Thursday, November 15, 2007

China's new labor law

Lauren Hilgers

China’s new Labor Law is expected to come into effect on January 1st next year and both domestic and international companies are responding with mass layoffs and general panic.

The law promises to expand worker’s rights and limit employer freedom when it comes to hiring, firing and changing the workplace environment. Rumors are flying that Chinese lawyers are lining up clients in advance, targeting foreign companies. Olympus, the camera-manufacturer, is moving half its China business to Vietnam and miners recently laid off in attempt to preempt the law’s requirements are reportedly taking to the streets to protest their treatment. The new law is, I suspect, the first of many that could raise the cost of doing business in China.

On the positive side of things, the process of formulating the new law was one of the most transparent China has seen. In 2006, the government opened the draft law to public comment and received around 200,000 responses, many from international companies who, in general, opposed the new law. Complaints focused on the increased difficulty of hiring and firing and the proposed role of China’s Labor Union, which, under the draft law would have had veto power over planned changes in a company’s workplace rules. The companies' position provoked criticism from the Chinese public, some of whom claimed the foreign companies were simply trying to maintain the sweatshops they have become accustomed to running.

Foreign businesses also ran afoul of U.S. labor unions in their complaints about the draft law. U.S. labor unions have long advocated labor reform in China. In 2004, the AFL-CIO filed a 104-page petition calling for an investigation of China’s labor practices.

They have a point. Present-day China presents a paradise for the potentially abusive employer. With a labor force estimates put as high as 900 million people, long hours under poor conditions are common. In a particularly spectacular labor violation this spring, 100s of laborers were rescued from slavery at a brick factory in Shanxi. Under the current laws, employees themselves are not able to file claims against their employers. Complaints are instead presented to local government agencies or to their unions who then decide whether a claim should be filed. China’s unions, tied to the state, are likely to support economic growth over worker’s rights.

Recent scandals, which have been devoured with glee by the Chinese press, involve violations of the current law from MacDonald’s Corp. and Yum! Brands (the owner of KFC) who were found to be underpaying their employees. Factories manufacturing for Disney have been accused of working their employees 15 hours a day.

Under the new regime, employees with a more than ten-year history with a company are required to get a permanent, open-ended contract. No more than two temporary contracts can be signed and any employee who goes without a contract for one year is entitled to indefinite employment, a relationship much harder to terminate.

The law also restricts the use of probationary periods, limiting an employer to one six-month probationary stretch per employee. Non-compete clauses limiting employees from moving to competing companies have also been restricted. Unions, all part of the All China Federation of Trade Unions, now have to be consulted if any changes to workplace policy are under consideration.

If enforcement of the new law mirrors that of the current law, it would not make waves. The government has shown a large degree of dedication to the new labor policies, however, and has gone so far to include an article addressing the punishment of government officials who do not enforce the laws. It also increases the penalties for those disobeying the law.

The law has companies spooked enough to start taking action early. A handful of domestic companies (and WalMart) have reportedly starting firing and, in some cases, rehiring their employees to try and avoid the ten-year cut-off on temporary contracts.

Foreign companies are not the ones committing the majority of labor violations in the country. Many are worried, however, that multinationals will be held to a higher standard than domestic operations and the allowance for civil suits will open the floodgates to a population who loves to see the foreign giants go down.

The new law falls in line with a continuing strategy coming out of Beijing, which is increasingly emphasizing high-tech, better-paying enterprises over those that bring low-paying, low-skilled jobs into the country. While cheap labor remains at the foundation of China’s economy, prices are slowly but surely going up.


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