>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


3 Comments on “>Assessing the impact of the new China labor contract law (Part III)”

  1. vivienne says:

    >Hi Auret,I just returned from China (Jan 25) and went to factories in Guangdong and Qindgao. Each of the 6 factories knew the details of the contract labor law which was encouraging. The question is, how will the changes be governed and the factories held accountable? It’s an insurmountable task to oversee correct implementation. Managers were saying that they will have to pay all categories of social insurance by the end of 2008 and that the country will be able to manage the recording of benefits for migrant laborers. What have you heard about this?thanks!Vivienne

  2. >Hi Vivienne,The Government hopes that this will be self-regulating, in other words that workers and managers will defend their rights and interests as set down in the employment contract. If they get into a disagreement, either party can access the dispute resolution mechanisms. Labor inspectors or other government agents poring over records to ensure that appropriate payments have been made is the least likely form of oversight. The problem with this scenario is that the dispute resolution mechanisms are not well established, trained or experienced and are likely to bog down, potentially generating even further conflict. That is why I think that multinational buyers have a key role to play in ensuring that their suppliers are geared up to implement the law, and that they stick to it. This will take needs analysis to see where their gaps lie, capacity building, monitoring, and impact assessment. This can best be done in a coordinated way through the FLA, so we will be drafting modules and organizing training programmes to that effect. Thanks,Auret

  3. M.K.H.J says:

    >I have just terminated a China Sales Manager due to 2 reasons:-A. Sales Performance for the year is bad. Poor execution of project resulted in technical and commercial implication to the company.B. Involved himself in signing a contract with supplier and end-user in projects without company’s knowledge, hence, putting company’s interest at risk and liabilitiesIn such as, I understood that company has right to overturn the labour contract based on faulty dissolution. At the point of dismissal, we denied paying severence fee and bonus to him. The company concerns is, having not pay him severence fee and bonus (due to poor result), is such act justifiable under new China Labour Law?Hope to get your comment soon

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