By: Dan Harris and Brad Luo

It has been a little over eight months since China enacted its groundbreaking new Labor Contract Law, which is just enough time to preliminarily assess its impact. The Labor Contract Law has already greatly impacted employee treatment in China and greatly impacted how Chinese employees view their rights. It also has increased employer costs, but less than publicized. The Labor Contract Law has caused some companies to go out of business and caused other companies to leave China for other countries less protective of their workers, but many of those companies were not terribly profitable in the first place. So far though, we have detected very little impact on Western companies doing business in China.

Before enactment of the Labor Contract Law, employee abuse was rampant in China and worsening. Labor disputes in China increased more than thirteen-fold between 1995 and 2006 and a large and growing number of these disputes erupted into public demonstrations. Most Chinese labor law experts viewed the existing labor laws and regulations as inadequate for solving employer-employee disputes and considered employees to lack basic legal protection. The Labor Contract Law was designed to give employees greater rights and easier enforcement of those rights so as to achieve the ultimate social policy of creating and sustaining a “harmonious society”:

This Law has been formulated to improve and perfect the labor contract system, to make explicit the rights and obligations of both parties of the labor contract, to protect the lawful rights and interests of laborers and to build and develop harmonious and stable labor relationships. (Emphasis added)

The Labor Contract Law gives workers a private right of action to enforce their own legal rights. In other words, employees may now sue their employers directly, without the aid of the state. Chinese labor departments and agencies still may assign administrative penalties for labor law violations, but granting a cause of action to Chinese employees has greatly minimized the role of the state in the employer-employee relationship and greatly increased the power of Chinese employees to handle their employment grievances on their own.

Chinese workers are not hesitating to seek to enforce their rights in the courts and they are flooding China’s court dockets with labor cases. Since last year, labor disputes have increased in Beijing’s Chaoyang District People’s Court by 106%, by 231% in Nanjing’s Qinhuai District People’s Court, 126% in Shenzhen, 132% in Dongguan and 92% in Guangzhou. This increase in labor law cases proves both that Chinese workers are aware of their new rights under the LCL and that they perceive themselves as having new rights worth enforcing.

With these new employee rights comes a corresponding impact on employers. This is particularly true of foreign company employers as enforcement of China’s laws has always tended to be stricter against them, both by the government and by private action. Many labor-intensive companies that manufactured in China have shut down altogether or have moved to lower labor cost countries like Vietnam, Bangladesh, or Cambodia. Though these closures and moves seem large in terms of the number of companies closing or leaving, these numbers are deceiving. Very few of the foreign companies that have closed down or left China appear to have been based in either North America or Western Europe; most were from Hong Kong, Taiwan or South Korea. The overwhelming majority of companies that have quit China of late were in very low level manufacturing (imagine a room with 30 workers and no real machinery) and were marginal or illegal operations even before the new labor law came down. Profitable Western companies are talking about expanding outside of China (the “China Plus One Strategy”), but they generally are not leaving. The reason for this is simple: China is better equipped than countries like Vietnam, Bangladesh, or Cambodia to manufacture all but the least sophisticated products.

Though factory closings and moves outside China have been rare, the impact of the new law has been widespread. In reaction to the new labor law, French supermarket giant, Carrefour, required most of its forty thousand strong Chinese employees to resign and then sign a new two-year contract on the eve of the Labor Contract Law becoming effective. Carrefour did this to try to circumvent the Labor Contract Law’s provisions requiring indefinite contracts, which make employee termination difficult.

Since enactment of the Labor Contract Law, foreign direct investment (FDI) into China has continued to increase; China attracted $42.78 billion in FDI from January to May 2008. A recent (post-Labor Contract Law) Ernst & Young survey indicated 44% of world business leaders still consider China the best destination for FDI. Many Western companies that were already meeting or exceeding the Labor Contract Law requirements are pleased with the new law because it is forcing their less employee-friendly competitors (particularly domestic Chinese companies) to spend new money to meet the new Labor Contract Law standards.

On a micro level, the new law has changed the way nearly every company does business in China. Smart companies in China now use written employment contracts, in Chinese, with all of their employees and maintain a written policy manual, also in Chinese, explicitly setting forth the various bases for employee termination. The written contract is necessary to avoid potentially huge penalties and the policy manual setting forth grounds for termination helps militate against having lifetime employees.
Emboldened by the new laws, local governments and unions are also stepping up their efforts to protect worker rights. In an effort to circumvent Article 42 of the Labor Contract Law, which gives existing long-time employees extraordinary rights when terminated, Huawei (China’s largest networking and telecommunications equipment company) secured “voluntary resignations” from of nearly all of its long time employees. Huawei’s plan was to enter into new written employment contracts with these workers, thereby making them brand new employees and thus easier to terminate under Articles 40-41. In response to Huawei, the Guangdong Supreme People’s Court and the Guangdong Labor Arbitration Commission jointly issued Guiding Opinions Regarding the Application of the Labor Dispute Arbitration Law & the Labor Contract Law, voiding the resignations.

The Labor Contract Law has also carved out a bigger and better defined role for Chinese labor unions and the unions are beginning to act on that. Articles 51-56 of the Labor Contract Law specifically authorize labor unions to enter into collective bargaining agreements with employers and all employees in China may join the China Federation of Trade Unions (ACFTU), which is controlled by the Communist Party and has around 170 million members. Unions can negotiate salary, working hours, holidays, and benefits, but they do not have the right to strike. The ACFTU recently reached collective bargaining agreements with Wal-Mart in several cities, gaining pay raises this year and next. By the end of 2006, around 50,000 foreign companies in China had entered into collective contracts in China and the ACFTU has made no secret of its goal to unionize nearly all foreign companies within the next few years.

Despite all the changes brought about by the Labor Contract Law and all the changes to come from that new law, Chinese employee rights are still lacking as compared to the West. But China’s efforts to move away from being a destination for foreign companies seeking super low paid workers will inexorably continue with little let up. Just as with so much else in China, foreign companies are getting out in front in terms of going along with what China wants to do to upgrade its labor relations. Domestic companies are and will continue to follow in terms of having to deal with unionized and higher paid employees. China wants to improve its labor relations in a way that creates harmony without disruption. It is moving towards granting workers greater rights and increasing unionization and that will continue. But these moves will come incrementally, not in big lurches.

What has the impact been on your business?