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Pacific Bridge, Inc. - Asian HR eNewsletter

Volume 7, Number 8 (August 1, 2007)

NEW LABOR CONTRACT LAW PASSED IN CHINA

In early July 2007, China’s legislature passed a new labor law strengthening protection for workers. Among other things, the new Labor Contract Law requires employers to provide written contracts to their workers, restricts the use of temporary laborers, and makes it harder to lay off employees. The law will take effect on January 1, 2008.

The new labor contract law will also enhance the role of the All-China Federation of Trade Unions (ACFTU), China’s government-controlled umbrella labor union. In addition, it will allow for collective bargaining for wages and benefits.

The pro-worker law was met with mixed reactions from investors and labor specialists. Many investors worry that the new measures will make it more costly to operate in the country. Foreign firms are particularly concerned that the involvement of trade unions in negotiations over pay and layoffs might complicate labor relations. But labor specialists noted that the changes were made mainly to protect the legal rights of migrant workers and to address rising incidence of workers’ unrest and labor disputes. Many argue that the new Chinese laws are reasonable, and will not greatly compromise China’s attraction as a manufacturing and commercial base.

The new Labor Contract Law is wide-ranging and detailed legislation has yet to be spelled out. The full implications cannot be fully examined at this stage. What is known is that all employees (at least in theory) must have written employment contracts that comply with minimum wage and safety regulations. All employees with short-term contracts will also automatically become full-time employees with benefits if their short-term contracts have been renewed twice. Companies will also be required to consult with the ACFTU if they plan to downsize their workforce.

In cases of ambiguities, authorities will be required to interpret labor contracts in favor of employees. Pre-existing contracts are also likely to be subjected to the new legislation. Finally, if employers choose not to renew employees’ fixed-term contracts, they will have to pay compensation of one month’s salary for every year of service.

However, companies will have greater flexibility in laying-off large numbers of workers in the event of bankruptcy, production difficulties, relocation, or changing economic circumstances. Under a revised “non-compete” clause, a company can prevent an employee with confidential company information from joining a competitor within two years of leaving the company. This is a reduction from the current three years.

Since full details of the new law are uncertain for now, it is essential for HR managers and foreign business leaders to keep themselves informed of further updates and implementation details. Indeed, some of the changes are expected to force companies to review and restructure their employment contracts, as well as human resource policies. However, how strictly these laws will be enforced is uncertain.