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4507-East Asia: Capital & Labour Spring


Chinese Labour Contract Law analysis and implications

Candidate Nr. 4704

U n i v e r s i t e t e t i O s l o

EAST 4507 Candidate nr. 4704

A new law regarding labour contracts in China went into effect on January 1, 2008. According to the new 98-article-long "Labour Contract Law", employees of at least 10 years standing are entitled to contracts that protect them from being dismissed without cause. The new law also requires employers to contribute to employees' social security accounts and sets wage standards for employees on probation and working overtime. The law also requires employers to consult an employee representative congress, usually a branch of the official All China Federation of Trade Unions, on any changes to matters including hours, benefits and compensation. The new law, which was more than two years in the making before its final passage in July, was the subject of intense interest and scrutiny from companies, workers and union groups. Some estimated that as consequence of the new reform, the labour costs would be close to 40% higher. It has been predicted that foreign companies investing in supermarket chains, restaurants, building industries and other low- end manufacturing, which abuse cheap labours and avoid paying social security would suffer some losses. Indeed in October, US-based retail giant Wal-Mart fired about 100 employees at a sourcing centre in China.1 But in the long run, the new labour contract law would not negatively impact China's competitiveness and appeal as a destination for foreign investment. These predictions arise some important questions? Why would Chinese authorities adopt a reform that would have a negative effect on Chinese competitiveness? What and who were the main driving forces of this reform? Is this reform one of the steps taken as a part of Hu Jintaos administrations spoken focus on welfare? While some welcomed the reform as a laudable step forward others argued that the reform would cause no changes of significant importance as constraining companies ability to dismiss workers is something of a moot point in the context of a tight labour market, with factories in Chinas coastal manufacturing hubs struggling to remain fully staffed. So is this labour reform a meaningful progress or just another illusory reform?

1 Chan 2006

EAST 4507 Candidate nr. 4704

Putting it whole in perspective protests and social unrest as a driving force

The 2008 labour contract reform can be seen as a product of the 'second reform era' commencing from 1992. The first era, dating from 1978 onwards, inspired new ideas and hope while the second saw greater social divisions, the dissolution of dreams and the need to confront the problems of ordinary people rather than the grand scheme. From this angle, the law with which this paper is concerned emerges as a pertinent attempt to address some of China's biting labour force issues brought about by an increasing market prerogative that has pressured both state- based and private enterprises to reduce employee numbers and increase efficiency.2 Since 1990s, the frequency and the magnitude of social unrest and protests have increased rapidly. Where the number of protests reported by the Ministry of Public Security was 8700 in 1993, the number rose up to 74 000 in 2004.3 The Labour Law of 1994 was the first attempt to establish a relatively sound basis for the development of labour relations suitable for a market economy without democratization.4 But the years have shown that the labour regime established by the Labour Law was not easily enforceable, mainly because of the employers reluctance to sign labour contracts and the laws vague and lenient formulations, which in its turn contributed to the poor enforcement. This problem was by far mostly present among the migrant workers, which constitutes the biggest bulk of Chinese work force. As a result, conflicts between labour and capital have been increasing. Official statistics show that the number of labour dispute cases increased from 19,098 in 1994 to 226,000 in 2003, and the number of workers involved increased from 77,794 to 800,000 during the same period.5 Violent confrontations or attacks on government property have grown at the fastest rate. Central authorities had no other choice than try to appease the workers. Their rights came finally up on the agenda. The workers and especially migrant workers situation in China was (and still is) indeed in dire. According to the general report (zongbao) on the matter, in 2004, only 12.5% of
2 Mitchell 2008: 2 4 Ngok 2008: 53 5 ibid.: 54 3 Selden & Perry 2010: 26

EAST 4507 Candidate nr. 4704 migrant workers had a contract, only 10% of them had a medical insurance and only 15% had retirement pensions.6 Up until 2003, migrant workers were not even eligible for membership in a trade union, paradoxically because they were not considered as a part of the working class.7 The sitting leaders, Hu Jintao and Wen Jiabao, taking lessons from the SARS crisis in 2003 and the worsening developmental conditions, sought to formulate a new set of ideas about Chinese development that aimed to strike a balance among economic growth, social development, and environmental protection.8 Already in 2003, the State Council issued an official notice, Notice on Doing a Better Job Concerning the Employment Management of and Services for Migrant Workers, which acknowledged that migrant workers engaged in industrial labour are given irrational restrictions (bu heli xianzhe) and their lawful interests are not safeguarded (hefa quanli debudao youxiao baohu).9 In order to strengthen the administration of employment of migrant workers, the document proposed following: 1. Elevate the knowledge on how to best manage and service migrant workers 2. Abolishment of unreasonable restrictions 3. Feasibly solve deductions of and delays in wage payment 4. Improve working and living conditions of migrant workers 5. Offer vocational training to the migrant workers 6 Introduce multi-channel arrangement to protect the school children of migrant workers 7. Strengthening and improvement of administrative controls on migrant workers.10 In 2006, another document on migrant workers was issued by the State Council, which acknowledged their importance and outlined broad policy objectives for improving their situation.11 Many of the policy principles and measures for improving the situation of workers in general and migrant workers in particular have been eventually codified in the new Labour Contract Law of 2007. The formulation of the Labour Contract Law started in 2004 amid huge complaints about
6 Huang 2009 7 Howell 2006: 9 8 Ngok 2008: 57 10 ibid. 11 Ngok 2008: 59 9 State Council 2003

EAST 4507 Candidate nr. 4704 employers mistreating workers. The first draft was released in March 2006. Soon afterward, the National Peoples Congress (NPC) announced an open comment period, for companies, organizations, and individuals to submit comments and complaints on the proposed law. There were over 200,000 responses received, including detailed complaints from the American Chamber of Commerce in Shanghai and the European Chamber of Commerce in China.12 Labour Contract Law was adopted in June 2007 after four sessions of deliberation. The final version of the Law represents a compromise between the interests of both the employees and the employers.

Chinas Labour Contract Law

The improvements
As the article 1 states, the purpose of this law is to improve the labour contract system, specify the rights and obligations of both parties to the labour contracts, protect the legitimate rights and interests of the workers13 and has a wide application covering enterprises, individual economic organizations, non-enterprise private entities and other entities and the workers thereof, as well as the conclusion, performance, alteration, discharge or termination of labour contracts14. Even though in many ways controversial, the new law is still widely regarded to have brought some major improvements to the existing legal framework: One of the most important improvements came to the issue of underpayment of wages. The Labour Contract Law addresses the issue through article 30 and 31, where the employer is prohibited to force any worker to work overtime or do so in any disguised form15 and is obliged to pay the workers their remunerations on time, with local peoples court as a sanction mechanism.16 The law also prohibits bonded labour17 which limited workers mobility through financial constraints and it also prevents an employer from including
12 Gross & Connor 2008 14 LCL: Article 2 13 Labour Contract Law of the Peoples Republic of China (LCL): Article 1 15 LCL: Article 31 16 LCL: Article 30 17 LCL: Article 9

EAST 4507 Candidate nr. 4704 penalty clauses in employment contracts, unless agreed beforehand.18 To ensure maximum safeguarding of the workers rights, the law requires a physical written contract concluded within one month of employment. The article 82 states that if an employer fails to conclude a labour contract in written form with a worker in more than one month but less than one year after the date of starting to use him, it shall pay the worker double amount of his monthly salary. This was a welcomed move, since the old labour contract system worked poorly because of Chinas disadvantageous labour to capital ratio, which led to a situation where workers were afraid to ask for a written contract in fear of losing their job. 19

Finally, the new Labour Contract Law strengthens the workers right in relation to dismissals related to occupational hazards20 and in the case of company restructuring21. Just before the adoption of the law, after the exposure of forced labour in the brick kilns of North Chinas Shanxi Province, a new clause was added to stipulate that government officials guilty of abuse of their office would face administrative penalties or criminal prosecution.22

As mentioned before, the final version of the Law represents a compromise between the interests of both the employees and the employers. Thus some less fortunate and controversial clauses are bound to be included. A number of possible shortcomings and uncertainties in the law will be identified, although because of the scope of this article, far from all shortcoming will be addressed. The area that perhaps spawned most disagreement between the involved parties concerned forms of contracting and termination of employment. While workers organizations pushed for job security and compensation in the even of dismissal, the companies in their turn
18 LCL Article 25 19 Ngok 2008: 55 20 LCL: Article 42, 32 21 LCL: Article 33, 34 22 Ngok 2008: 59

EAST 4507 Candidate nr. 4704 wanted to reduce the cost of contract termination.23 As a result there have been made no clear-cut divisions between manual labour relations (laodong guanxi), service relations (laowu guanxi) and employment relations (guyong guanxi). Even though three different laws regulate three of them, confusions and gray zones arise both intentionally and unintentionally.24 The outcome often is that workers engaged in one of the standard categories enjoy protections, while non-standard workers fall between the regulations. When talking about non-standard workers, one group sticks out - namely migrant workers. As written above, just like the 1994 Labour Law, the 2008 version also fails to offer a clear definition of what a labourer is. As there is no specific definition available, it still very unclear whether migrant workers are labourers in the sense of labour law.25 Even though the migrant workers are still protected by some general provisions of the law, the undisputed reality is that they dont enjoy the same rights in terms of social security, wages and other benefits, as urban workers. As one scholar argues, migrant workers are labourers in a legal sense, but they can be treated differently by policies adopted by local governments.26 Perhaps the biggest controversy was surrounding the revision of the first draft, which by some NGOs account, was gutted by global corporations.27

The Debate
On December 11th the Chinese National Peoples Congress Legal Affairs Committee held a meeting to debate the suggested revisions to the Draft Labour Contract Law received during the public comment period. The committee met again on December 19th and soon issued a revised draft of the law. In contrast to the first public comment period, the government invited only select parties such as American Chamber of Commerce to submit comments on

23 Cooney et al. 2007: 794 24 Wu 2011 26 ibid. 27 Global Labour Strategies 2007: 4 25 Ngok 2008: 60

EAST 4507 Candidate nr. 4704 the second draft, and provided copies of the legislation only to these invitees.28 So what were the demands or the objections? An opposition to measures that would limit the capacity of corporations to structure their employment arrangements as they chose was the primary fuel for the debate.29 Some of the more positive clauses were eliminated or modified. For example, the initial draft of the Labour Contract Law provided that if an employer failed to enter into a written contract with workers, the law implied a non-fixed term contract. 30 In a case of a dispute, the ambiguities were to be interpreted in favour of the employee.31 Article 9 of the first draft states that: on existence of different understanding of labour relations, unless contrary is proven, the understanding of workers prevail.32 The first draft of the law also provided for negotiations over workplace policies and procedures, health and safety, and firing with a labour representative. The article 4 of the first draft stated that: The employer's rules and regulations directly related to the interests of workers, shall be subject to trade unions, trade unions or employee representatives.33 It also expressly stated that before a company may lay off fifty or more workers, it must reach consensus (xieshang yizhi) with the trade union through negotiation.34 The final draft of the law no longer requires that the subjects of directly related to the interests of workers, be adopted by trade unions. Instead the wording is changed to the less binding equal consultation by employers and labour union or representatives of workers.35 Employers
28 ibid. 29 Cooney et a.l 2007: 789 30 Global Labour Strategis 2007 13; Cooney et a.l 2007: 789

31(First draft of the Labour Contract Law) Zhonghua Renmin gong he guo laodong

hetong fa (cao an): Article 9, 10.

32 Zhonghua remin gong he guo laodong hetong fa (cao an): Article 9:

33 Zhonghua remin gong he guo laodong hetong fa (cao an): Article 4: 34 Zhonghua remin gong he guo laodong hetong fa (cao an): Article 33 35 LCL: Article 4 8

EAST 4507 Candidate nr. 4704 also no longer need to negotiate with the trade union or staff representative over large-scale economic lay-offs and only needs to explain the situation to the union and report to the local labour administrator.36 A pathway from temporary work to permanent work was also severed. Where in the first draft of the law the temp agency workers could become permanent employees after one year37, temporary workers could now only receive permanent position after working uninterrupted for no less than ten years38.

ACFTU and the weak enforcement

We all thought that the Labour Contract Law going into effect on January 1 would have showered usthe weak and disadvantaged masseswith blessings. Our youth is gone with the days of the growth of the company. To our profound disappointment, none of us were offered open-term contracts despite years of diligent work. In our thirties to forties, we are under heavy familial burden. We are afraid of losing our jobs. We feel this is extremely unfair and we are angry, too.

These were the words of a 38year old male warehouse department worker written in an open letter to Walt Disney Co. (Hung Hings buyer). Just couple of month after the Labour Contract Law went into effect, several Chinese NGOs have documented several cases of workers being forced to sign blank or incomplete contracts.39 There were even reported cases were the workers had to sign their contracts in English. In the recent FOXCONN incident, the situation for some were so desperate that they in sheer desperation jumped to their deaths from the roof top of the factory building. In all of the cases mentioned above, All China Federation of Trade Unions (ACFTU) did close to nothing to support the workers. The positive results came only through desperate measures taken by the workers themselves. Even though the new Labour Contract Laws intention was to boost ACFTUs role, examples posited above, paint a whole different picture.
36 Global Labour Strategies 2007: 16 38 LCL Article 14. 39 Chan 2009: 46 37 Zhonghua remin gong he guo laodong hetong fa (cao an): Article 40

EAST 4507 Candidate nr. 4704 Through 30 years of reform, China has moved more and more towards becoming a full scale market driven economy, and with this the ACFTUs role, seeing it as an organization founded upon principles of a socialist society, has also become more ambiguous. Many even tend to doubt ACFTUs role as a channel for workers to demand and improve their rights and instead view it as an appeasement tool meant to control the level of discontent. Chen (2003) argues that cases taken up by AFCTU are mostly the ones where managerial malfeasance was unmistakably against the Labour Law.40 There are several views on why ACFTUs enforcement power is so weak. The first one as mentioned, is a failure to adapt itself to the market-driven economy. Secondly, the ACFTU is still not independent from the party-state apparatus and has to work inside the constraints set by the party policy. When the Party is for improving workers conditions, there is also a space for the ACFTU to do so, but with Chinas political priority lying in keeping the growth-rates up, the ACFTUs mandate to protect and represent the workers also becomes weakened.

Concluding Remarks
Chinese Labour Contract Law has drawn a lot of attention and interest, not only from domestic stakeholders, but also from foreign interest groups. The law itself came about at a relevant time in Chinas development to provide a much-needed fix for the gaping holes of the preceding labour law. Although the final draft of the law bears the mark of being hollowed out by the compromise between the interests of both the employees and the employers, it still is a clear improvement on the legal position that prevailed prior to its enactment. While being a positive step forward, the law in itself is far from enough to address the compliance problems that have plagued (and is still plaguing) China. The ACFTU, a body which in theory should have the power to ensure employers compliance with the law, has shown little will to intervene on behalf of workers, unless if it is a case where the violation is so clear that they are sure to win. To quote one professor: Although these developments may help to strike a balance between labour protection and economic growth, the legacies of the old development paradigm, which focused on the growth of GDP at the cost of labour,
40 Chen 2003: 1014-1015


EAST 4507 Candidate nr. 4704 are still influential.

Chan, Anita (2001), China's workers under assault: the exploitation of labor in a globalizing economy Chan, Anita (2006), Organizing Wal-Mart: The Chinese Trade-Union at a crossroad, The Asia- Pacific Journal: Japan Focus ( Chan, Jenny (2009), Meaningful progress or illusory reform: analyzing Chinas Labor Contract Law, New Labor Forum 18(2): 43-51, Joseph S. Murphy institute Chen, Feng (2003) Between the State and Labour: The conflict of Chinese Trade Unions Double Identity in Market Reform. The China Quarterly. Global Labour Strategies (2007), Under Influence: Corporations Gain Ground in Battle over Chinas new Labour Law but human rights and labour advocates are pushing back. r_strategies.pdf Gross, Ames & Connor, Andrew (2008), New 2008 China Labour Law Update, Pacific Bridge Inc. Huang, Zongzhi (2009), Zhongguo bei hushi de fei zhenggui jingji: xinashi yu lilun, Wyyouzhixiang Howell, Jude (2006), New democratic trends in China? Reforming the All China Federation of Trade Unions, Institute of Development Studies, Sussex, UK.


EAST 4507 Candidate nr. 4704 Labor Contract Law of the People's Republic of China: ( Mitchell, Dominique (2008), Law of the Peoples Republic of China on Employment Contracts, AFTINET Selden, Mark & Perry, Elizabeth J. (2010), Chinese Society: Change, Conflict and Resistance Third Edition, Routledge State Council (Guowuwan) (2003), Guowuyuan bangongting guanyu zuo hao nongmin jin cheng wugong jiuye guanli he fuwu gongzuo de tongzhi. Wu Youshui (2011), Lun woguo laodong guanxi, guyong guanxi he laowu guanxi de jieding. Zhonghua Renmin gong he guo laodong hetong fa (cao an)