Supply Chain Innovation

Assessing the new China labor contract law (Part I)

Friday, January 11, 2008

I recently spent a week traveling around China and spending time in factories and government offices talking to people about the much publicized labor contract law, which came into effect on January 1, 2008. Readers will recall that this law was two years in the making and was published for comment in 2006. Over 190,000 submissions were received from the public, including loud objections from prominent U.S. organizations. The law was finally adopted in mid-2007 amidst the public outcry that followed media reports of the use of child slaves in brick kilns. At the last minute, the National Peoples Congress (NPC) even added additional penalties for employers who violate the law.

Genesis of the law
The NPC moved to adopt the law when they became aware that only 20% of workers in the private sector had written contracts. This meant that workers were often not receiving the minimum wage and social security benefits, were working excessively long hours without being paid overtime premiums, and were being unfairly dismissed. There was also widespread abuse of probation periods, short term contracts and temporary workers supplied by labor brokers. The NPC concluded that written contracts were the best response, and the new law states that all workers should be issued a contract in writing specifying their terms and conditions of employment, including the job description, working hours, remuneration, and social security benefits. Failure to issue a contract or long delays in the process does not reduce workers’ rights to job security and benefits. Three types of contracts are envisaged – fixed term, non-fixed term and project based. One of the most controversial features of the law arises from the fact that workers who are issued three contracts in a row, or who have worked for ten years for the same employer, are entitled to non-fixed term contracts. In addition, if no contract has been issued to an employee within one year of starting work, the contract is deemed to be non-fixed term.

Is this the end of “hire and fire”?
No, but the law does set out the conditions under which contracts can be terminated. Employees and employers may terminate the employment contract by mutual agreement, but if either side decides unilaterally to terminate, they must give 30 days notice. If the employer decides to terminate, the circumstances under which they may do so are limited, basically to invalidity, incompetence or major changes in the objective circumstances. Large scale retrenchments are possible in cases of restructuring or serious financial difficulty, or if the enterprise changes its line of business. Workers whose contracts are terminated are entitled to severance pay. In all cases, consultation with the worker and/or worker representatives is required.

These two provisions, namely those providing for non-fixed-term contracts and for consultation with workers or their representatives, have alarmed many business people and associations who fear that their managerial prerogative will be curtailed. A careful reading of the law, however, shows that neither provision is as rigid as they are often portrayed, and they do not represent the kind of “iron rice bowl” that workers enjoyed in the state-owned sector in the past. Even non-fixed-term contracts can be terminated and “consultation” does not mean joint decision-making. The employer is obliged only to consult and not to reach agreement with workers, and it is still the employer who makes the final decision.

What about the cost?
Besides the threat of inflexibility in the hiring and firing of workers, the other major concern that has been raised relates to costs. Many employers and commentators are speculating that costs could rise between 40-70%. If one breaks that down, it does become clear that companies who obey the law are looking at significant cost increases. By giving workers contracts and registering them in social security funds, employers will be bound to pay at least the minimum wage, overtime and holiday premiums, and social security benefits (the latter alone can add 30%). In addition, companies will now bear new administrative costs in issuing contracts, registering workers, making social security contributions and handling disputes. This last point is a major concern in that the new law is generally expected to spark off a flood of disputes.

Yes, but will it be enforced?
Another concern that is frequently mentioned relates to enforcement. Many people have pointed out that laws in China are often not enforced and/or significantly modified by local authorities. That has indeed been the case, but this law is different. For starters, it is far more specific than previous laws (which were more like policy statements). Secondly, this law provides for contracts, and contracts can be enforced by the parties. In other words, the government is relying on workers themselves to enforce the contract and there has been a huge publicity campaign to inform workers of their rights. People close to the ground tell me that they have never seen this much discussion about a law and that workers are pumped-up at the prospect of being able to sue their employers for contract violations. This could lead to some serious frustration since the machinery and skill required to process claims is simply not available. Workers who contest a contract are expected to pass through a series of stages, beginning with conciliation, then the workplace mediation committee, before proceeding to the local labor bureaus’ arbitration services and finally on to the courts. Many of those structures are under-trained and under-resourced and they have never had to deal with these sorts of issues in the past since this type of contract is relatively new to China.

Auret van Heerden

To be continued…

Read Auret’s comments in a recent Bloomberg article regarding the new China labor contract law here.


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