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China’s New Labor Law: A View from Foreign Business

Post Series: 2008: Volume 7, Number 3
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China’s New Labor Law: A View from Foreign BusinessJanuary 2008 was my ninth year working in China, and it also marked the implementation of China’s new labor law. This law has had an immediate impact on foreign companies in China, and will influence business decisions for a long time to come. Based on my experience of starting and managing companies here, I will analyze some of the real time issues that it raises.

The new labor law was enacted in response to increasing public concern that employers were mistreating employees. Low wages, non-existent benefits, lack of contracts and poor working conditions are among the issues that workers have been dealing with. This law fits into the central government’s current “balanced development strategy” to build a “harmonious society” that tries to tip the scales toward hard-working people and to lessen reasons for unrest.

While improving workers’ rights is a positive and needed step, some have characterized the effect of this new law as a return to the “iron rice bowl,” where state-owned companies were responsible for all aspects of employees for their entire lifes. Only now, it is all companies that would have these responsibilities, and would bear the associated costs.

The new law has several important components with perhaps one of the most important being all employees must have a contract within one month of being hired. This has created severe problems for exporting companies that rely on seasonal orders and therefore have used temporary employees. They kept their costs low because they did not have to provide social benefits such as health insurance and retirement contributions. Many companies—both Chinese and foreign—are relocating to other Asian countries where the labor laws are less strict. Under the new law employees can only be fired for cause, and not for downsizing or other business reasons. Once an employee has a contract they have many options open to them to air a grievance, such as contacting the labor department, labor tribunals, or through grievance mechanisms.

As with most laws in China, the labor statute was promulgated without sufficient guidelines for implementation. Therefore, implementation and enforcement are left to local labor bureaus where interpretation varies from province to province, city to city, and desk to desk within the local labor bureau. However, to help ensure that the law is enforced, the central government has new guidelines for punishment of officials who do not properly enforce the law. The effect has been immediate. There have already been strikes triggered by employers trying to lay off or outsource workers. Also, foreign companies are usually held to a much higher compliance with the law than their domestic counterparts.

Even powerful people have been unable to push through changes in the law. Zhang Yin, one of the richest women in China, attempted to get the government to amend the law to exempt companies from having to sign permanent contracts with employees with 10 years service. China’s Deputy Minister of Labor and Social Services, Sun Baoshu, in a statement released by the China News Agency on March 9th said, “Whether to amend the new contract law or not is not a question. The question right now is how to enforce this new law effectively.” If one of the most powerful and wealthy women in China with access to its national political advisory body – the Chinese People’s Political Consultative Conference – was unable to get the new law amended, this sends a strong message that the law is intended to be enforce, at least for the near term.

Another problem with the law is how it relates to other statutes. For example, an employee of a foreign owned company based in Shanghai accidently hurt his back during his time off. The company continued to pay his salary for fifteen months, but finally reached an agreement with the employee that his employment contract was terminated since he was unable to work. The employer and employee signed a termination contract saying that the employee had been sufficiently compensated and it was approved by the Labor Bureau. However, the employee then went to the court system in his home town of Wuxi and filed a lawsuit against the company for a half million RMB ($56,561). The local court accepted the lawsuit, and the outcome is pending.

Shanghai, Beijing, and a hand full of other cities are more advanced in transparent interpretation of laws. However, second and third-tier cities still present major problems for foreign companies. The American Chamber of Commerce in Shanghai’s AmCham Shanghai 2007 China Business Report, page 20, lists the top five business challenges in second and third-tier cities as: bureaucracy, inconsistent regulatory interpretation, lack of transparency, management-level human resources constraints, and unclear regulations. Second and third-tier cities are now offering more incentives and government support to attract foreign firms than the first-tier cities that have significant industrial development. As a result, more and more foreign companies have begun doing business in these cities and will confront the problem of uneven interpretations of laws and regulations.

There are two avenues to counteract the problem of inconsistent interpretation of laws. First and most obvious is to have local lawyers prepare all labor contracts and make them long and very detailed because they understand what language will meet the needs of the labor bureau, which will help keep the employer out of difficulty. The second and perhaps the most effective method to avoid the potential of long and uncertain legal battles is to build strong relationships with local officials. Large companies such as GM seldom have these issues for two reasons. First, they set a good corporate example by obeying the laws, and second, they have built strong relationships with top officials such as the mayor of Shanghai and district governor of Pudong.

Attraction, retention, and motivation of high quality employees have been major problems for several years and continue to grow larger as work experience is gained and demand increases. Foreign companies are constantly raiding other companies’ “top talent.” This issue is addressed in Article 22 of the new Labor Law. The article basically makes workers who breach employment contracts liable to pay compensation to employers who offer funds for training beyond that required by state regulations. However, if an employee leaves the firm after being trained, getting the agreement enforced and compensation paid is nearly impossible.

The new law is also explicit on penalties for not having a new labor contract with employees in place effective January 2008. Fines can be up to three times the employee’s salary times the number of years of employment.

Employee representation on boards of directors is another of the many requirements of the Labor Law. Companies must select an employee to represent the employees on their boards. This person is non-voting and the purpose is to report to the employees and the government on the actions of the board.

The following is an example of how local governments enforce laws. We were setting up a new company in an east coast province. When registering the company the local government told us we had to add one person to our listed board members as the union representative of the employees. Because we were in the initial start-up process we did not have employees to meet this requirement and informed the government. They said. “No problem!” (This is a common phrase one will encounter when doing business in China.) “Just put (one of our partners) on the board and designate her as the employee representative.” They said that she qualified because she was Chinese and an employee. We were happy with this outcome because we did not have to appoint an employee with no business experience, and apparently the government was satisfied as well.

The foregoing example demonstrates the importance of extra care in setting up a business now that the new Labor Law is in force. Understanding how to operate a business in China is key. Being extra careful in the set-up phase of a business in China is well worth the time and effort. The new Labor Law does need not be a deterrent.

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