working Hours and Karoshi Prevention

The Japanese Labor Standards Act sets a limit of 8 hours per day and 40 hours per week. Overtime work is only possible based on a written agreement with employee representatives (the so-called Article 36 Agreement).

The law limits overtime to 45 hours per month and 360 hours per year. Violating these rules is a sensitive issue due to the phenomenon of karoshi (death from overwork), and employers risk not only fines but also criminal prosecution and reputational damage.

India: Complex System and State Variations

In India, legal regulation is fragmented into many laws and regulations of individual states. Although central law does not mandate a written contract in every case, the laws of states like Maharashtra often require the issuance of an appointment letter with terms and conditions.

In practice, the absence of a written contract in India is a massive risk. Without a written record, you will have a minimal chance of proving agreed terms, confidentiality, or intellectual property protection within the Indian court system.

Supply Contracts in Asia: CISG, Choice of Law, and Arbitration Clauses

When entering into a purchase agreement with a partner from China, Vietnam, or Japan, the UN Convention on Contracts for the International Sale of Goods (CISG) will likely apply. Both the Czech Republic and the aforementioned Asian states are signatories, providing a balanced legal framework.

However, India is not a signatory to the CISG. Therefore, if you enter into a contract with an Indian supplier without an explicitly stated choice of law, determining the applicable law will depend on complex conflict-of-law rules.

Choice of Law Clause – Your First Line of Defense

A choice of law clause allows parties to choose the legal system that will govern the contract. However, it is necessary to remember that the choice of law does not eliminate the mandatory norms of the country of import, such as customs regulations and administrative permits.

Attorneys from our Prague-based law firm point out that even if you choose Czech law, if the other party is based in a country that does not recognize judgments from Czech courts, the judgment will be useless. This is the case with China, where you will face difficulties without a specific treaty on the recognition of judgments in commercial matters.

Arbitration Clause and Enforceability

Crucial for the enforceability of law in Asia is the arbitration clause, as most Asian countries have signed the New York Convention. An arbitral award issued in a recognized arbitration center is much easier to enforce in these countries than a judgment from a state court.

We recommend avoiding the jurisdiction of local Chinese or Vietnamese state courts and opting for neutral arbitration. A correctly set clause is the key to the actual enforceability of your claims in the event of a dispute.

Special Risks: The Chinese Stamp and Intellectual Property

In China, the official company stamp (the red circular "chop") plays a central role and is binding for the company even without the signature of an authorized person. When signing contracts, always insist that the contract be affixed with this stamp and check the consistency of the company name with the characters on the stamp.

Intellectual Property Protection – The First-to-File Principle

In China, a strict "first-to-file" principle applies to trademarks—meaning the first person to apply for the registration generally gains the rights. If you do not register your brand in China first, a squatter might do so and subsequently prevent you from manufacturing your own products.

It is crucial to contractually secure the ownership of molds and designs before production begins. Our Prague-based attorneys at ARROWS law firm recommend completing trademark registrations in China before entering the market or commissioning production.

Social Security and Posting of Workers

While the A1 form is used within the EU, the situation regarding Asian countries depends on the existence of a Social Security Treaty with the Czech Republic.

• Treaty exists (Japan, India, South Korea): You can apply to the Czech Social Security Administration (ČSSZ) for a Certificate of Coverage. The employee then remains insured under the Czech legal system and does not pay contributions in Asia.
• No treaty exists (China, Vietnam): There is a risk of double insurance, where local regulations may require contributions to the local system as well.

Employment of Asian Nationals in the Czech Republic

When employing third-country nationals in the Czech Republic, strict rules of the Czech Employment Act and the Act on the Residence of Foreign Nationals must be followed.

• Reporting a Vacancy: The position must be reported to the Czech Labour Office and listed in the central registry.
• Information Duty: The employer must inform the Labour Office of the foreigner's start date no later than the day they begin work.
• Health Insurance: Since 2024, all foreign minors with long-term residence are included in the public system.
• Commercial Insurance: Adult foreigners without employment must arrange commercial insurance with a specific limit.

Conclusion

Navigating Asian labor and supply contracts is a complex discipline that requires a deep understanding of local legal systems. Asian jurisdictions hide risks in the form of high penalties, different interpretations of contracts, or specific administrative requirements.

Thanks to our international reach and network of partners, we enable clients to safely conduct business and employ staff in Asia. Whether you need to prepare an employment contract in Shanghai or review a supply agreement, ARROWS law firm in Prague has the know-how to protect your investments. We are insured for professional liability up to CZK 400,000,000, providing you with the certainty of a professional approach.

If you are dealing with similar situations in Asia, do not hesitate to contact our Czech legal team at ARROWS law firm at consultation@arws.cz. A single consultation can save you hundreds of thousands of crowns and months of worry.

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