China’s new labor contract law, adopted by the National People’s Congress in June 2007 and put into force in January 2008, is a landmark in the effort to achieve better labor standards in the country. It can easily be called the most enabling legal instrument for Chinese workers introduced since the start of the reforms three decades ago. Interestingly, its passage came at a time when China’s cost-advantage-driven manufacturing miracle was entering into a critical juncture.
Before examining the new law and its possible implications for firms and workers, it would be useful to recall the background of its origin. Toward the late 1990s there was an intensifying trend of worker strikes and protest demonstrations across China. The contentions between workers and enterprise managers were centered on issues such as arbitrary layoffs, low wages, payment arrears, employment insecurity, managerial high-handedness and denial of social security entitlements. The workers’ complaints reflected their growing anxieties about the shrinkage of livelihood rights in post-reform China. It is also widely known and well documented that Chinese workers, especially in the export-oriented manufacturing sectors in the coastal economic zones, are often subjected to a range of severe labor conditions including long working hours, low wages, pressure for overtime, shop floor violence and extremely poor living conditions in the work dormitories.
In the absence of any legal right to organize or collectively bargain, Chinese workers confronted serious challenges in securing a minimum living standard in the new market economy. The official All-China Federation of Trade Unions (ACFTU), the monopoly labor union in the country, has been assigned to promote the objectives of the reforms and therefore most often finds itself on the management side of worker-management conflicts. Local governments are more concerned with attracting investments into their region, often by promoting a labor-cost advantage, than with working to improve the lives of workers. Given these official propensities to favor investment capital, attending to worker complaints was not a high priority for local governments or their labor bureaus. Under these situations, growing worker discontent broke into open conflict with firms and local government, at times developing into low-intensity social unrest in many cities. This seems to have forced the Chinese government to acknowledge the seriousness of the problem and formulate effective institutional responses.
The New Labor Law
The new law is designed to remove some of the grievous anomalies in the existing labor contract system that evolved in the reform era. Prior to its enactment, most firms enjoyed nearly unbounded powers in determining the terms, tenure and time of termination of workers. The 1994 labor law did not have any specific provisions for making the terms of employment a binding contract. Therefore, to achieve cost advantages, most firms, both local and foreign, employed workers for shorter and more convenient periods just to complete their production requirements. This created an extremely flexible labor regime in which workers were repeatedly hired and fired, and in that process denied any claim over employment security and other benefits.
The new law has clear provisions to regulate labor contracts by making them binding on both firms and workers and explicitly setting forth rights, obligations and liabilities. The most important provision is that firms must conclude a written contract with workers; it lays down that only a written contract can establish a labor relationship. The law implies that the earlier practice of informal employment, in which workers were inducted into the production process without registering them and recording their work and remuneration cannot continue. Henceforth, employment requires a written contract that must contain details concerning remuneration, job description, working hours, and social insurance, among other things. This provision is a very significant step toward achieving minimum labor standards in China as it provides basic safeguards against labor violations arising from a lack of regulation.
At the same time, the government has recognized the varying labor requirements of companies and has provided scope for flexible employment. This has been achieved by delineating the limit and scope of specific labor needs as having separate categories of contract employment, with different claims and entitlements. The law has provided for three types of labor contracts: fixed-term contracts for limited tenure, non-fixed-term contracts for longer and unspecified periods, and a project-based contract for short-term employment.
This categorization of contract employment into three distinctive types recognizes the existing labor-market segmentation, which in turn will give ample institutional leverage for companies. Furthermore, it reflects a careful approach that avoids any strong legal claim for employment security and permits enterprises to determine the strength of their workforce based on competitive concerns. By insisting on a written contract, the new law attempts to provide protections against violations and abuses that were widespread under the earlier system. In that sense it is only a limited intervention.
As such, the new law does not encourage labor market rigidities as has been argued by some foreign firms and industry associations. The legislative intent is limited to removing some of the gross anomalies in the earlier system. For instance, Article 9 by implication forbids companies from collecting residential identification cards or other papers from laborers as collateral when hiring. This will free both migrant and local workers from involuntary attachment to companies that have in the past sometimes used their most important legal documents as bargaining chips.
For employees who have been working in a company for many years, the new law extends certain legal protections. Article 14a stipulates that a laborer who has been working in a company for a consecutive period of 10 years is entitled to a non-fixed-term contract. This type of labor contract ensures relative employment security as it does not stipulate a termination date. The same is also applicable to those workers who are less than 10 years away from the statutory retirement age.
It appears that there has been a general weakening of China’s public institutions in recent years. In the context of accelerating reforms and rapid economic growth this has been particularly the case with the country’s regulatory institutions. On the one hand, there has been a deliberate policy orientation to facilitate speedy investments and transactions. But on the other hand, effective regulation has become elusive in a range of areas. Many companies found they could easily circumvent or flout existing administrative (guidelines and even clear rules) with little interference from the local authorities. The provision for a written contract in the new law also faces the same challenge. In an apparent attempt to make this provision foolproof, the law stipulates that if a firm fails to sign a written contract within one year from the time of hiring, the unit will be deemed to have already signed a non-fixed-term contract with the laborer. The clarity of this clause and the prospect of penalty implied here may become effective deterrents to those firms who will still try informal employment.
Among the contentious issues that provoked labor protests in the past were layoffs and arbitrary reduction of the workforce. The new law has addressed this question by prescribing certain guidelines. The government seems to have taken into account circumstances that make it necessary for the firm to reduce existing work force and render a labor contract non-performable. Enterprises that are in difficulties such as bankruptcy-related restructuring or changes in production scales can lay off 20 persons or more under Article 41. Here it seems that the law is more sensitive to the competitive concerns of the firms as it quietly endorses management prerogatives by conceding the need for staff reduction owing to “adjustments of managerial operation style.” By defining the circumstances of workforce reduction in the broadest possible range which include, in addition to the above, “major changes in the objective economic circumstances,” the government has conceded a great deal of autonomy to the firms and investors. An enterprise can lay off a significant number of workers whenever it deems necessary by taking refuge in Article 41.
During the public debate on the draft law it was strongly argued by labor activists and the ACFTU that such staff reductions must require prior agreement by the company’s union. However, this demand did not make it to the final text, which contains a prescription that firms shall explain only the circumstances to their union and report the staff reduction plan to the labor administration department. This suggests that neither the trade union nor the local labor bureau has any meaningful say in firm-level staff reductions and layoffs. Here again we see that the Chinese government has given substantive leverage to management and investors in strategizing their workforce deployment.
A potentially important provision provided in the new law is recognition of the concept of collective bargaining. Chapter 5 incorporates a special provision for collective contracts between enterprises and employees reached after negotiations. Labor unions are assigned to execute collective contracts on behalf of the employees. The potential scope of this provision will be steeply curtailed by two prevailing factors. First, China does not recognize any independent labor union, and in recent years all the initiatives to form independent labor unions have been nipped in the bud. The All-China Federation, even though it is the only official union, does not enjoy any meaningful organizational autonomy and is strictly subordinated to the Communist Party’s overall policy framework. Therefore, a significant section of the Chinese workforce is much less sure that the Federation can genuinely represent worker interests. Second, labor unions are not allowed in the majority of the foreign firms. In recent years allegations of widespread labor abuse at firms with leading global brands and their contracting suppliers have come into sharp focus. There is a growing sensitivity toward this issue. Without independent labor unions, the idea of collective bargaining will have only notional relevance. To have any practical consequences, the government must recognize independent unions and allow them in foreign-owned firms.
An Indian Perspective
From an Indian perspective, three key points concerning the Indian case may well be useful for understanding the contrasting scenarios prevailing in the two countries. First, India’s labor laws are a collection of specific statutes enacted over half a century that concern separate areas such as industrial disputes, minimum wages, labor contracts, social security and so on. Since the legislative matters pertaining to labor involve power sharing between central and state governments, great variation exists in labor standards across states in India. These labor laws are applied mainly in what is called the formal or organized sector, the bulk of which is composed of state-owned enterprises and public institutions. However, they cover only a small fraction (around 7%) of the total labor force in the country. While employees in state-owned institutions and formal sector industries are covered under the protective regulations, and therefore enjoy relative employment security, better wages and other social security benefits, laborers in the unorganized sector do not receive any protection at all. Well over 90% of the estimated 406 million workers in India do not get even the statutory minimum wages provided by legislation let alone other benefits. Why India failed to secure minimum protection for its vast laboring masses – notwithstanding progressive legislation, trade unions and a democratic polity – is an extremely confounding question.
Secondly, for all practical purposes, it is extremely difficult for an ordinary worker in India to access the institutions of labor protection. One of the main reasons for this general exclusion of workers from the institutions of labor is the excessive legalism in the working of the labor laws. This is again complicated by time-consuming procedures involving a multitude of administrative and legal offices. An attempt to seek justice can push an Indian laborer into a labyrinth of administrative and legal procedures that cannot be settled in a short time. The reality is that the Indian justice system is just not affordable for poor litigants.
Thirdly, in marked contrast with China, India has not introduced a single new piece of legislation on labor since the country started economic reforms in 1991. Even though all earlier labor laws are in force, the reforms have introduced, and of late increased, flexible employment even in organized sectors. In order to accelerate reforms and attract more investment, the government has weakened the existing machinery of labor regulations such as the office of the labor inspectorate. In addition, post-reform India is witnessing a trend of competitive federalism where state governments are competing with each other for investment and opportunities for industrialization by projecting the existing low wage rate as a comparative advantage.
China’s new labor contract law, when viewed from the Indian experience, offers far greater scope in ensuring better labor standards. Although it serves to reinforce the imperatives of the new market economy by legalizing flexible labor regimes, it tries to extend minimum protective coverage to all workers, including the migrant laborers. This seems to be the real strength of this new law – that irrespective of the nature of employment every worker is entitled to a minimum wage and social security benefits. For India the inclusive nature of the Chinese law presents a vitally important lesson. As indicated above, the vast majority of India’s laborers are practically excluded from the purview of existing law. The main reason for this situation is the absence of a clear law that provides comprehensive coverage to all workers. The existing laws are too fragmented, focused on separate categories of workers such as permanent employees, contract workers, apprentices, and the like. A national law applicable to all enterprises (including state-owned enterprises, private businesses, and foreign firms as is the case with China’s new law) would be more effective as a legal instrument. China’s new law would be the latest instance of the country’s transition to a unified national legal framework that will progressively replace the earlier administrative regulations and laws concerning labor.
Some provisions in the new law are designed to remove the sources of the unfair labor practices by firms rather than targeting them when they occur, as in the case of the Indian labor laws. For instance, Article 19 stipulates periods of probation according to the length of a contract. It also prescribes that an enterprise may stipulate only one probation for any given worker. This can preempt the creation of dual labor markets within firms as practiced by some large companies in India. For example, the Hyundai Motor plant in Chennai and some leading automobile components suppliers in the region have a disproportionately large segment of short-term workers. They are employed as probation workers, apprentices, contract workers and so on for many years at drastically reduced wages.
For India, however, adopting a similar law, which in effect would legalize casual and flexible employment, would not be a useful alternative. China’s reforms have come a long way and have produced better outcomes both in terms of poverty reduction as well as employment creation and increasing income. India has a long way to go in achieving similar social and economic transformations. Therefore, labor reforms in India cannot begin with the same market economy imperative that guides the Chinese labor law.