Assessing China's latest legal milestone

June 29th was a red letter day for China's HR community. The Standing Committee of the National People's Congress approved the New Employment Contract Law. The law has been over three years in the making and will come into effect at the start of next year. It has been hailed as a landmark piece of legislation, but exactly what does it contain and what will it mean for your organisation?

The new law replaces previous legislation that was created as long ago as1995, when the Chinese employment world was very different. Back in those days China's main employers were state owned enterprises. The labour market was rather simplistic and very few contractual issues arose. Since then though, China has witnessed explosive growth and private enterprises have begun to feature on a far greater level, which has created a whole new set of challenges.

Many private employers have used the outdated legislation to save money by short-changing their employees on vital benefits such as insurance and social welfare. Because of this, over the last decade, it has become increasingly difficult for workers to protect their rights. Three years ago the central government decided it needed to look for a solution, and now, they think they have found it!

A vital aspect of this new reform was that it involved more of a dialogue than any previous legislation. Local and foreign companies as well as labour movements were able to offer feedback and revisions before the final draft was issued. BSR China recently spoke with Shanghai Normal University's Professor Liu Cheng to gather his insight on the newly passed law. Liu, who was closely involved in providing comment on all four iterations of the new law, is optimistic. He believes the new legislation will greatly enhance employee protection and the enforcement of labour rights as well as carving out a new role for China's unions.

Better Protection of Labour Rights

China has very quickly made the transition from a centrally planned and controlled economy to an almost hyper-capitalist economic model. Given this dramatic change, Liu believes that Chinese enterprises now need financially driven reasons to uphold labour rights, particularly for migrant workers. The new Contract Labour Law, in Liu's view, provides precisely what is needed - a series of heavy financial penalties for companies found to be in violation.

"Under the current labour law, companies in China may make a calculation: ‘Is it more expensive to obey the law, or is it more expensive to break it?' In some instances now, it is indeed cheaper to disobey regulation," said Liu. "The new Labour Contract Law puts enforcement power behind the law. When the new law comes into place, companies will be faced with very specific and harsh financial penalties should they choose to break the law. Financial risks for noncompliance will be higher and clearer- in essence creating a market based incentive for companies to protect labour rights," he said.

Greater Detail on Implementation

While the previous labour law was primarily a set of national guidelines, the new Labour Contract Law is much more focused on the mechanics of enforcement and implementation. For example, in Article 14, there are several specific clauses to ensure workers are paid the benefits and social insurance they are owed. This is addressed via specific language around fixed-term employment contracts, which are often abused in the existing system. Currently, many companies in China take advantage of the labour law by hiring workers for a series of short, fixed-term contracts, in effect keeping them on a constant "probationary" period, and denying them insurance and social welfare payments. The new law stipulates that a company may not hire a worker for more than two fixed short-term contracts; thereafter, the employee must be offered a non-fixed term contract, or else the company must pay the employee double his or her wage.

The new law also details the legal responsibilities of labour agencies. Labour agencies play a critical role in China's labour market, especially for migrant workers. Many companies use agencies as a way to recruit migrant workers, and by default, using an agency also allows the company to forfeit liability for the workers employed through that agency. Under the new law, labour agencies must sign a two-year contract with their employees. When there is no work available for these workers, the agency is required to pay workers a minimum wage as defined by the local authorities.

A New Role for China's Unions

Liu admits that implementation and enforcement are amongst his biggest concerns regarding the new law. Resource-strapped labour inspection offices often cannot manage to effectively implement or enforce the current law. However, the new law introduces an enhanced role for Chinese unions in implementation - in Liu's view, a positive role that holds a lot of promise. The burden of enforcing existing labour laws falls mainly on local labour inspection offices, which often do not have the capacity to manage such enforcement. Although the new employment contract law will still rely on these local offices, trade unions are given a much greater role in implementation and enforcement under the new regulations.

Guo Jun, one of the drafters of the new law, is the Director of the Democratic Governance Unit at the All China Federation of Trade Unions. In the July 5edition of Southern Weekly, Jun noted, "The Labour Contract Law empowers unions with two significant functions: participation in companies' management and supervision of companies' relationships with employees. From now on, all internal regulation of companies, the termination of labour contracts initiated by employers, collective bargaining, and important or large-scale layoffs, etc. shall be concerted with the union. However, not all companies have a union ...Therefore, to push companies to establish their union is more than important -it's urgent."

Professor Liu notes that the new law indicates a critical role for Chinese unions in its implementation. According to his analysis, the law has effectively created a system that allows union leaders to properly defend worker rights both by giving the union the authority to do so by requiring clear, documented labour contracts (essentially written "evidence" in any dispute), and by providing an instructive set of penalties for non-compliance. Liu believes helping Chinese unions assume this new role will take time, but that they will be up to the challenge.

Some Challenges Remain

Despite his strong optimism about the new law, Professor Liu still has a few key concerns about implementation. He believes the unions will assume their roles in helping to operationalise the new law, but also admits that much of the enforcement will continue to rely on labour inspections. With limited resources compared to the high number of Chinese enterprises, Liu notes that it will be problematic to enforce the new Labour Contract Law through legal inspections. That said, given that the new law has a more prescriptive set of penalties in place for non-conformance, Liu believes that local labour bureaus will be in a better position to enforce regulation.

He also sees some areas where the new laws lack specificity. The law includes non-competitive clauses that require a company to compensate employees if they are restricted from working for competing firms; employees are in turn required to compensate employers should they move to a competing company. However, in neither instance is any guidance provided on how to calculate the level of compensation. Finally, while the law outlines a company's responsibility with certain types of workers (i.e. temporary workers), it does not specify a company's responsibility regarding other categories of workers, such as part-time student workers.

By Scott Chang, Associate in Advisory Services, BSR China, and YilingHuang, Communications Manager, BSR China