Supply Chain Innovation

Impact of the Economic Crisis on China’s Labor Contract Law

Monday, March 9, 2009

China has been through 30 years of unbridled growth based on its low-cost labor market structure. During this period, the state’s priority was employment creation. The laws and regulations issued were intended to support the low value-added processing industries that were flourishing at the time, but they were poorly enforced and created an unstable labor supply.

By the end of the 1990’s, Chinese policy makers realized that their economic future did not lie in these low value-added industries and that jobs alone would not ensure the social stability they sought. The strategic objectives of industrial restructuring and social cohesion necessitated the development of longer term, more stable employment relationships – hence the need for labor contracts.

China’s Labor Contract Law (LCL) therefore had two objectives – the need to protect workers and to upgrade industry – and both contribute to the overriding objective in Chinese policy at present, namely to maintain social stability or harmonious society as it is officially described. The runaway growth that the Chinese economy has enjoyed has produced many cleavages between urban and rural, rich and poor, and employed and unemployed. The hundreds of millions of people affected could threaten social stability if not protected, so the Chinese state has opted for a social market economy model in which labor protections and a social safety net moderate the potentially negative consequences of a relatively unregulated market economy.

Labor market reforms inevitably engender conflict and to deal with this, the state enhanced the arbitration system rather than improve the industrial relations system. The Government had anticipated the upsurge in disputes arising from the introduction of the LCL and had specifically expanded access to arbitration services but they were nonetheless swamped. In Guangzhou for example, the number of cases lodged with the Arbitration Council from January to November 2008 doubled (to 60,000) while in Beijing they leapt 104% to total 33,000 in the first 9 months of the year. To put this in perspective, consider that in the period 1987-2005 the growth rate in labor disputes was 27% annually. Delays in cases up to one year have become common.

There are those commentators who argue that government opted for the legal protection of workers as an alternative to trade union protection and that if the government had not moved to protect workers through the LCL, vulnerable and abused workers would have chosen industrial action either through their unions or through wild-cat strike action. The policy-makers and party leaders realized that the employment relationship needed more sophisticated regulatory mechanisms if labor unrest was to be kept in check, but they preferred the option of providing individual legal protection to that of collective trade union protection of workers. They launched a major publicity and awareness-raising campaign six months prior to the LCL going into effect to educate workers about their rights under the new law and to encourage them to sue for enforcement against employers who did not respect those rights. Another law was passed that extended the time period in which workers could avail themselves of free arbitration in employment disputes to support this strategy.

Industrial relations in China in 2008 were driven mainly by two factors – the entry into force of the LCL and the impact of the international financial crisis. The former prompted many employers to avoid or blunt some of its effects, such as using temporary or interim workers or outsourcing the functions of certain categories of workers (such as catering, security and cleaning staff) to avoid signing longer term contracts and paying full social security benefits. In the first year of LCL implementation, the number of interim workers ballooned from seven million to 27 million. Other employers issued bogus contracts of one sort or another, or moved to cheaper provinces or countries. In many cases workers, newly aware of their rights, opposed the moves through demonstrations or wild-cat strikes. Lawyers, either activist or mercenary, encouraged workers to sue with the promise of major cash payments for back pay and benefits. The ACFTU, which acts in the national interest as a broker between workers and employers, was overwhelmed by the situation and workers generally turned to local government officials for help. Surprisingly, the official local position was usually to support the workers and to urge management to settle as quickly as possible in order to avoid negative publicity in the build-up to the Olympics. This lack of leadership by the ACFTU partly reflects their bureaucratic structure but may also be a conscious decision on the part of the government not to shift the ACFTU into a more conventional trade union role.

The second driver, namely the worsening economic conditions, included rising costs for labor, energy and materials and worsening market conditions, particularly as the financial crisis hit consumer markets in the US and Europe. Factory closures accelerated and workers were frequently not paid their full termination pay and benefits. Once again they demonstrated and turned, not to the ACFTU, but to local government which urged some settlement for the workers and even provided some financial compensation from the public coffers in some high-profile cases. For example, when Smart Union Group Limited closed two factories without any notice and abandoned workers without paying three months back wages, the township government promised to pay workers using township revenue.

Factories continued to close and clashes with the police grew, particularly as the Olympics receded and local governments were less worried about negative publicity. In response to the increasingly difficult position of export industries, local labor authorities began relaxing the obligations of the LCL and reducing the rates of Social Security coverage a company had to carry. These moves to reduce the burden on enterprises was largely aimed at saving jobs since the growth of unemployment was seen as a factor driving potential social instability. Even the Shanghai Minhang district federation of trade unions appealed to more than 200 companies not to lay off employees.

While the factory closures, strikes and demonstrations were grabbing headlines the day-to-day work of industrial relations was continuing. The ACFTU reported at its conference in October that it had signed 1.091 million collective contracts covering 1.834 million enterprises/work units and 140 million workers. The ACFTU also announced at the end of the year that 313 unions had been set up at the headquarters of multinationals in China (83 percent of the total) and at about 3,843 of their corporate entities across China, bringing-in around 2.13 million union members. Union membership had grown from 123 million to 209 million and migrant workers had become the “emerging force” of the union with 66 million new members in the past five years.

So what does 2009 hold? The ACFTU will continue its drive to sign-up multinational enterprises, but this will be a top-down strategy and will only involve organization of workers if a high-profile company resists the overtures of the ACFTU. At the same time, the tight economic conditions and industrial restructuring are likely to generate lots of work for human resource departments whose room for maneuver will be restricted by the expanding application of the Labor Contract Law and other laws, especially if the government stimulus package takes hold and growth rates improve. Dissatisfied workers still do not have enough channels for resolving grievances and are likely to resort to wildcat strike action to gain the attention of employers or local government (who will probably be less accommodating than in 2009). The hot-button issues will be written labor contracts, social security coverage, hourly minimum wages (particularly in areas where local governments have been ambitiously raising minima), overtime premiums and interim or “dispatched” workers. Local governments can be expected to ease enforcement of these provisions but when caught between the conflicting interests of employers and workers they will choose social harmony, i.e. the protection of workers.

Auret van Heerden


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