Last week, I attended co-blogger Steve Dickinson’s lecture on China labor law. Steve’s lecture was part of a truly superb Doing Business in China seminar put on by Global Nav. The thrust of Steve’s speech was that labor laws in China have changed, they are being enforced against foreigners, and they are very different from U.S. labor laws. In a nutshell, the biggest differences are that written contracts with all employees are required in China and firing an employee generally must be for cause. Neither of these are true in the United States.

Judging from the audience questions (and this was an extremely sophisticated audience), many were surprised by this and many had trouble understanding the full import.

A few days later, Steve and I were talking about this with the Chinese lawyers we work with in Qingdao. In explaining to them some of the cases we have handled for American clients who got themselves into trouble by improperly laying off Chinese employees, it soon became apparent to Steve and me that the Chinese lawyers were not grasping why these American companies were making these mistakes. They would ask questions like, “how could these American companies really believe they could lay off 100 people without first securing their approval and that of the government as well?” When Steve and I told them about US labor laws, the Chinese lawyers found them so bizarre, they actually laughed.

We told them of how there is a saying in the U.S. that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination). We talked about how one might fire an employee for wearing a green shirt. We told them of how most employees in the United States do not work under written contracts and how companies generally prefer not to use contracts. It took us at least a half an hour for us to give a basic explanation of employer-employee relations in the U.S. Even then, it was pretty clear that these exceedingly bright lawyers were still nonplussed.

It was a good exercise for Steve and me and it only reinforced why it is that Americans (the labor laws in Europe are not so wildly different from China) in China so often act on Chinese employment law matters based on completely false assumptions as to how things are really done there

For more on China’s Labor Contract Law, check out the following:

 

  • I’m a Dutch IT guy working in China and as such didn’t have any clue about the American labor law. The American system sounds very bizarre (unsocial) to me as well. I’m glad that in Europe and in China (at least on paper) the rights of workers are better protected.

  • Inst

    I’m curious, how does this compare to say, India or Europe in the inflexibility of labor? If it’s as you say, it’s certainly less flexible than the United States, but more flexible than it is in Europe. Is it inflexble enough to be a problem, so that employers would have to a lot of time deliberating before hiring new employees?

  • I think China has more in common with Europe than America when it comes to employment law.
    Your post reminded me of a conversation with an Italian businessman – I said it was great to see so many brothers, sisters and cousins working in the same company, he answered saying ‘in Italy when you give somebody a job, you’re giving them a job for life, so family come first’.

  • William

    Has the new labor law had a noticeable effect on China’s employment rate? It would certainly make me think twice before hiring anyone. It reminds me of France’s insane labor laws that cause high unemployment.

  • And when you are done getting bizarre looks from explaining US labor law… Try explaining the American jury system….

  • Glen

    It’s a little bit amusing to picture these individuals, who have come to China to make money by exploiting cheap labor or lax environmental laws, get bent out of shape when they discover they can’t fire 1,000 people because it’s a Tuesday.
    Maybe I’ve gone too far. The mass layoffs experienced in the U.S. in recent months have really helped turn the economy turn around, thank goodness! You just can’t let your workers get all uppity by guaranteeing them some modicum of stability. That would be (whispers)socialism.

  • Bill

    It is quite common for Chinese to confuse “legal” with “moral”.

  • The Terminator

    Has China’s new labor law affected employment? You bet it has. We have cut our head-count by two-thirds since the law came in, through attrition and targeted redundancies, and re-engineered our business to work with less full-time personnel. We now subcontract work to smaller companies, including some that former staff have set up.
    Why? Because the new labor law is too restrictive and too risky for a small company. Even so, we spend a lot more time than we used to dealing with HR and administrative matters. For a small company it is a drag on business. The sad thing is – we were previously expanding and had staff who were very happy with the very flexible approach we used to have, including flexi-time and working from home. All these benefits have gone by the board to comply with the new labor law.
    I know of other companies that have been using the recession to start downsizing and re-engineering their businesses. The real reason has little to do with the recession; it’s all about the new labor law. Workers of China, thank your government.

  • Fascinating post Dan. It sounds to me as though Chinese labour laws have more in common with not only European labour laws, but also with the labour laws of Australia (pre-2005). In 2005, the Howard Government introduced the WorkChoices Act, which removed unfair dismissal laws and made it possible for workers to submit their certified agreements directly to Workplace Authority rather than going through the Australian Industrial Relations Commission. There were also clauses in WorkChoices that made it harder for workers to strike and which made it easier for employers to force their employees onto individual workplace agreements rather than collective agreements. WorkChoices was generally very unpopular, and was one of the main policy factors that brought the Howard Government down in the last federal election.
    The new Rudd Labor Government is slowly dismantling WorkChoices (they have already decalred WorkChoices dead in fact) and are reintroducing more socially progressive labour laws, similar to what we had prior to 2005.
    The labour laws in China sound quite progressive, but I’m wondering how well labour laws in China are actually enforced these days – do you have any knowledge on how well and how widely such labour laws are enforced?

  • Tim

    As for the socialism comment, why bother whispering? It seems to me another attack on capitalism, which many seem keen on bashing lately. In normal times there is plenty of value from less regulated labor regimes. Worker productivity, operating efficiency, and a reallocation of labor to those areas it is needed. The truth is that the mass layoffs are helping turn the economy around – unless you’d prefer the GM effect throughout the economy? Remember that workers and businesses can still form private binding contracts should they deem it valuable to be so bound. We no longer seem to be at risk for indentured servitudes after all.
    And as to the reactions of these Chinese lawyers, the story vaguely stirs some impatience I’ve felt with the Chinese mindset – if I may shamefully generalize a bit. This incredulity that any place else could be different, when the new labor law provisions are all of 2 years old?
    Speaking of new laws, as an aside, the Cato Institute had a presentation today on RDI’s study on the state of China’s property law. It was somewhat interesting if also inconclusive. Might be worth checking out the podcast for all y’all property rights hounds.

  • Giorgio Brusati

    Also before the implementation of this new Labor Law, firing an employee in China was kind of a delicate matter. If you failed to comply to written, and mostly non written, rules, you could have the authorities raiding your premises and giving you big troubles….
    Now, at least on the paper, it seems that workers have more rights…let’s see what will happen with the facts.
    Just a reply to “UK Visa Lawyer” on the “conversation with the Italian business man”: it was long ago when in Italy a job was for life….;-)

  • Dan

    Thijs(Shenzhen),
    I do not know whether the labor laws are enforced against Chinese companies, but they certainly are being enforced against foreign companies. The key thing to know about the new labor law is that the workers themselves can bring legal claims and when their own money is on the line, they absolutely are not hesitating to do so.

  • Dan

    Inst,
    I have to confess to having very little knowledge of the labor laws in Europe, but my sense is that China’s laws, as written, are much closer to those in Europe than to the U.S.
    Are these laws slowing down employment? I can answer this only regarding foreign (mostly American) companies and my answer there is yes. Many of our clients in China are outsourcing work to Chinese companies that they formerly did in-house. In particular, those of our clients that used to raise employment seasonally (very common in the food business) are just not doing so.

  • Dan

    uk visa lawyer,
    Ah… familia….

  • Dan

    William,
    For more on French economics, check out http://is.gd/raKv

  • Dan

    TwoFish,
    A few years back, as a favor to a Korean lawyer friend of mine, I gave a brief seminar on the basics of US law before around 10 Korean judges. They were absolutely fascinated by the US jury system and, in particular, by the fact that they rule on long and complicated cases. They had real trouble getting their heads around that. When I asked if such a system might ever come to Korea, they just laughed.

  • Dan

    Glen,
    Most of the problems American companies have with China’s labor laws stem from their not doing sufficient planning from inception. The companies that have big problems are those that go off and hire employees, don’t give them a written contract, and then expect to get rid of them without severance. Ain’t gonna happen.

  • Dan

    Bill,
    It is quite common for everyone to confuse “moral” with “legal.”

  • Dan

    Terminator,
    Your using outside Chinese companies instead of hiring your own employees is becoming increasingly common. In some circumstances (usually involving few employees) we are suggesting to our clients that they pay to set up Chinese companies for those whom they would previously have hired as employees.

  • Dan

    Mark Anthony Jones,
    Won’t those countries that grant employers more freedom with respect to their employees end up being more likely to succeed internationally?

  • Dan

    Tim,
    The new law is relatively new, but the idea of not being able to just fire someone in China for no reason is not new at all. Remember Danwei and the Iron Rice Bowl?

  • Dan

    Giorgio Brusati,
    Good points re the past. See comments above re the present.

  • Labor flexibility has its advantages and disadvantages. One big disadvantage is that when you have bad economic times, you can run into the this downward spiral in which companies massively cut payrolls quickly, causing the economy to spiral downward even more quickly.

  • Glen

    @ Tim
    “It seems to me another attack on capitalism, which many seem keen on bashing lately.”
    Capitalism, as practiced recently, is worthy of criticism and I bash it because I care. Whether it governs the treatment of employees or how risk is assessed, regulation is necessary to ensure everyone plays by the rules.
    In the case of China, the PRC Gov’t is probably leaning harder on foreign companies in enforcing the new labor laws. That’s a real bummer, but hey, it’s their turf and they call the shots. If you don’t like it, you’re free to take your business elsewhere.
    Back to the U.S., I don’t buy the idea that the “reallocation of labor” is turning the economy around. Are the recently downsized buying products and services? Are they buying cars? Houses? Investing? Are their skills and education being used to the utmost efficiency? What? No? Getting people back to work will require that dirtiest of words: government intervention! All the laissez-faire sunshine and unicorns in the world cannot heal a fundamentally broken credit system. And remind me again: who broke it and how?
    Also, GM is not a microcosm for the entire U.S. economy. They uniquely benefited from low fuel prices and refused to think ahead, not to mention their lobbying for low fuel economy standards. Blame unions all you want, but GM management kept cranking out sub-par autos.

  • Dan, you ask: “Won’t those countries that grant employers more freedom with respect to their employees end up being more likely to succeed internationally?”
    I’m not aware of any studies that show this to be the case. Labour costs certainly do effect international competitiveness, but so do many other factors – taxation, environmental laws, transports costs, etc.
    At the end of the day, from an ethical point of view, the question that needs to be addressed I think, is this: do labour laws regulate employer-employee relations in such a way that employees are exploited fairly? If employers are permitted to unfairly exploit workers on mass for their labour power, then the labour laws themselves are inadequate, from a human rights point of view.
    China labour laws are socially progressive, and not all that different in many respects from European and Australian labour laws. The question however, rests on whether or not these labour laws are widely enforced. How capable is China of enforcing their labour laws, given its lower-middle income level of development?

  • lark

    This reflects the incredible submissiveness of Americans. In Europe they protest at layoffs and such. In the USA people suffer in silence (or go nuts and blast a dozen or so with an AK 47). It’s the ‘individualism’ we supposedly practice, in which the elites get to gloat at their good fortune and ordinary folks are left to die, if they have the misfortune to get sick after a layoff. I’m disgusted by Americans, I really am. And now to discover that China is more protective of workers rights than Americans! Gawd.

  • Inst

    “Many of our clients in China are outsourcing work to Chinese companies that they formerly did in-house. In particular, those of our clients that used to raise employment seasonally (very common in the food business) are just not doing so.”
    I’m wondering in this case whether the central planners are thinking “Mission Accomplished!” (http://i46.photobucket.com/albums/f139/sharonjumper/bush_codpiece.jpg) or are realizing the impacts of this kind of policy on employment.

  • outcast

    All this flak about China’s employment laws really amazes me. On one hand you have a large number of people in Western countries that bashed China for not having workers rights (not like anyother developing countries do). Yet, when something is done to finally fix this issue, you have people in Western countries that bash China for giving its workers rights….Guess it’s a no win scenario for them……

  • This is a good post about an issue that is very close to the heart (and intestines) of any manager of any company in China. I suspect that many large multinationals are subjecting themselves to significant liability by invoking large-scale layoffs in China without considering the consequences… especially as distracted as they have been in the past few months.
    But as another reader commented above, the most acute pain from the new contract requirements (and other changes) last April is felt by small and medium-sized companies that don’t have the depth to absorb the painful process of compliance or to fend off lawsuits.
    In a nutshell, if you want to fire anyone, you need to be very careful to make them ENTIRELY happy with their resignation/severance/buyout or whatever format is agreed upon. ANTICIPATE all potentialities.
    And in the end, even a perfect termination agreement can still result in a lawsuit if the former employee “changes his or her mind” and makes additional threats or demands.
    You can only be so good at recruiting, hiring and incentivizing great employees, and there is little chance that you will be perfect. But you can always try.
    Good luck!

  • bss

    What’s the point of bashing capitalism/socialism? The Chinese couldn’t give a flying f*** in regards to the ideological debate around all the economic ‘isms’, they just adopt whatever works, pragmatism over idealism.

  • I think bss has hit the point!

  • well, i don’t know much about US laws, but the culture really make people think differently. Here is an example that always makes me think the culture differences, in US, you can send someone in jail say 100 years, but there is no such thing in China, a lecture of mine told that because amercian see a bit further that human can live longer than 100 years one day.. hmmm… it sounds like make sense..

  • Greg

    Dan
    “We told them of how there is a saying in the US that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination)”
    And often companies stick to the “no reason” clause to fire anyone for anything, and discrimination against white male workers and applicants is on the rise rapidly. Funny thing now is that the IT giants in the US are laying off US workers while applying for large numbers of new H1B visas and lobbying for the ceiling to be raised. Something surely stinks around here.
    And as for bashing capitalism, it can’t be bashed because it has not been practiced. Had capitalism been in practice, these worthless banks and other large corporations with their flunky leadership would have been allowed to fail or private money would have rescued them and eviscerated the the pay scale, especially for top managers. Instead, these “master-fishing-lure-baiters of the world” went to the US gov’t for money and cried “communism” when any attempt to restrict their pay was enacted.
    Corporated executives + HR = evil.

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