Once Feared, China Labor Law Eases Its Bite

The Chinese Labor Contract Law went into effect on Jan. 1, 2008, amid suspicions that it might be used to force Western companies into compliance with the whim of whatever Chinese regulator happened to use it.

Then China’s economy began to unravel along with the rest of the world’s. Today, the law might as well have never been written.

“January to June [of 2008], we won 90 percent of our cases,” says Li Qiang, executive director of China Labor Watch, a New York-based activist group that helps Chinese employees sue their employers. “But from July, the tide seemed to have turned. We saw the government doing less to encourage enforcement.”

The Labor Contract Law requires that all employees have a contract, that companies pay punitive wages if they don’t offer one, that overtime and severance be paid, and that management consult labor whenever drafting any policies relevant to the workers. On paper at least, it was as aggressive as any European-style worker protection, and set off alarm bells at many manufacturing businesses.

Original estimates were that the new law could drive up personnel-related costs as much as 50 percent; companies saw themselves facing direct costs related to social security and overtime payments, and a huge compliance burden as workers began to exercise their new rights.

But by the middle of last year, however, the government started to send signals that much of the new law could safely be ignored.

“Once the Olympic games were over, the incentive disappeared,” says Auret van Heerden, CEO and president of the Fair Labor Association, a group committed to improving working conditions globally. “And the economic problems started to bite.”

The exact mechanism is far from transparent. China’s official press suggests that companies will not be prosecuted if they don’t follow some provisions of the Labor Contract Law. Local officials, always crucial players in any business dealings in China, are negotiating away some of the more onerous provisions of the law. In some cases, for example, they say that if a reasonable number of social security payments are made, they will not make an issue of employees not covered. The national trade union is becoming less activist and more willing to cooperate with management.

Watering Down the Law

Wei

As usual, no official pronouncements from any Chinese regulators or courts have been made. But, says Shi Wei, a senior associate in the Shanghai office of the law firm Clifford Chance, “we have learned that some local labor authorities or courts are providing internal guidance to the lower-level labor authorities or courts dealing with labor disputes. This internal guidance suggests that, where provisions in the Labor Contract Law are unclear or controversial, the authorities may interpret or enforce them in a way that also takes account of companies’ interests.”

“You can get away with just about anything as long as you don’t lay people off.”

— Andreas Lauffs,

Partner,

Baker & McKenzie

They must juggle several competing interests with the law. International criticism of its labor practices is always a threat, as it damages the country’s reputation and increases the likelihood that the world community will be less accepting of its goods; that pulls the government in the direction of enforcing the law. At the same time, however, Beijing is also fearful of rising wages that might lead companies to locate elsewhere, and the new threat of global recession leaving tens of millions of Chinese unemployed and restless.

“The Communist Party is worried about maintaining social harmony,” says Andreas Lauffs, a partner at the law firm Baker & McKenzie in Hong Kong. Reports indicate “that authorities will keep both eyes shut and not enforce the law, as long as this contributes to social harmony.”

At the same time, some provisions of the law are being interpreted strictly and implemented with enthusiasm. Under the law, companies are supposed to inform local officials when they plan mass layoffs—precisely the sort of social disruption the government wants to minimize. Now local officials are requiring companies to get permission to shed workers, and an unspoken agreement is emerging: Maintain employment, and you can safely evade compliance with the rest of the law’s provisions.

CONTRACTUAL AGREEMENT

Below is an excerpt of the China Labor Contract Law that details the protections employers must extend to workers.

An Employer and a worker may conclude an open-ended employment contract upon reaching a negotiated consensus. If a worker proposes or agrees to renew his employment contract or to conclude an employment contract in any of the following circumstances, an open-ended employment contract shall be concluded, unless the worker requests the conclusion of a fixed-term employment contract:

(1) the worker has been working for the Employer for a consecutive period of not less than 10 years;

(2) when his Employer introduces the employment contract system or the state owned enterprise that employs him re-concludes its employment contracts as a result of restructuring, the worker has been working for the Employer for a consecutive period of not less than 10 years and is less than 10years away from his legal retirement age; or

(3) prior to the renewal, a fixed-term employment contract was concluded on two consecutive occasions and the worker is not characterized by any of the circumstances set forth in Article 39 and items (1) and (2) of Article 40 hereof.

If an Employer fails to conclude a written employment contract with a worker within one year from the date on which it starts using the worker, the Employer and the worker shall be deemed to have concluded an open-ended employment contract.

Article 15. An “employment contract with a term to expire upon completion of a certain job” is an employment contract in which the Employer and the worker have agreed that the completion of a certain job is the term of the contract.

An Employer and a worker may, upon reaching a negotiated consensus, conclude an employment Contract with a term to expire upon completion of a certain job.

Article 16. An employment contract shall become effective when the Employer and the worker have reached a negotiated consensus thereon and each of them has signed or sealed the text of such contract.

The Employer and the worker shall each hold one copy of the employment contract.

Article 17. An employment contract shall specify the following matters:

(1) the name, domicile and legal representative or main person in charge of the Employer;

(2) the name, domicile and number of the resident ID card or other valid identity document of the worker;

(3) the term of the employment contract;

(4) the job description and the place of work;

(5) working hours, rest and leave;

(6) labor compensation;

(7) social insurance;

(8) labor protection, working conditions and protection against occupational hazards; and

(9) other matters which laws and statutes require to be included in employment contracts.

In addition to the requisite terms mentioned above, an Employer and a worker may agree to stipulate other matters in the employment contract, such as probation period, training, confidentiality, supplementary insurance and benefits, etc.

Source

The Chinese Labor Contract Law (June 29, 2007).

Lauffs

“Even though the labor law makes it relatively easy to layoff workers, the local labor bureaus apply additional burdens,” Lauffs says. “You can get away with just about anything as long as you don’t lay people off.”

Pragmatic Approach

People advising global corporations doing business in China say that companies should take advantage of the new attitude out of Beijing when possible. Companies should still be good corporate citizens and work to improve conditions at their Chinese manufacturing operations, yes, but companies also need to consider the reality of the times and adjust their thinking accordingly.

Anything else, advisers caution, could be disastrous for the company and for the workers.

“I have done the math,” says Ian Spaulding, managing director of Infact Global Partners, a China-based corporate social responsibility consultancy. “Full legal compliance usually means that the factory is no longer in business.”

Spaulding recommends a phased approach, raising the compliance goals in measured, practical increments. Work with your suppliers or local management, try to get them to agree to make improvements, and regard the glass as half full when something—anything, really—gets done. Otherwise, a company will get itself priced out of working in China or global compliance officers will be lied to by local executives on the ground.

“If you ask for overnight compliance, you get lip service and falsification of documents,” he says.

Even those committed to ending sweatshop labor acknowledge that the Labor Contract Law cannot generally be applied as written. They say that companies have to follow Beijing’s lead and view the statute as more of a goal than an absolute line to cross. If China is to remain stable and if workers are to remain employed, they argue, compromise is needed.

“I think they should strike deals,” van Heerden says. “We have to recognize that the economy fluctuates. The companies, the workers, and the government need to get together and reach agreements on how to the survive this crisis.”