Businesses are concerned a government-run labor union may appoint staff to the local entity’s corporate board. Fortunately, several exceptions apply to this rule and many companies are exploiting a legal loophole to avoid that entirely—with legal advice from attorneys familiar with regulatory trends.
Once only applicable to state firms, China has extended its German-style codetermination system, where worker representatives may serve as directors to all companies. But only entities with over 300 employees must appoint a worker director to the board, or alternatively audit committee. A variety of workarounds have been developed and used in China, involving fluctuating headcounts, whether executives can be classified as “workers,” and use of insiders such as friends and relatives as worker directors.
In this CBL explainer, we’ll walk you through the worker director eligibility, election, fiduciary duty, removal, and replacement. We’ll also help you determine the need for such directors, offer solutions for the dynamics between the employee headcount fluctuation and worker director seat, analyze the risks of noncompliance, and provide the strategies to manage such risks.
Contents
- Candidate Eligibility and Conflict of Interest
- Election Process and Shareholder Exclusion
- Fiduciary Duties and Dual Role Tensions
- Resignation, Removal, and Replacement
- When Are Worker Directors Required
- Consequences of Non-Compliance
Candidate Eligibility and Conflict of Interest
There is controversy as to whether executive level employees can serve as worker directors. More confusingly, many lawyers with limited English translate this role as “employee director,” but the actual legal meaning is largely the opposite of what an employee director in the United States or United Kingdom usually is: a director who is an executive and therefore an employee. Using senior employees as worker directors, while common, could be deemed an unlawful circumvention scheme or attract regulatory scrutiny.
Beyond the general eligibility requirements under the China Company Act § 178, conflicts of interest are often considered.[1] Given this concern, companies often nominate labor union chairs as worker directors and may use plurality voting in multi-candidate elections to broaden the candidate pool. Whether executives may serve as worker directors remains controversial because their appointment could undermine workers’ interests and impair board independence. Below, we examine this debate and determine candidate eligibility.
While the China Company Act does not prohibit executives from serving concurrently as worker directors, some regulations do.[2] The China National Federation of Labor Unions and the State Council State-owned Assets Regulatory Commission have also issued guidance providing that executives who are not labor union chairs are prohibited from concurrently serving as worker directors.[3] The rationale is that executives are typically nominated by shareholders, other directors, the board, or the president and elected by the board, and this creates a conflict of interest with the workers and undermines representation. Adding an executive to the board as a worker director can also affect board composition and function by increasing the number of executive-held and non-independent seats.
Nevertheless, some companies with concerns over workers’ capabilities in board decision-making, or sought investor control over the board were still inclined to have executives as worker directors. A June 2025 Securities Times article found, more than 150 public Chinese companies reportedly announced worker director elections since May 2025. The reported worker directors largely fell into three groups: (1) former worker supervisors or non-independent directors; (2) executives, accounting for approximately 20%; and (3) ordinary workers. In some companies, close relatives of the beneficial owner were appointed as worker directors.
Many businesses have successfully resisted the idea of a government union elected worker sitting in on their board meetings and reading confidential records. To make a strategic decision, you need legal counsel with insight about how to navigate these challenges. In this respect, CBL can help you find a professional lawyer to assist with making—and executing on—the right choice.
Election Process and Shareholder Exclusion
An independent, fair and free vote must be coordinated in such a way that workers can fully participate. The China Company Act requires employees to elect worker directors through a meeting of employee representatives or a meeting of all employees, rather than through the shareholders’ meeting.[1]
While the shareholders’ meeting is empowered to elect and remove company directors generally, judicial precedent and regulatory guidelines typically hold that this authority does not extend to worker directors, whose selection is reserved to company employees. Some guidelines also explicitly support this approach to prevent shareholders from using veto power over worker directors to interfere with the employee election process.[4][5]
Worker director candidates may be nominated by a company’s labor union, more than 1/3 of employee representatives, over 10% of its employees, or an ad hoc representative committee. Some labor lawyers believe that temporary workers must also be included in addition to the employees. The union and management will then negotiate a candidate list, which requires approval from the company’s internal Chinese Communist Party Committee, or the parent labor union if there is no such committee. The proposed candidate list is then announced for at least five business days. If no objections are raised, the candidates are treated as confirmed for the election.
The employee representative meeting then votes through a secret ballot, and the candidate receiving a majority of the votes is elected. If an employee representative meeting cannot be convened, the labor union may organize an employee-wide election. Election results must be filed with the parent labor union and the business registrar, and the worker director’s bio must be publicly distributed before the worker director takes a board seat. The start of the worker director’s term is set by a resolution adopted at a meeting of all employees or employee representatives, or the resolution’s issuance date if no start date is specified, unless corporate governance documents provide otherwise.
The role of the Communist Party has created a minor red scare in the business community. Indeed, the law does not envision a mere “employee director,” the political orthodoxy considers this a worker director who pursues class struggle for the worker class. The reported cases however say clever lawyers have resolved most of these concerns.
Fiduciary Duties and Dual Role Tensions
The task of representing worker interests does not give worker directors license to betray the company. They have the same powers, obligations, and responsibilities as other board members. They are required to perform their role in compliance with the applicable laws.
In performing their obligations, worker directors are expected to represent employee interests and reasonable demands, and to protect employee rights. Worker directors have two legal relationships with the company: an employment relationship under an employment contract governed by the China Employment Contracts Act, and a director relationship governed by the China Company Act and other applicable law.[6]
Under the China Company Act, the worker director’s relationship with the employee representative meeting does not affect their primary obligations. Worker directors must perform their duties lawfully according to the company’s governance documents, fulfill duties of care and loyalty to the company, exercise independent business judgment in board decisions and voting, and be responsible for those decisions or votes. The employee representative meeting may remove a worker director if dissatisfied with the director’s performance. Worker directors must also maintain corporate confidentiality, and may disclose information only to the extent permitted by law, the governance documents, and shareholder or board resolutions. A worker director may be held liable for unauthorized disclosures to the labor union, the employee representative meeting, other employees, or any business or third party.
Resignation, Removal, and Replacement
Worker director resignation and removal are governed by general rules, because the China Company Act only has special rules for their election, not removal. § 70 provides that a director may resign by providing written notice to the company, and the notice becomes effective upon the company’s receipt of the notice. If the resignation would cause board membership to fall below the required quorum, the departing director must remain until a successor is appointed. § 71 of the Act authorizes the shareholders’ meeting to remove directors by resolution, effective on the date the resolution is adopted. Because worker directors are elected by the employee representative meeting or a meeting of all employees, they may also be removed by the them, with removal effective on the date the resolution is adopted.
Is the worker director’s seat affected by employment or contract termination in China? A worker director is no longer eligible to serve upon termination, because they were elected from among the company’s employees. If a worker director is prematurely removed or their employment is otherwise terminated, the company’s labor union must hold a replacement election using the same process as the initial election. The newly elected worker director serves for the remainder of the term.
When Are Worker Directors Required
The threshold for appointing a worker director is 300 employees, but in practice, questions arise over whether a company with more than 300 employees but no board must appoint one and how later headcount changes affect worker director seat allocation.
How to determine whether you have 300 employees? China Company Act § 68(a) provides that limited liability companies with boards of over three members may include an employee representative.[1] Any company with more than 300 employees is required to include at least one worker director on its board unless its audit committee already includes employee representatives. However, the China Company Act and its regulations lack rules to calculate whether a company has “over 300 employees.” A company may actually have fewer than 300 in its jurisdiction of registration, but more when counting regional locations. § 13 of the Act provides a local branch registrations count towards the company’s employees, as it lacks separate legal personality. But subsidiaries are not counted since the law grants them independent legal personality.
“Employees” in China generally includes all individuals who have signed employment contracts with a company, including those on a probationary period. There is no law on whether contingent employees are employees of the staffing agency or the host employer. Outsourcer staff, interns, and rehired retirees are typically excluded.
How to resolve issues in headcount changes and worker director seat allocation? While employee headcounts fluctuate, the number of worker director seats for a given term is fixed, and the Act does not provide for how mid-term changes affect seat allocation.
One method is to use a cutoff date before the board election, on which the employee headcount determines if the next board has a worker director. If less than 300, any existing worker director continues to serve for the remainder. Conversely, a board with no worker director doesn’t need to add one midterm, i.e., a rise in headcount does not trigger board composition change; it only affects the next board.
Similarly, whether a worker director must be added depends on if the employee headcount reaches 300 on the cutoff date set before the board re-election. However, setting a cutoff date may be too arbitrary. Instead, consider using the average employee headcount over a defined period, such as the calendar year before the board re-election. Provide for this in corporate governance documents. If your employee headcount fluctuates often, determining whether you can legally avoid appointing a worker director can be difficult. Consult a CBL legal expert to help you make the right choice while avoiding compliance risks.
A company’s duty to elect a worker director also depends on whether it has a board. China Company Act §§ 75 and 128 allow small companies or ones with few shareholders to appoint a single director instead of a board.[1] While a company with 300 or more employees would not generally be considered “small,” it may still lawfully choose against a board if it has few shareholders, in which case it’s not required to elect a worker director under § 68. Thus, the requirement applies only if a company has over 300 employees, a board, and does not already satisfy employee representation requirements through employee supervisors. Some commentators nonetheless argue that they be mandatory, to prevent companies from circumventing worker directors via the single-director option.
Consequences of Non-Compliance
Noncompliance carries no statutory penalties but may adversely affect the company, including a government correction order, market-regulator rejection of company filings, or void board resolutions.
While neither the China Company Act nor the rules cited above provide definite penalties for violating § 68, some negative consequences exist. For example, § 54 of the China Labor Union Act empowers county governments and parent bodies to order you to desist from obstructing lawful union organized employee elections at representative meetings or otherwise.[7] Separately, the Business Registration Administrative Regulations §19 provides a business registrar may reject registration or amendment filings for such non-compliance.[8] Other local market regulators’ online Q&As also state that the China Company Act § 68 is not treated as mandatory at this stage and do not provide specific penalties for violations.
Noncompliance also risks impairing board resolution validity, i.e., it’s set aside or invalidated. China Company Act § 27 provides a board resolution is void if the meeting fails to meet quorum or get enough votes as required under either the Act or governance documents. There is a question as to whether a resolution can be challenged on these grounds if a required worker director is not appointed, if the governance documents require any unanimous director approvals. It may be prudent to remove the unanimity requirement, so their absence doesn’t obstruct board resolutions.
The Act § 25 provides a shareholders’ or a board meeting resolution is only voidable on grounds of unlawful purpose, even if the board’s composition is defective; however, a court may invalidate a resolution over meeting composition. Additionally, if the shareholders’ meeting resolution approves governance documents that unlawfully exclude worker directors, it may be invalidated on the ground that it conflicts with the Act. There is no risk for single owner companies, but this can occur in joint venture shareholder disputes.
Conclusion
The China Company Act requires corporate governance to balance the interests of shareholders and stakeholders (i.e., D&O and employees). If you have over 300 employees and a board of directors—which is more than a single director—the Act requires employees be represented by a worker director or supervisor. The legislative intent is to improve employee representative meetings, increase board diversity, and improve supervision by workers.
Consider acting to define the worker director’s role, authority, and duties to maintain the desired board composition and voting thresholds. Unless governance documents explicitly grant blocking rights, their vote will minimally impact decisions. Nevertheless, respect their duty to represent employee interests before the other directors. Make sure they effectively maintain relationships with employee representative meetings, labor unions, and other employees, and enforce confidentiality to avoid unauthorized disclosure of sensitive information.
Overall, corporate lawyers in China have developed a variety of strategies acceptable to their local regulators, to either minimize the power of worker directors or avoid appointing worker representatives entirely.
FURTHER READING
Get more insights on corporate governance in China.
FOOTNOTEs
[1] China Company Act (中华人民共和国公司法), (China National Congress, Dec. 29, 2023) (in Mandarin)
[2] Corporate Governance Compliance Under the Amended Company Act Circular (关于公司治理监管规定与公司法衔接有关事项的通知), (China Financial Regulator, Dec. 17, 2024) (in Mandarin)
[3] Employee Representatives in Board of Directors and Supervisors Guidelines(关于进一步推行职工董事、职工监事制度的意见), (China National Federation of Labor Unions, May 31, 2006) (in Mandarin)
[4] China Public Company Articles of Incorporation Guidelines (上市公司章程指引), (China Securities Regulatory Commission, Mar. 28, 2025) (in Mandarin)
[5] China State-owned Enterprise Articles of Incorporation Guidelines (中央企业公司章程指引), (China National Council State-owned Assets Regulatory Commission, Aug. 2, 2024) (in Mandarin)
[6] China Employment Contract Act (中华人民共和国劳动合同法), (China National Congress Standing Committee, Dec. 28, 2012) (in Mandarin)
[7] China Labor Union Act (中华人民共和国工会法), (China National Congress, May 12, 2014) (in Mandarin)
[8] Business Registration Administrative Regulations (公司登记管理实施办法), (China Ministry of Justice, Dec. 20, 2024) (in Mandarin)