Can the law intervene in the dismissal of employees at a virtual money exchange in China?

Introduction

Recently, there was a small incident in the cryptocurrency circle where an employee of a certain virtual currency exchange was fired and stated on social media that they were unreasonably dismissed by the exchange in order to evade legal compensation.

The exchange also responded on its official account on social media, stating that in addition to not accepting the claims of this former employee, the company had terminated his employment contract in accordance with the law and regulations. Moreover, during the employee's departure process, the company promptly offered an N+1 compensation plan, which the employee did not accept.

The "resignation turmoil" has caused a certain amount of public opinion on social media, especially on overseas platforms where friends in the cryptocurrency circle gather.

As a web3 lawyer, Lawyer Liu does not discuss the emotional controversies or moral rights and wrongs surrounding the event. We will analyze the legal issues within it, especially regarding labor law issues in the cryptocurrency sector.

1. Is Chinese law applicable to labor disputes in exchanges?

Lawyer Liu noticed that whether it was the former employees of Gate.io mentioned above or Gate.io itself, they referred to legal terms such as "statutory compensation", "labor contract", "in accordance with the law", "N+1", etc. In the context of the Chinese language, we would naturally understand this to mean that all parties are making statements in accordance with relevant Chinese laws.

At this point, the question arises. As everyone knows, since the "9.4 Announcement" ("Announcement on Preventing Risks of Token Issuance and Financing") in 2017, exchanges in mainland China have gradually gone offshore. After the "9.24 Notice" ("Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation") in 2021, virtual currency exchanges have hardly any foothold in mainland China, with most being severely impacted by criminal prosecution.

The "9.24 notice" also mentioned the labor employment of virtual currency exchanges:

"Offshore virtual currency exchanges providing services to residents within our country through the internet also constitute illegal financial activities. Domestic staff of relevant offshore virtual currency exchanges, as well as legal entities, non-legal entities, and individuals who are aware or should be aware of their engagement in virtual currency-related businesses and still provide marketing promotion, payment settlement, technical support, and other services for them, shall be held legally accountable."

There is a distinction here that the domestic staff of overseas exchanges will be held legally accountable; whereas the overseas staff of overseas exchanges are actually not regulated by our country's regulatory documents.

So, we will discuss it in two situations:

(1) Domestic staff of the exchange

This situation falls under the prohibited actions outlined in the "9.24 Notice." For staff within the exchange, any violation of the mandatory regulations in the "9.24 Notice" renders any agreements, such as an Employment Contract or Service Contract, invalid under Chinese law, making it difficult for them to be effective in China. However, if the contract stipulates that the governing law is that of a foreign jurisdiction, then it is necessary to analyze which specific country's or jurisdiction's law is applicable based on the agreement.

(2) Overseas staff of the exchange

For foreign staff of exchanges, the laws of mainland China are actually less applicable. Even if the nationality of this foreign staff member is registered in mainland China, if the worker holds a foreign work visa, they will certainly be governed by regulations outside of mainland China's laws.

Taking the "Service Agreement" on the Gate official website as an example, it stipulates that the method for resolving disputes with users (players) is arbitration (in practice, one can choose to sue in court or opt for arbitration, but generally, the platform decides which mode to adopt, and users have little choice), with the arbitration location being Panama and the arbitration language being English.

Of course, this does not imply that the labor contract between Gate and its employees is also subject to this agreement; the actual contract text should prevail.

Another situation is that the exchange may take into account the regulatory policies in mainland China and use a mainland shell company or affiliated company to sign labor contracts and pay social insurance for employees located in mainland China. However, the actual work content still involves providing labor for foreign exchanges. If we look through this situation, it essentially remains that domestic employees are providing labor for foreign virtual currency exchanges, which still violates the "9.24 notice." However, if the actual work content of the affiliated company is not directly related to the exchange, I personally believe that it can apply the labor laws of mainland China.

2. Suggestions for Employment at the Exchange

For the domestic affiliated company of an overseas virtual currency exchange, and not engaged in virtual currency trading-related business, Lawyer Liu's analysis and suggestions are as follows:

(1) Regulate employment relationships in accordance with the law to avoid "quasi-outsourcing" and "pseudo-freelancer" models.

Many exchanges often adopt methods such as signing labor service contracts, freelance agreements, or outsourcing to external companies to reduce labor costs, thereby circumventing formal labor contracts. If the mandatory regulations of the "9.24 Notice" are not considered, especially for domestic affiliated companies of overseas exchanges, the aforementioned practices, once disputes arise, are highly likely to be recognized by labor arbitration or courts as "de facto labor relationships." This not only requires the payment of overdue social security contributions but may also lead to liability for compensation.

Lawyer Liu suggests: For employees who are actually subordinate in terms of management, attendance, instructions, etc., the affiliated companies in the mainland (not engaged in virtual currency exchange related businesses) should sign formal "Labor Contracts" and pay the "five insurances and one fund" on time.

(2) Avoid disputes caused by illegal termination of contracts and unclear performance mechanisms.

Some affiliated companies, during the layoff process, did not follow the legal procedures for economic layoffs or vaguely defined performance evaluation criteria, resulting in employees claiming "unlawful termination" and receiving double compensation.

Lawyer Liu recommends: strictly follow the termination process as stipulated in Articles 40 and 41 of the Labor Contract Law of Mainland China, paying special attention to the need for clear standards in performance evaluations, quantifiable processes, and signed confirmation of evaluation results.

(3) Legally optimize the company structure and clarify the applicable local labor laws.

Virtual currency exchanges often "remotely" employ domestic employees through entities set up abroad, creating a legal loophole of "foreign labor contracts + actual domestic office."

Lawyer Liu advises: If the actual place of business is within the territory, the domestic entity should bear the employer's responsibility, and do not confuse the subject of employment. (The premise for this article still applies: the business carried out in the mainland must be unrelated to virtual currency transactions; if, in reality, it is still directly providing technical, marketing, and other services for overseas virtual currency transactions, it still violates the mandatory provisions of the "9.24 Notice.")

III. Suggestions for Workers in the Cryptocurrency Industry

The suggestions in this section are applicable under the same premise as mentioned earlier. If workers in the cryptocurrency industry are directly providing services to overseas virtual currency exchanges, it is difficult to protect their rights through China's labor contract law.

(1) Be sure to confirm that the contract signing entity is consistent with the actual manager.

Many employees sign English contracts with overseas companies, but the domestic team is responsible for issuing salaries and arranging work. If disputes arise, it may lead to failure in protecting their rights due to difficulties in providing evidence.

Lawyer Liu suggests: Keep records of work communications, attendance records, salary payment accounts, and other evidence to ensure that in the event of a dispute, one can assert a "de facto labor relationship."

(2) Beware of disguised dismissals under the pretext of "performance"

We have encountered some workers in the cryptocurrency industry reporting that before leaving their jobs, the company suddenly reduced their positions or salaries under the pretext of "performance not meeting standards," or forced them to resign voluntarily under the guise of "position adjustment."

Lawyer Liu suggests: Employees have the right to request the company to disclose performance evaluation standards and data. If the company engages in malicious dismissal, they can claim compensation for unlawful termination (Labor Contract Law, Article 48, Article 87).

(3) Apply for arbitration promptly after leaving the job to prevent exceeding the statute of limitations.

According to Article 27 of the Labor Dispute Mediation and Arbitration Law, the statute of limitations for labor arbitration is 1 year, calculated from the date when the party knows or should know that their rights have been infringed.

Lawyer Liu advises: After being dismissed or discovering illegal activities by the company, one should promptly write a letter to protect their rights and submit a labor arbitration application to avoid missing the time limit.

IV. Conclusion

From the perspective of laws in various countries, virtual currency exchanges are indeed a very novel industry. Especially under the premise that activities related to virtual currencies are classified as "illegal financial activities" in mainland China, workers in the domestic cryptocurrency sector are certainly in an absolutely disadvantaged position. Those working directly for exchanges, particularly web3 practitioners, have no legal recourse under mainland China's laws. This necessitates a thorough understanding of the legal regulations regarding the place of registration of the exchange, the actual place of operation, and the location of employment, especially the relevant provisions of labor law.

A few days ago, Singapore also imposed stricter regulations on web3 practitioners, requiring all web3 workers to not only be well-versed in industry knowledge but also to have some understanding of legal knowledge. Alternatively, they can seek legal advice from professional web3 lawyers.

In the future, the virtual currency industry will face stricter global regulations and pressure from business contraction, leading to more frequent labor disputes. Exchanges should comply with labor regulations, and employees need to enhance their awareness of rights protection. There may be more judicial disputes over "cross-border labor relations," and it is recommended that both employers and employees clarify the applicable law and dispute resolution methods when signing contracts. Efforts should be made to resolve disputes at the nascent stage.