>Assessing the impact of the new China labor contract law (Part III)

>In a nutshell
The bottom line is that the China labor contract law will formalize protections for workers that were more or less intended ever since the 1995 Labor Law but which have never been implemented or enforced. Employers will now have to honor the minimum wage, overtime and holiday premiums, rest days and leave periods, and social security provisions that have been largely ignored to date. Unfair dismissals will be less likely and employers will have to pay severance in all cases. Will it improve wages and working conditions? Yes, but mainly in those companies that are able to raise their level of human resource management. What will the rest do? It is true that the law has been introduced very quickly and many will simply not have the time to ramp up their management systems. Some will move to Bangladesh, Vietnam or Cambodia. Some will hire labor lawyers to teach them all the loopholes, including the use of labor brokers and sub-contracting, both of which are tactics widely used in other countries with high social charges and inflexible labor contracts (such as Turkey, for example). Some employers will continue business as usual and hope that workers do not sue.

Cost impact
How will companies absorb the additional costs? It is likely that the low-margin, labor-intensive companies will move inland to cheaper parts of the country, or offshore. Most companies will think twice before adding workers and this is a major concern to the Chinese government for whom employment growth remains a major priority. The Chinese economy is expected to slow somewhat this year in line with the U.S. and EU and so the new law comes at a bad time for employment. Interestingly, both trade and labor officials expressed this concern to me and privately felt that the law went too far, given the state of the Chinese economy. This further demonstrates the extent to which the NPC drove this law, despite reservations by government and business.

For better or for worse?
It may turn out that a law which was designed to promote greater social harmony and cohesion, may (in the short term at least) generate unemployment and conflict over labor contracts. In the longer term, however, the law should lead to a more stable workforce and greater retention of workers. Employers will be able to invest in training and human resource development and move up the value chain, something the Chinese authorities have been urging them to do. This law may well prove to be the catalyst for a shift into more modern methods of management and a leap forward for the Chinese economy.

Auret van Heerden

>Assessing the new China labor contract law (Part II)

>Plugging loopholes
Given that the new labor contract law provides notice periods and accumulated severance rights to workers being dismissed, one of the fears that surfaced was that employers would fire workers just before the law came into effect on January 1, so that they could start them on zero years of service under the new system. There were indeed some high profile cases involving forced resignations of workers but they have generally been resolved in favor of the workers. Zhang Yin, one of the richest women in China, who made her fortune recycling scrap paper, tried to outsource some 2,000 gardening, cleaning and non-technical workers to an agent. The salaries would still have come from Nine Dragons but the contracts would have been issued by the agent. On December 14 workers went on strike in protest because of concerns that their accumulated rights and social security benefits would be threatened. The Dongguan Labour Bureaux mediated and workers signed contracts with Nine Dragons. Ms. Zhang said that the incident represented a misunderstanding and that the 2,000 workers in question had always been casual laborers. She said that the new law was premature as China did not have a sufficiently comprehensive social security system and that the law is too protective of workers. National Ministry of Labour officials have pointed out that forcing workers to resign in order to start them on new contracts would not be regarded as an interruption of workers’ years of service and they may move to close this loophole. Guangdong local labor officials have also clarified that it is still possible to fire workers, provided that employers respect the applicable notice periods and pay severance.

Protection for trade union leaders
The Jan 5-6 edition of the official China Daily featured a fascinating piece. The paper reported that the Shanghai Trade Union has issued a directive to affiliates to protect union chairpersons who are demoted, given a pay cut or transferred. That support could go as far as paying for litigation if the union leader decides to sue the employer in question. The article goes on to quote a labor lawyer who notes, “I have handled very few cases involving trade union cadres suing their employers. But that doesn’t mean everything is fine. Very few trade union officials dare to stand up for employees rights, therefore they are seldom punished”. The paper also quotes Fan Xiayan, chairwoman of the union at a foreign invested automotive components company, who notes, “trade union officials in China still have a long way to go before they have the authority to settle disputes between management and staff, as they do in western countries.”

Auret van Heerden

To be continued…

>Assessing the new China labor contract law (Part I)

>I recently spent a week traveling around China and spending time in factories and government offices talking to people about the much publicized labor contract law, which came into effect on January 1, 2008. Readers will recall that this law was two years in the making and was published for comment in 2006. Over 190,000 submissions were received from the public, including loud objections from prominent U.S. organizations. The law was finally adopted in mid-2007 amidst the public outcry that followed media reports of the use of child slaves in brick kilns. At the last minute, the National Peoples Congress (NPC) even added additional penalties for employers who violate the law.

Genesis of the law
The NPC moved to adopt the law when they became aware that only 20% of workers in the private sector had written contracts. This meant that workers were often not receiving the minimum wage and social security benefits, were working excessively long hours without being paid overtime premiums, and were being unfairly dismissed. There was also widespread abuse of probation periods, short term contracts and temporary workers supplied by labor brokers. The NPC concluded that written contracts were the best response, and the new law states that all workers should be issued a contract in writing specifying their terms and conditions of employment, including the job description, working hours, remuneration, and social security benefits. Failure to issue a contract or long delays in the process does not reduce workers’ rights to job security and benefits. Three types of contracts are envisaged – fixed term, non-fixed term and project based. One of the most controversial features of the law arises from the fact that workers who are issued three contracts in a row, or who have worked for ten years for the same employer, are entitled to non-fixed term contracts. In addition, if no contract has been issued to an employee within one year of starting work, the contract is deemed to be non-fixed term.

Is this the end of “hire and fire”?
No, but the law does set out the conditions under which contracts can be terminated. Employees and employers may terminate the employment contract by mutual agreement, but if either side decides unilaterally to terminate, they must give 30 days notice. If the employer decides to terminate, the circumstances under which they may do so are limited, basically to invalidity, incompetence or major changes in the objective circumstances. Large scale retrenchments are possible in cases of restructuring or serious financial difficulty, or if the enterprise changes its line of business. Workers whose contracts are terminated are entitled to severance pay. In all cases, consultation with the worker and/or worker representatives is required.

These two provisions, namely those providing for non-fixed-term contracts and for consultation with workers or their representatives, have alarmed many business people and associations who fear that their managerial prerogative will be curtailed. A careful reading of the law, however, shows that neither provision is as rigid as they are often portrayed, and they do not represent the kind of “iron rice bowl” that workers enjoyed in the state-owned sector in the past. Even non-fixed-term contracts can be terminated and “consultation” does not mean joint decision-making. The employer is obliged only to consult and not to reach agreement with workers, and it is still the employer who makes the final decision.

What about the cost?
Besides the threat of inflexibility in the hiring and firing of workers, the other major concern that has been raised relates to costs. Many employers and commentators are speculating that costs could rise between 40-70%. If one breaks that down, it does become clear that companies who obey the law are looking at significant cost increases. By giving workers contracts and registering them in social security funds, employers will be bound to pay at least the minimum wage, overtime and holiday premiums, and social security benefits (the latter alone can add 30%). In addition, companies will now bear new administrative costs in issuing contracts, registering workers, making social security contributions and handling disputes. This last point is a major concern in that the new law is generally expected to spark off a flood of disputes.

Yes, but will it be enforced?
Another concern that is frequently mentioned relates to enforcement. Many people have pointed out that laws in China are often not enforced and/or significantly modified by local authorities. That has indeed been the case, but this law is different. For starters, it is far more specific than previous laws (which were more like policy statements). Secondly, this law provides for contracts, and contracts can be enforced by the parties. In other words, the government is relying on workers themselves to enforce the contract and there has been a huge publicity campaign to inform workers of their rights. People close to the ground tell me that they have never seen this much discussion about a law and that workers are pumped-up at the prospect of being able to sue their employers for contract violations. This could lead to some serious frustration since the machinery and skill required to process claims is simply not available. Workers who contest a contract are expected to pass through a series of stages, beginning with conciliation, then the workplace mediation committee, before proceeding to the local labor bureaus’ arbitration services and finally on to the courts. Many of those structures are under-trained and under-resourced and they have never had to deal with these sorts of issues in the past since this type of contract is relatively new to China.

Auret van Heerden

To be continued…

Read Auret’s comments in a recent Bloomberg article regarding the new China labor contract law here.