New Chinese Labor Contract Law

September 8, 2007

Foreign Corporations' Opposition to the New Chinese Labor Contract Law and Their Impact

September 2007

I. Overview

On March 20, 2006, the Chinese legislature launched the public consultation period for its draft Labor Contract Law. By April 20, the legislators received 191,849 responses, a majority of them from workers. Meanwhile, foreign investors and commercial groups also studied the draft law and submitted their comments. According to a May 11, 2006 report in 21st Century Economic Report magazine, the European Union Chamber of Commerce in China (EUCCC) and the American Chamber of Commerce in Shanghai (ACCS) —the two largest foreign investors organizations in China—each submitted recommendations and opinion papers on the Draft Labor Contract Law to the Legal Affairs Committee of the Standing Committee of the National People's Congress. The submission by the EUCCC included 11 items, while the papers submitted by the ACCS was 42 pages long, covering almost every chapter and provision in the Labor Contract Law.

In the EUCCC recommendations, it read: "The labor laws currently adopted in several European countries have led to the increase in labor costs, resulting in many European countries having to move their production lines to countries outside Europe or to other European countries with less strict labor laws. Therefore, if China chooses to implement the draft law on labor contracts, it will undoubtedly face a similar challenge." The recommendation made by the American Chamber of Commerce was even more direct: "We believe it [the draft on labor contracts] might have negative effects on China's investment environment." The law may "reduce employment opportunities for PRC workers."

The American Chamber of Commerce in Shanghai represents over 1,300 corporations, including 150 Fortune 500 companies, such as Dell, Ford, General Electric, Microsoft and Nike. The European Union Chamber of Commerce in China represents more than 860 members. The U.S.-China Business Council represents 250 U.S. companies doing business across all sectors in China.

During a seminar on the Draft Labor Contract Law held in Shanghai, a representative of the Shanghai Association of Human Resources Management in Multinational Companies said, "If this kind of law is going to be implemented, we will withdraw our investments." Dr. Keyong Wu, an expert for British Chambers of Commerce, stated, "Business is attracted to China not only because of its labor costs but also because of its efficiency. If regulation starts to affect that and flexibility, then companies could turn to India, Pakistan and South East Asia."

Such blatant opposition to stronger labor laws outraged both rights advocates and the public. "You have big corporations opposing basically modest reforms," said Tim Costello, an official at Global Labor Strategies and a longtime union advocate. "This flies in the face of the idea that globalization and corporations will raise standards around the world."

The corporate campaign to blunt the effectiveness of China's Labor Contract Law contradicted the justification that corporations have often given for their support of public policies that encourage them to invest in China. U.S.-based corporations have repeatedly argued that they are raising human and labor rights standards abroad. For example, the American Chamber of Commerce in Hong Kong lists among its "universal principles" that "American business plays an important role as a catalyst for positive social change by promoting human welfare and guaranteeing to uphold the dignity of the worker and set positive example for their remuneration, treatment, health and safety."

The proposed legislation will not eliminate Chinese labor problems. It will not provide Chinese workers with the right to independent trade unions with leaders of their own choosing or the right to strike. But foreign corporations are attacking the legislation, not because it provides workers too little protection, but because it provides them too much. Indeed, the proposed law may well encourage workers to organize and demand enforcement of the rights it offers.

Foreign corporations' opposition the Labor Contract Law provoked a strong pushback by Chinese and international forces. U.S. members of Congress have introduced legislation decrying the corporate intervention and apparent complicity of the current U.S. administration; China's official labor organization, the All-China Federation of Trade Unions (ACFTU), has also taken a strong stand against corporate pressure; international union federations have pressured their employers to reverse course; and human rights organizations have mobilized support for Chinese workers' rights.

Such counter-pressure has led to splits among global companies operating in China. Nike has virtually repudiated the efforts of the ACCS to lobby against the law. And the E.U. Chamber of Commerce has reversed its opposition to the law and renounced its threat that its member companies may leave China if the law is passed. A detailed report by Global Labor Strategies, "Undue Influence: Corporations Gain Ground in Battle over China's New Labor Law,"  ( reveals this and other shifts among U.S. and E.U. corporations operating in China. As the reports concludes, the new focus on the role of U.S. and other global corporations in China represents the emergence of a "new paradigm" for analyzing the current form of globalization, not just in terms of "free trade vs. protectionism," but also as a product of a global "sweatshop lobby" that is deliberately shaping labor law and labor markets around the world.

II. "Sweatshop Lobbying"

Foreign corporations are fighting against the very aspects of the proposed legislation that might ameliorate some of China's most blatant labor problems:

Contract Protections for All Workers: Foreign corporations want to maintain the current system which creates a large underclass of workers with no security and no rights.

The new law would create an implied contract for any worker who receives a wage, giving millions of workers rights and benefits now denied them. It stipulates that any ambiguities in the interpretation of a contract will be made in the employees' favor. ACCS opposes these provisions on the ground that "these provisions are not consistent with the recruitment system of modern enterprises." Instead, companies want to unilaterally set pay and terms of work for all workers without signed contracts. Management alone would determine "all problems " such as pay confirmation, the way of handling the social insurance, the method of dismissal and the standard of compensation."

Collective Bargaining with Employees: The new law provides for negotiations over workplace policies and procedures, layoffs, health and safety, and firings with a union or an "employee representative."

Foreign corporations demand unilateral authority, not negotiation. The U.S.-China Business Council writes, "It is not feasible to state that an employer's regulations and policies shall be void if they are not adopted through negotiation with the trade union". Requiring the consent of the trade union before such changes can be made is overly burdensome and may prevent important company policies from being implemented in a timely manner". Final authority and responsibility for company policies should rest in the hands of the employer."

Freedom to Change Jobs: Non-compete agreements prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer. For a developing economy like China, knowledge transfer is essential. The new law caps damages employers can seek for workers who change jobs, makes it more difficult to claim confidentiality has been breached, and allows for geographic exemptions to foster the spread of skills throughout the country.

Opposition to this provision comes with a threat: "If carried out," according to the comments on the bill submitted by the ACCS, "it will seriously affect the individual technology innovation of the Chinese enterprises and thus multinational corporations would not introduce their advanced technology, let alone allow the Chinese staff members expose [sic] to and master [sic] the core technology."

Limited Probationary Periods: Currently, corporations in China can set probationary periods unilaterally, often for an entire year, keeping people in a highly precarious employment status. The new law sets standards probationary periods of from one to six months depending on the type of the job.

ACCS argues a longer probationary period is justified, because one to six months is "not long enough to provide sufficient time for enterprises to examine new staff."

Payment for Training: Under current practice, employees sign a separate contract that allows companies to recover any training costs if a worker terminates his or her employment. Under current law, almost anything that management considers "training"—including many of the kinds of on-the-job training that are standard for any new job—can be subject to re-payment, leaving a departing worker either in debt or, if unable to repay the training expenses, bonded to his/her current employer. The new law limits the costs employers can recover by, for instance, defining "training" as instruction that takes place "off-the-job," on a full-time basis, and lasting for at least six months.

The U.S.-China Business Council says the new law is misguided because "the employer would not be entitled to claim compensation from the departing employee for [on-the-job and other types] of training experiences."

Severance Payments: There is theoretically no at-will employment in China; all workers are supposed to have labor contracts—although in practice many do not. Most contracts are for a "fixed term," after which an employer can dismiss a worker without penalty and a worker can leave without penalty. This system encourages highly unstable employment relationships. The new proposal encourages stable employment by requiring employers to provide severance pay to workers whose contracts end, but not to those whose contracts are renewed. ACCS opposes this provision as "most unreasonable."

A Pathway from Temporary to Permanent Work: Chinese companies employ a large number of temporary workers hired through temp agencies. Temporary work encourages management to avoid the protections and commitment that come with standard employment. Under the new law, temp agency workers would become permanent employees after one year of employment at a client firm, thus reducing the number of insecure, contingent jobs. According to the U.S.-China Business Council, "This stipulation impedes the right of the employer to find the best person for the job and will reduce the flexibility of human resource allocation."

A Fair System for Lay-offs: In practice, corporations frequently lay off workers at their own discretion. Under the new proposals, corporations would have to lay people off on the basis of seniority.

ACCS opposes seniority-based lay-offs in part on this novel argument: "It is a discriminative policy against the new staff to fire them while they work for the [same] enterprise as the old staff."



III. Changes Between the Initial Draft and the Final Version

The "Undue Influence" report detailed how multinational corporations' demands resulted in changes from the first draft of the labor contract law to the second draft. Here I will update and complete it with the "pro-employer" changes adopted in the final version. Due to limited research resources, it is hard to conclude to what extent multinational corporations' lobbying contributed to these changes.

1. First Draft: The initial draft provided that if an employer failed to enter into a written contract with workers, the law implied a non-fixed term contract—i.e. open-ended employment contract—between the employer and the employee. In addition, when a dispute arose between an employer and employee as to the meaning of a specific contract provision, ambiguities were to be interpreted in favor of the employee.

Adopted Labor Contract Law:

Article 10, "In the event that no written employment contract was concluded at the time of establishment of an employment relationship, a written employment contract shall be concluded within one month after the date on which the Employer starts using the worker."

Article 14(3), "If an Employer fails to conclude a written employment contract with a worker within one year from the date on which it starts using the worker, the Employer and the worker shall be deemed to have concluded an open-ended employment contract."

2. First Draft: The First Draft of the law provided for negotiations over workplace policies and procedures, health and safety, and firing with a labor representative. It also expressly stated that before a company may lay off fifty or more workers, it must "reach consensus" with the trade union through "negotiation."

Adopted Labor Contract Law: The adopted law no longer requires that changes to company policies—such as work hours, health and safety, and other matters of vital interest to workers—be adopted by trade union representatives. Instead, proposed changes only need to be "discussed by the employee representative congress or all the employees. If the employees have an objection, they shall "put forward a proposal and comments, whereupon the matter shall be determined through consultations with the labor union or employee representatives conducted on a basis of equality."

At the same time, employers no longer need to negotiate with the trade union or staff representative over large-scale economic lay-offs. Now employers need only "explain" the situation to the union and report to the local labor administrator: if circumstances make it necessary to "reduce the workforce by 20 persons or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the enterprise' employees, the Employer may reduce the workforce after it has explained the circumstances to its labor union or to all of its employees 30 days in advance, has considered the opinions of the labor union or the employees, and has subsequently reported the workforce reduction plan to the labor administration department." (Article 41)

3. First Draft: The initial draft limited the scope of non-compete agreements between employers and employees to "the geographical region within which any actual competition against the employee's Employer may be found."

Adopted Labor Contract Law: While initially seeming to limit non-compete agreements to senior managers and technicians, the final version actually extends the restriction to all "other personnel with a confidentiality obligation." The final version also eliminates the mandatory geographical limitation of such agreements, relegating the matter to private negotiations between the employer and employee. If an employer refuses to limit the geographical scope of the agreement, an employee could be barred from working in a similar industry anywhere in China.
Article 24, "The scope, territory and term of the competition restrictions shall be agreed upon by the Employer and the worker, and such agreement shall not violate laws and regulations."

4. First Draft: The first draft mandated that a temp agency worker's contract with the temp agency expires after one year of employment, if the host employer continues to employ the temp worker. The temp worker shall sign employment contract with the host employer directly thereafter. It also required employers hiring through a temp agency to deposit at least 5000 RMB in a bank account for each employee to ensure payment of wages.

Adopted Labor Contract Law: The adopted Labor Contract Law is completely silent about converting temp agency workers' contract into permanent employment. Instead, "the employment contracts between staffing firms and the workers to be placed shall be fixed term employment contracts with a term of not less than two years." (Article 58) This may create many potential ambiguities and disputes, especially if the temp agency is registered in a different province or region. The adopted final version also wholly eliminated the requirement that employers deposit 5000 RMB in a bank account for each temp worker they hire through a labor dispatch agency.