NPC: Official – China labor law criticism unfounded

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Law there to protect workers from abuse, should not be seen as attempt to burden foreign investors with additional liabilities

BEIJING, Mar. 11 – The Chinese Vice-Minister of Labor, Sun Baoshu stated yesterday that manufacturers were wrong to blame the new Labor Contract Law for the rising cost of production in China, and that certain media reports by “unqualified foreign lawyers” that the law was designed to inflict additional costs and litigation on foreign businesses operating in China were groundless and could be traced back to “a desire to generate fee income from naive clients who buy such misguided stories.”

Certainly the labor law has not been without its critics, even within the National People’s Congress. However Sun rejected calls to amend certain parts of the legislation, and stated the labor law issue now had the full support of the law. Zhang Yin, one of China’s wealthiest businesswomen and operating a chain of restaurants with some 20,000 employees, had called for the NPC to amend the clauses concerning open-ended contracts and replace it with fixed term contracts. Sun replied that the provision that employers were required to sign open-ended contracts with staff did not mean employers were offering them an “iron rice bowl.” Employers were free from such conditions if the employee was incapacitated, broke company rules or was convicted of a criminal offense he mentioned.

The issue has been a hot topic of conversation at the National People’s Congress and in foreign media. However, we can add commentary to it as follows:

Rising cost of production

“China has long been accused of abusing workers rights. Yet when they tighten up the labor law to prevent this – they get criticized!”

There are two concurrent elements to this. Firstly, as China develops, the cost of land, labor and raw materials in certain industries will inevitably rise due to demand. This is an effect of a free market system, and one that most foreign investors will be entirely familiar with. The choices in dealing with this up until now have been varied, and not always to the benefit of the workers, with many unscrupulous foreign investors seeking to cut corners of the true cost of doing business in China by deliberately paying less than the legal minimum wage, or denying workers their mandatory welfare payments. Abuse such as the termination of labor upon pregnancy or illness, or lack of compensation for work related injury and death have also been common. The labor law quite rightly is aimed at putting an end to such abuse. China has long been accused of encouraging poor labor conditions, yet when it does something to improve this, it gets criticized!

It is also correct to note that certain industries in China, and especially those that have enjoyed a period over the last 10-15 years with a lax regulatory environment, are now being challenged by a strengthening of various regulations to properly justify their existence beyond that of purely lining the pockets of the investors. Many businesses, and especially those in energy inefficient and polluting industries, and those which do not contribute to the tax revenues of the country, are being forced to appreciate the true costs of business in China by the governments targeting them with a series of measures. These have included over the past year an increase in the corporate income rate for many foreign investors from 15 percent to 25 percent, stronger laws upholding environmental protection and energy wastage, and better labor law practices to prevent abuse. This is not unreasonable – the days of largely unregulated manufacturing in China are over, and there are certain types of industries China does not wish to encourage that fall into these categories.

Manufacturers have options when addressed with these issues. They can relocate nationally in China to other, less expensive regions, or they can relocate overseas to establish operations in less regulated markets such as India or Vietnam; or they can close and take their profit.

Financial cost of the new labor law

“It is businesses who were not in compliance who are facing difficulties”

For businesses that have largely been in compliance with China’s labor law, there has not been a large increase in overheads. Dezan Shira & Associates maintains over 1,700 retained foreign invested businesses in China, across the country, none have been seriously impacted cost wise by the new law – they have been well managed and advised over matters of labor contracts and mandatory welfare payments over the years (see the China Briefing archives for examples). However, businesses in China that have been deliberately exploiting personnel in the manner described – paying staff less than the legal minimum, non–payment of mandatory welfare – pension funds, unemployment, medical insurance and so on – these companies are now having to get into compliance. This can only be a good thing. It is businesses that were not in compliance with the previous labor law that are facing difficulties with the new strengthened regulatory regime, not those who have historically been treating staff in accordance with China laws.

Legal issues

“There is little to be gained from redrafting Labor Contracts without being privy to the Implementing Rules – which are still to be released”

Concerning the current open-ended contract clause in the new Labor Law, we do not follow the opinion that it is intended to act solely as a job for life after two years of employment. In any event, changes to Chinese labor contracts that deliberately seek to omit this regulation will not be held valid in disputes if they are in contravention of the actual law. Nonetheless, it is obvious some legal ambiguity remains over the intention of the government and the actual wording of the law. This is not uncommon in China, especially when subtleties have to be translated from Chinese into English. The law does not actually state that employees must be retained for life, there are get out clauses that need to be written into the company employment manual (not the staff contract) to mitigate this. Lawyers altering employment contracts to get around such clauses are missing the point, and run the risk of having such contracts overturned by the courts or Labor Unions if they are not consistent with Chinese law.

That said, we do expect to see clarification of certain aspects of the Labor Law; as usual in China, the Implementing Rules follow the actual law and lay down the disciplines through which it is to be applied. These implementing rules, although it may seem curious to the new to China businessman or lawyer, always follow the actual legislation by a few months, or in some cases a year or more. While frustrating for foreign lawyers and legal counsel to understand and properly assess legal and political risk, they are in fact designed this way to permit the debate and impact of the actual law to take place prior to the drafting of the implementation process. It’s the implementing rules that legal counsel need to be aware of, these outline the specific treatment and execution of the actual law.

These will, however differ from province to province and city to city. The reason for this is that China, large and populous as it is, retains distinctive characteristics on a local level, and Provincial governments rather than the State government are charged with understanding these demographics. It will be the case with the Implementing Rules for China’s labor law, as local demographics alter the amount, for example, of mandatory welfare contributions on a region by region basis. Such matters, in which the Labor Contract Law is highly influential, are not uniform across China, and attention to detail needs to be paid in securing the correct local advise depending upon where the business is located. One uniform labor contract for employees in China, covering the country, is not sufficient.

While it may not be comfortable for many in-house legal counsel, there is little to be gained from conducting and paying for extensive redrafting of labor contracts in China assuming your staff are already largely in compliance – without being privy to the Implementing Rules of the new labor law in the first instance. To date, these are still being drafted on a province by province basis; it will be the content of these that will truly drive contractual amendments and deal with the legal debates concerning liabilities.

Litigation matters

“Contractual disputes are resolved by the labor unions, not by external law firms”

Commentary has also appeared of the nature that “Chinese law firms are lining up to sue foreign investors for damages on behalf of Chinese employees as a result of Labor law contract breaches.”

Such sentiments belong to the ambulance-chasing type of attorney mentality and are not grounded in reality.

Firstly, large employers with multiple staff will have in place a company Labor Union (which can be instigated for all companies with an excess of 25 people) and it is the role of the labor union, not external lawyers, to negotiate disputes between staff and the employer. The China Labor Union movement extends from grass roots shop floor level right up to the National People’s Congress, and is specifically charged with mediation and employment dispute resolution. It is very rare for Chinese employees to take civil action against an employer (although it may be threatened). Contractual disputes between employers and employees are nearly always resolved by the Labor Union; the specter of Chinese commercial law firms lining up to pursue litigation against errant foreign invested enterprises breaches existing Chinese dispute resolution protocol and is largely put about by mischief making or un-informed foreign legal personnel with limited understanding of Chinese law or it’s structure.

Secondly, employees will only be earning relatively small wages, and certainly would not be attractive as clients to commercial firms. For multiple disputes, it could be argued, the fees could be significant, but in practice – both the employer (who part funds the labor union) and the Labor Union (via the collection of fees from it’s members) who both fund and provide the structure to deal with such issues – well away from the litigation arena and the courts.

Related reading
China Briefing Magazine “China’s New Labor Law” – December 2007
China’s labor law – The reality for overseas investors

China’s local labor rules conflict with new national law

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