The New Labour Contract Law in China - Essay Example

 The New Labour Contract Law in China The global economy is today at a state where everybody is scurrying for cover as the Western economies are seeing what is called the ‘flight to quality’. Money is being taken off the global economic slowdown has been driven by not a volatile economy but the market and put into safe investments like government bonds. First time after 1929, the world’s economic driver for the whole of last century, United States of America. But what is most interesting is the attitude of the market in this slowdown where for the first time the market is looking east to recover and to pick up on strong growth cues. For the first time modern man has witnessed almost a perpetual boom in Oil prices due to the extreme hunger of the two emerging giants of world economy who are both terribly energy deficient—India and China. As India has surged on as the global services hub, it is China which has been the great leader in the industrial shift with most MNCs moving their manufacturing units to that country to cash in on its amazing infrastructure and extremely low skilled labor costs. Since, cheap labor has been one of the driving economic factors behind the shift in the global economic power map, labor laws in these countries have come under sharp attention. While India continues to draw flak from investors for poor and archaic labor laws, China recently added to the debate by tightening its employment contract laws even further. This new law that has come into force from 1st January of this year is the focus of this paper. The author will look at and discuss the prevailing circumstances leading to its creation, along with its possible implications both legally and economically. Why this law? The Asian giants have in the recent times faced a lot of controversy either for low enforcement standards or for archaic labor laws. In the wake of the Slave Scandal in China, the Chinese parliament came in with new labor law regulations to tighten the laws in favour of the workers. The famous economic journal, The Economist best described the situation in the following words. “LABOR conditions in China can be notoriously lousy. Reports abound of sweatshops, workers' protests and this year even of officials condoning the luring of children into slavery. A new law on employment contracts, coming into effect on January 1st, will in theory improve workers' lots, but is creating more headaches.”1 Slavery Scandal One of the main aims of the new law is to counter the widespread complaints in China that the country has been over-zealous in its embrace of capitalism. These complaints became particularly shrill in June, after reports emerged that local officials in the northern province of Shanxi had allowed rural brick kilns to lure hundreds of people, including children, to work in slave-like conditions. The new law had been publicly debated long before the scandal surfaced. But its critics say the government rushed to push it through the rubber-stamp legislature in June in order to assuage public anger over the kilns.2 The slavery scandal had created furore in the international community and was a great slap on the face of the Chinese Government. The following words from the Jamestown Foundation China Brief best describes the mood of the international comity of nations. “The slave labor scandal in Shanxi Province has exposed not only the near-barbarity of the “early stage of capitalism with Chinese characteristics” but also the deep-seated administrative malaise in the Chinese system. Since early this month, the nation has been stunned by reports revealing that more than 1,000 “slaves,” including children and mentally retarded men, were working for long hours with no pay in primitive brick-making kilns in hilly and remote counties in the underdeveloped province. Investigations ordered by the Chinese Communist Party (CCP) leadership have discovered that massive kidnapping and smuggling of children and youth—and their subsequent enslavement in shoddy kilns, mines and other makeshift workshops—has taken place in Shanxi during the past few years. While some 359 victims have so far been rescued, the shocking incident is a slap in the face of the “putting people first” and “harmonious society” credos of Chinese President Hu Jintao and Premier Wen Jiabao.”3 More importantly, the scandal revealed serious lapses in the administrative ability of both Beijing and the provinces. In spite of the fact that President Hu had launched a full-year, Maoist-style ideological campaign in 2004 to “raise the governance capability of party cadres and members,” poor governance and corruption has persisted throughout all levels of the Chinese government. Aside from the slave labor scandal, for instance, the Shanxi provincial government has also been responsible, in numerous cases, of the gross mistreatment of urban workers and peasants. Thousands of mostly migrant laborers from the outer provinces have died or sustained heavy injuries in coal mines that lack rudimentary safety measures. Additionally, little has been done regarding the upsurge in cancer incidence rates in towns and villages: three among the country’s ten most polluted cities are located in Shanxi. Provincial authorities have also turned a blind eye to collusion among local cadres, triad bosses as well as private entrepreneurs, who are responsible for the practice of human trafficking and slave labor. Alarmed by the negative national and global impact of the slave story, Hu and Wen, together with three other Politburo members, gave stern instructions in mid-June on exterminating the practice immediately. It is symptomatic of bureaucratic overlapping and the lack of clear-cut division of labor among central units that “special work teams” were dispatched to Shanxi simultaneously from four different departments—the Ministry of Public Security; the State Prosecutor’s Office; the Ministry of Labor and Social Welfare; and the CCP-affiliated All-China Federation of Trade Unions. It is also a testament to the indifferent attitudes of regional bureaucrats that Shanxi officials started taking action only upon receiving Hu and Wen’s instructions. Shanxi Party Secretary Zhang Baoshun said his province would “seriously implement the important decrees of the central leaders.” On June 18, the first of the kiln bosses were arrested. A few days later, Shanxi Governor Yu Youjun accepted responsibility for the law-and-order breakdown in his province and tendered an apology to Shanxi residents, the central leadership as well as the victims and their parents.4 All these negative exposure meant that the legislators of China had their hands pushed and required to do something drastic in order to salvage some degree of acceptability both internationally and even domestically. As has already been stated this law was in discussion for sometime and only its legislation and passing and coming into effect were expedited by the shanxi controversy. We will now take a look at the English language version of this stated law. Labor Contract Law of the People’s Republic of China The law in question is statutorily named as Labor Contract Law of the People’s Republic of China. This law was adopted at the 28th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on June 29, 2007, is hereby promulgated and shall come into force as of January 1, 2008. According to its object and purpose stated in Article 1 this law is ostensibly for the purposes of improving the labor contractual system, clarifying the rights and obligations of both parties of labor contracts, protecting the legitimate rights and interests of employees, and establishing and developing a harmonious and stable employment relationship5 The ambit of applicability of the law has been greatly widened by making it applicable to all issues of Labor contract even with non-enterprise entities as defined in Article 2.6 The law stipulates that the all managements (that is employers) will have to decide terms and rules of important issues in labor contract through discussion with the employees and the Unions.7 This is an unabashed attempt by the government to bring back the state controlled communist Trade union back in control even in private sector. The political implication of this will be discussed later in the paper. Article 4 further makes it imperative that a sound system of employment rules is in place in an establishment so as to ensure that its employees enjoy the labor rights and perform the employment obligations. Through Articles 5 and 6 the legislature has aimed to strengthen the Unions further by making them a party to all these negotiations and part of a three party mechanism where the local government, the union and employer are involved. It also clearly grants through Article 6 the extreme power of collective bargaining to the trade unions. Article 6 states: The labor union shall assist and direct the employees when they conclude with the employers and fulfill labor contracts and establish a collective negotiation mechanism with the employers so as to maintain the lawful rights and interests of the employees. This is a huge step and takes back Chinese labor law to its Maoist days. This principle of collective bargaining envisages that Trade unions or employee representatives to negotiate with an employer on the collective bargaining contract applicable in the same company, industry or region. For a collective bargaining contract applicable in the same company, the contract shall be reviewed and approved by a congress of employees or a congress of employee representatives, and the contract will take effect, if there is no objection from the local labor authority, within 15 days of the submission. Chapter II is on formation of the labor contract and contains basic requirements of contract like full information, written contract etc. On labor contract the law states that a written contract shall be formed in the establishment of an employment relationship. In situations where an employment relationship already has been established with no written contract, a written contract shall be formed within one month of the date of retaining an employee. If an employer forms a written labor contract with an employee more than one month but less than one year after the date on which the employer started retaining the employee, the employer shall pay the employee’s monthly salary at double the usual amount. Furthermore, should an employer fail to establish a written labor contract with an employee for more than one year after the date at which the employer retained the employee, a labor contract without a fixed term is deemed to be established with that employee. This Chapter makes some sense and creates a lot of necessary minimal protection for the labor class. But the clause on protection and safety measures sounds quite hollow, as there seems to be hardly an enforcement mechanism. Under Article 11 the collective contract becomes prominent as in absence of a written stipulated wage, the wage in the collective contract is payable and in its absence ‘equal work, equal pay’ has to be followed.8 The Act classifies labor contracts according to their termination. Art. 12 specifies the three types as fix-term labor contracts, labor contracts without a fixed term, and the labor contracts that set the completion of specific tasks as the term to end contracts. 9 Under Article 14 the statute even stipulates circumstances in which non-fixed terms contracts can be concluded. 1. The employee has already worked for the employer for 10 full years consecutively; 2. When the employer initially adopts the labor contract system or when a state-owned enterprise re-concludes the labor contract due to restructuring, the employee has already worked for this employer for 10 full years consecutively and he attains to the age which is less than 10 years up to the statutory retirement age; 3. The labor contract is to be renewed after two fixed-term labor contracts have been concluded consecutively, and the employee is not under any of the circumstances as mentioned in Article 39 and Paragraphs (1) and (2) of Article 40 of this Law. If the employer fails to sign a written labor contract with an employee after the lapse of one full year from the date when the employee begins to work, it shall be deemed that the employer and the employee have concluded a labor contract without a fixed term. This has had terrible implications as the last clause is a classic loophole in the law and several companies especially the Chinese telecom giant Huwaei has been accused of asking some 7,000 employees with more than eight years of service to resign to compete for new short-term posts. The aim, allegedly, was to reclassify them as new employees.10 If there has been an early termination of a labor contract with a fixed term, an employer shall be liable for severance pay. This severance pay shall be calculated at one month’s salary for every year worked. An exception to this payment of severance pay is a circumstance in which the employee is unwilling to resume the employment relationship, even if the employer improves or maintains the same working conditions. The burden of proof for this exception is on the employer. Article 18 of the Act makes it amply clear that in case of a dispute on remuneration or working conditions etc, the parties will first have the option to renegotiate failing which the collective contract will work or in absence of that the provincial alws will come into force. Probation period has been fixed at maximum of one term which can be of one month at most for contracts of less than one year but more than three months, two months for contracts of one to three years and 6 months for those above three years. These provsions are much stricter than those existing in respect to the terms, salaries, terminations of labor relationships and consequences. The new law states that the salary during the probation period shall not be lower than the minimum salary for the same post at the same company, or lower than 80 per cent of the salary stipulated in the labor contract; nor may it be lower than the minimum salary of the city or district where the employer is located. If the employer wishes to terminate the labor relationship within the probation period, then he has to put forth justified reasons to do so. This is different from the current practices, where no reason is necessary for terminating a labor relationship within the probation period. On the other hand if the employee desires to terminate the labor relationship within the probation period, he or she shall inform the employer three days in advance, with or without justified reasons. Under Article 20 and 21 it has been made clear that the employer cannot pay the employee less than the minimum wages during probation or less 10% less than the actual stipulated salary whichever is higher. Moreover except in case of two specific circumstances, the companies cannot lay off anyone during probation without an explanation. In a welcome break however it is mandatory for employees to repay the cost of special training imparted by employers when quitting the job before stipulated time. The law states that if such an employee violates the stipulations on the service period, he or she shall pay to the employer a penalty for breach of contract, in an amount not exceeding the training expenses attributable to the unfulfilled service period. This is a good measure to make sure there is no job loss or excessive poaching and industry can build its workforce to its necessity.11 In a classic move away from standard labor law practice across jurisdiction, the Chinese statute is deeply interested in micro managing its problems by even keeping a clause that protects the employers from breach of trade secrets aand non-compete clauses by the employees. However, on termination of the contract, the employer has to shell out compensation and only in case of a breach does the employee need to pay a penalty.12 The law states that both the employer and employee may agree in a labor contract the scope, jurisdiction and term for the non-compete obligations, but the term of the non-compete obligation shall be limited to two years only. The compensation for non-compete obligations may be mutually agreed upon, and such compensation may be paid on a monthly basis immediately after the termination or dissolution of the labor contract. In terms of violation of the non-compete obligations, the employee is liable for liquidated damages as maintained in the labor contract. Additionally, the employee shall also be liable if the employer suffers any economic losses as a result of the employee’s violation. However, such non-compete clauses are limited in operation to only the higher levels of the worker pyramid that is senior managers and senior technicians and technologists.13 This is unique as in most countries such limitations are created through principles of law laid down through the statute governing the contract law. This attempt to micro manage shows the actual; frailty of a legal system that continues to remain confused between communism and capitalism. It is also disconcerting for any Foreign Direct Investment provider to see that special stipulations against any sort of breach by employee has been statutorily limited to the grounds under Articles 22 and 23. The terrifying part of this new law lies in its ability to constrict the employer with regards to its Human Resource management. It is like the Chinese government is trying to make the private players run their business with a sword of Domascles’ hanging over head. This is clear from previous discussion and a look at Article 26 which lays down conditions when such contracts become invalid. Article 26 states: The following labor contracts are invalid or are partially invalid if: 1. A party employs the means of deception or coercion or takes advantage of the other party’s difficulties to force the other party to conclude a labor contract or to make an amendment to a labor contract, which is contrary to his will; 2. an employer disclaims its legal liability or denies the employee’s rights; or 3. the mandatory provisions of laws or administrative regulations are violated. If there is any dispute over the invalidating or partially invalidating of a labor contract, the dispute shall be settled by the labor dispute arbitration institution or by the people’s court. While the first clause is a precipitation of long held legal principle of non-coercion the other two may not look that convincing as they look like designed to corner the investors. The tragedy is that unlike normal laws, the problem here will not only be about the loopholes like the one already discussed but also the loopholes that have become apparent across the local governance structure in China where the provinces are no more interested in improving but just in keeping the eyesores away from Beijing’s eyes.14 The other matter that will need discussion in this regard is the efficacy of the so called Labor Tribunal Arbitration. The other requirements will include the payment of wages for the period of employment in case of invalidation of contract, according to that paid to contracted workers at the same position. Also Article 27 makes the principle of severability applicable to such invalidated contracts. If the employers fail to pay remuneration on time then the employees have recourse to the Peoples’ Court. What is shocking in this is the binding nature of duty of the Peolple’s Court where the Act mandates that the people’s Court ‘shall’ give an order for payment of such dues according to law.15 The next clauses are essentially lame efforts to help the employees from hazaerdous activities and non-remunerative overtime.But they are lame as more often than not the corruption at the provincial level will never help the government enforce this16. However, this is clearly a political clause and is aimed to answer those NGOs who have been making noises about the terrible working conditions in the industrialised areas of China. The problems are accentuated as China makes it statutory that even in case of change in name or management, the labor contracts will subsist17. That is a problem for a country whose economy booms on low wage/rent ratio compared to the West. Even termination clauses under the statute seem loaded in favour of the employees. There are many and more grounds for the employee to renege the contract with only 30 days notice in case of full employment and 3 days notice in case of probationary employment.18 The employer also has his grounds to renege the contract and such grounds are elaborately laid down under Article 39 and 40 of the Act. This is a huge move away from the ‘hire and fire’ principles globally accepted as this requires specific and very serious grounds for removal.19 The Law implements more constraints on labor contract termination and dissolution in order to strengthen the protection of the employee and restrict the employer’s rights in terminating and dissolving labor contracts. To lay off 20 or more people or more than 10% of the total workforce every employer needs to notify the Trade Union concerned and discuss with them and then lay off. However even there the priority of lay off makes a list of most un lay offable which literally covers almost everyone. This actually does not make it in favour of laborers but instead makes the whole article infractuous.20 However the law rightly gives certain humanitarian protections to the worketrs which are necessary and needs to be lauded. These are basic support to people working in hazardous conditions and pregnant women from being laid off. Article 42 states: An employer shall not dissolve the labor contract under Articles 40 and 41 of this Law if any of its employee: 1. is engaging in operations exposing him to occupational disease hazards and has not undergone an occupational health check-up before he leaves his position, or is suspected of having an occupational disease and has been diagnosed or under medical observation; 2. has been confirmed as having lost or partially lost his capacity to work due to an occupational disease or a work-related injury during his employment with the employer; 3. has contracted an illness or sustained a non-work-related injury and the proscribed time period of medical treatment has not expired; 4. is a female who is in her pregnancy, confinement, or nursing period; 5. has been working for the employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age; or (6) finds himself in other circumstances under which an employer shall not dissolve the labor contract as proscribed in laws or administrative regulations Under the remaining articles the employer is required to inform the Union of reasons before dissolving any contract unilaterally. It is also allowed to dissolve contract in some extreme cases like bankruptcy or losing its licence to trade or manufacture something.21 Dissolutions of contract are classified as faulty and non-faulty and outlined in brief below: Faulty Dissolution An employer can dissolve a labor contract without notification in advance under the following circumstances: an employee seriously violates the rules of an employer; the employee causes severe damage to the employer by seriously neglecting his or her duties or seeking private benefits; the employee establishes a simultaneous relationship with another employer that could interfere with completion of tasks for the original employer; the employment contract is invalidated because of the employee’s actions; or the employee is subject to criminal liabilities. However, before the dissolution, the employer shall notify the labor union and take into consideration the opinions of the labor union. Non-Faulty Dissolution An employer must notify the employee of dissolution either 30 days in advance, or by additional payment of one month’s salary, if the dissolution is for justifiable reasons. Justifiable reasons include illness or a non-work-related injury, incompetence for the post as assigned and change of objective circumstances. The labor or trade union shall also be notified and consulted in this respect. Dissolution Prohibited An employer should in no case dissolve a labor contract if an employee falls within any of the following circumstances: occupational disease hazards; having lost or partially lost capacity to work due to occupational disease or a work-related injury; medical treatment for illness or a non-work-related injury; or pregnancy, confinement or a nursing period. An employer also must not dissolve a labor contract if an employee has been working for the employer continuously for not less than 15 years and is less than five years away from legal retirement age. Legal Consequence of Illegal Dissolution As per the new law double the amount of severance pay has to be paid if an employer illegally dissolves or terminates a labor contract. The implications are not just political as they are economic. The political aspect is obvious as this whole legislation was a political decision. The law has many detractors. Some allege it will take China back to the “iron rice bowl” era of Maoist days when jobs were for life and the economy was crippled by a lack of incentive. Others, conversely, argue that it will strengthen state-controlled unions but do little for downtrodden workers. The new law has been a boon to the All-China Federation of Trade Unions (ACFTU), an umbrella for all China's unions that is in effect an arm of government. In recent years it has seen its power eroded as state-owned industries have collapsed and the private sector has flourished, eschewing niceties such as unions and Communist Party cells. After persuading Huawei, which denied trying to evade the law, to revise its plans, the ACFTU this week issued a stern warning to other companies not to try anything similar. It said a “small number” were laying off large numbers of workers in advance of the new law. This, it said, was threatening the success of efforts to build a “socialist harmonious society” and should be “resolutely stopped”. But for all the ACFTU's propaganda, few expect it to emerge as a strident new champion of workers' rights. Independent trade unions will remain in effect illegal. China has no plans to reintroduce the right to strike, which it abolished in 1982 as it began to fret about the example set by the Solidarity trade-union movement in Poland. The role of the ACFTU, in the government's eyes, is to prevent worker unrest. One of the main aims of the new law is to counter the widespread complaints in China that the country has been over-zealous in its embrace of capitalism. These complaints became particularly shrill in June, after reports emerged that local officials in the northern province of Shanxi had allowed rural brick kilns to lure hundreds of people, including children, to work in slave-like conditions. The new law had been publicly debated long before the scandal surfaced. But its critics say the government rushed to push it through the rubber-stamp legislature in June in order to assuage public anger over the kilns. The Graph below clearly shows how the rate of labor disputes have increasedin China in the recent memory. This Act will create a whole new array of disputes and this will disturb the system that is already too litigatious. The survey graph below is taken from the article in Economist that has already been cited.22 One of the law's most outspoken critics is Dong Baohua of the East China University of Political Science and Law, who helped draft China's first labor law in 1994. Among Mr Dong's complaints is that the new law does nothing to improve the lot of tens of millions of migrant workers from the countryside. They make up most of the unskilled labor in urban areas and are the most frequent victims of poor labor conditions. China's official trade unions have yet to build a network among such workers. Nor will the law help people such as Shanxi's slaves, who suffer not from a lack of legal protection but from poor enforcement. Mr Dong also says the new law will not cut the number of labor disputes, which have become increasingly common in recent years.23 This will also hit China weher it hurts most as EU has already been complaining about these changes in law. China’s economy is heavily dependent on such manufacturing FDIs and such FDIs may leave it amidst such terse and archaic laws.24. It must be remembered that the environment and timing of the laws have sent more jitters as KFC and McDonalds have been under tremendous pressure unionise their outlets in China. Moreover most companies are angry as the law is clkearly opaque with little or no nprovision for Grandfathering or transition period.25 The reactions are even more pertinent as other ASEAN giants and india will be quick to react to this situation and cash in on this huge uncertainty prevailing in the Chinese economy. For a resource free nation which has worked hard to use its huge population to advantage may just be losing its economic edge especially with this coming at the time of a falling yuan, extreme inflation and falling stock prices along with the new findings that say the Chinese economy is not as big as it was made out to be. BIBLIOGRAPHY BIBLIOGRAPHY Articles: China’s New Labor law : Union of the State, 6th December, 2007, The Economist People’s Daily, June 20; Wen Wei Po, June 22; Outlook Weekly, June 24, 2007 Willy Lam, China Brief, China’s Slavery Scandal reveals weaknesses in Governance, Jamestown Foundation, 25/8/2007. China’s new Employment Laws get negative Response –www.forbes.com The Associated Press ,China bolsters labour laws amid slave scandal,Last Updated; June 29, 2007 | 11:01 AM ET Deacons, Provided by World Services Group, China : China Employment / Labour Contract; Published July 19, 2005 - Hong Kong Statement in response to Adidas' reply towards China Labor Watch's recent       report, China Labor Watch,  December 13 , 2007 The Associated Press, China's legislature approves new contract labor law ; June 29, 2007 AFX News Limited, China's new employment law gets negative response from multinationals – survey, April  25.2007, 6:42 AM ET China's New Labor Contract Law, Posted by Dan on November 25, 2007 Andreas Lauffs, Second Draft of Employment Contract Law Issued, February 2007 Standing Committee of the National People’s Congress, Employment Promotion Law of the People’s Republic of China, Subject: Trade Union, Promulgation date : August 30, 2007; Effective date : January 1, 2008. Standing Committee of the National People’s Congress, Employment Promotion Law of the People’s Republic of China, Subject: Contract, Promulgation date : June 29, 2007; Effective date : January 1, 2008. Standing Committee of the National People’s Congress, Law on Labour Dispute Mediation and Arbitration of the People’s Republic of China, Subject : Trade Union; Promulgation date : December 29, 2007; Effective date : January 5, 2008. China Daily, NPC Invites Public's Comments on Draft Employment Law, March 27, 2007. Anonymous, The China Business Review, The New Labor Contract Law, Nov/Dec 2007. Ben Dolven; Susan V Lawrence, Far Eastern Economic Review, Playing by the Rules, Jan 31, 2002; 165,4; ABI/ INFORM Trade & Industry. Anonymous, A Gathering Storm, SGB; Feb 2008, 41,2, ABI/ INFORM Trade & Industry. Garrett Brown, China Proposes Worker Protection Law, ISHN; May 2007, 41,5, ABI/ INFORM Trade & Industry. Alexander May; Tong Jia, , China’s Onerous New Labor Law, Far Eastern Economic Review Far Eastern Economic Review ,Jan/Feb 2007, 170,1; ABI/ INFORM Trade & Industry. Bama Athreya, Changing Labor Relations, The China Business Review; Jan/Feb 2004, 31,1, ABI/ INFORM Trade & Industry. Workplace Prof Blog, A Member of the Law Professor Blogs Network, Labor Law Reform in China, July 2, 2007. Read More