Issue: 2008: Vol. 7, No. 3, Perspectives on China's New Labor Law

The Evolution of Labor Contract Law and Comments on Two Papers

Article Author(s)

Dr. Kuang Tang

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Dr. Kuang Tang, Associate Professor, Renmin University, Beijing. Dr. Tang can be reached at [email protected]
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The Evolution of Labor Contract Law and Comments on Two PapersLabor Contract Law of People’s Republic of China

In 2003, research on drafting a Labor Contract Law began. In February 2005, it was announced that the Peoples Republic of China’s Labor Contract Law would be included in future legislation plans. In October 2005, the State Council, in principle, passed a draft Labor Contract Law. In December 2005, the draft was submitted to the Standing Law Committee of the National People’s Congress for review. In January 2006, the committee had the first review and discussion of the draft proposal. On March 20, 2006, the draft Labor Contract Law proposal was made public for the purpose of collecting opinions and comments. More than 190,000 proposals were received. There were many conflicts. Because of these proposals, the committee did extensive surveys all over China. The draft law was subsequently revised four times. Finally, the PRC Labor Contract Law was adopted at the 28th Session of the Standing Committee of the 10th National People´s Congress on June 29, 2007. The law became effective from January 1, 2008 and the implementing regulations of Labor Contract Law became effective from September 18, 2008.

This law has had an immediate impact on foreign and domestic companies in China and will influence business decisions for a long time to come. Many scholars in China have studied the law and evaluated its influence. Scholars have compared the draft version with the final version, from which they saw a shift from “double protection for the employer and employee” to “single protection only for the employee.” At the time when the Labor Contract Law was put into effect, the business community voiced their concern that the law would drastically raise the cost of doing business in China.

In December 2007, before the new law became effective, the HuaWie Company found a loophole. They canceled all current contracts with employees and asked them to sign new contracts. In effect, this would skirt the new Labor Contract Law provision giving long term employees permanent employee status. The company complained that the new law returned China to a socialist planning economy. This marked the beginning of a wave of dodging the new law. At the same time, the economist Zhang Wuchang argued: “The new law threatens to destroy the booming economy since the reform.” He said that the result of the new law would be a decline in the demand for employment, and a tremendous rise in unemployment. Prof. Wang Yijiang proposed that medium and small enterprises should be exempted from the Labor Contract Law. Many law scholars, such as Shanghai Professor Dong Baohua, claim that the new law will raise overall labor standards, and that its strict restrictions on dismissing employees will prevent businesses from integrating and optimizing human resources. He also predicted that the law would be ignored to the extent that it would be of no practical use. He claimed that this law was just for show and could not be enforced because local governments want to protect their business.

However, on the other side, the legislative agency of the new law and other scholars supporting the “single protection only for employee” system insisted that as the law came into effect, China’s labor market would see a long-term labor relationship that would be stable and harmonious and that the demands of employers would not be badly affected by the new law. China’s Deputy Minister of Human Resources and Social Services, Sun Baoshu, in a statement released by the China News Agency on March 9, 2008 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.”

Today, we are still at the stage of learning and publicizing the new law. Systematic theoretical and practical research needs to be done on changes in labor demand and other business reactions to the new law.

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

Mr. Ira Phillips has been working in China for nine years. Based on his experience of starting and managing companies there, Mr. Phillips successfully analyzed some of the real time issues that the new Labor Contract Law raises.

I agree with his opinion that China is too big to use only one inflexible means to do business in first- second- and third-tier cities. As a result, more and more foreign companies will have to confront the problem of uneven interpretations of laws and regulations. I think foreign companies would do well to follow his advice to employ local lawyers and to build a strong relationship with local officials, all of which are very important for their businesses.

In his article, Mr. Phillips mentions some businesses have characterized the effect of this new law as a return to the “iron rice bowl”, or a socialist system, where state-owned companies were responsible for all aspects of employees for their entire life. Here, I think, we could have a deep discussion on the meaning of the “iron rice bowl.” In fact, the market-oriented reforms of China’s economy have come a long way and have produced better outcomes in recent years. It is impossible for Chinese people to go back to the “iron rice bowl” years, which had been proved ineffective.

Regarding Mr. Phillips’s example of Zhang Yin, I would like to add some information that wasn’t included. During the period when the draft Labor Contract Law was made public for the purpose of collecting opinions, most employers in China were not aware of the new laws. They seldom paid much attention to these issues because they were able to successfully ignore previous laws due to poor implementation. Only when the new law took effect did businesses begin to recognize the importance of the Labor Contract Law and start to take actions against it. This shows there is a long way to go to build up the labor market law systems of China. Public awareness as well as enforcement of the new law needs to be improved.

Comments on China’s New Labor Contract Law: An Indian Perspective

Professor Suresh accurately grasps the spirit of China’s Labor Contract Law and makes a reasonable case that the law is a landmark piece of legislation towards achieving better labor standards in China. Based on his comparison between China and India, Professor Suresh proposes that India should not adopt a similar law because such a law would, in effect, legalize casual and flexible employment practices. This would not be a useful alternative for India’s otherwise ineffective labor laws.

About the enactment of China’s new labor law, most scholars like Professor Suresh understand the Chinese reality and think the enactment of the present Labor Contract Law cannot miss the fact that it was formulated under intense societal pressure. However, here I would like to emphasize the fact that the enactment will help all Chinese workers to benefit from the reforms and share the outcomes of 30 years of reform policies. At the same time, the enactment can also guarantee that salaries will be raised and work conditions improved with the productivity of labor increasing quickly because of large investments of human capital over the past thirty years.

About the contract itself, I agree with Professor Suresh who thinks any employment requires a written contract that must contain details concerning remuneration, job description, working hours, and social insurance among other issues. However, facing the serious realities currently in China, only 20 percent of private companies sign contracts with their employees. I think the first thing is to help a majority of workers get a written contract. Then we can discuss the next step of the contents of the contract.

Concerning collective bargaining and trade unions, most scholars have the same opinion that a potentially important provision provided in the new law is the recognition of the concept of collective bargaining. The labor union has been assigned to execute the collective contract on behalf of the employees. However, Professor Suresh recognizes that there are two prevailing factors that will make collective bargaining different from that in developed countries. I think Professor Suresh is right. If we consider that China has its own political system, it is obvious that China will build up a Chinese style collective bargaining system. Finally, I would like to point out a misunderstanding in his article concerning the Beijing Workers Autonomous Union (BWAU). Professor Suresh stated BWAU is representing the workers. However, BWAU is actually not a real union as we often think of since it is forbidden by China and as a result can’t represent the workers.