With China’s recent economic success largely due to its position as the world’s largest pool of cheap, flexible labor, a draft labor contracts law doing the rounds of China’s top legislators has drawn heavy interest.
Around 200,000 submissions poured in after the draft was made public in March, indicating the strength of feeling on both sides of the labor system. Perhaps predictably, employers claimed it went too far, while employees said the proposed measures did not go far enough.
The new law includes a range of clauses that will make it much more difficult, and costly, to terminate an employment contract. Insight, the magazine of the American Chamber of Commerce in Shanghai, summed up business concerns in a single headline: is this a "Return to the Iron Rice Bowl?" it asked.
But the reality is the iron rice bowl never left. It has just been ignored. Lifelong employment, enjoyed by most Chinese workers as part of the "cradle to grave" welfare system dismantled during China’s transition to a market economy, was effectively entrenched in China’s first labor law in 1994. Unlike the US, Beijing does not take the principle of "employ at will" to heart.
Andreas Lauffs, a specialist in China employment law and partner at US-based law firm Baker & McKenzie, points out China’s labor laws are more like those found in social democrat European countries, where contracts can only be terminated under a limited number of statutory grounds.
"The difference in Europe is that at least you have a functioning legal system, so there is some potential for relying on the statute and on the court system to deal with terminations," he said.
Lauffs points to arbitration statistics in Shanghai, which show workers wholly or partially won 87% of 14,000 cases. "With employers losing 87% of the cases, terminating employees is very difficult ? [The new law] makes it even more difficult."
Employees have not had it all their own way in China. In practice, life-long employment has been relatively easy to bypass. Many employers hire workers through Employment Service Agencies (ESAs), meaning the worker doesn’t appear on company books.
For direct hires, fixed-term contracts, which can just be allowed to lapse to terminate employment, have become common. "Fixed contracts have enabled foreign companies to negotiate terms pretty well," said Meg Utterback, a lawyer with US-based law firm Thelen Reid & Priest LLP.
In addition to equally controversial rules concerning non-compete agreements, training bonds and requirements for consulting with trade unions (See: Terms of contention: key clauses), the new law effectively ends the fixed-term contract system by requiring severance if a fixed-contract is not renewed on expiration.
In the absence of a contract, including if a fixed-term contract lapses, an open-term contract will apply. ESAs may also be forced out of business due to a requirement for a cost-prohibitive US$600 bond per worker, removing a source of easy-to-hire, easy-to-fire employees.
Utterback said the new law is a reaction to the flouting of labor laws in China, where employers have been able to terminate contracts without notice, withhold wages, and refuse to renew contracts. Most susceptible to abuse are migrant workers and low-end blue-collar workers in domestic companies. "Migrant laborers are not effectively protected, especially when they come through agencies," she said.
For Lauffs, the changes are an overreaction and will have no effect on problem employers, who already flout existing laws. "Rather than saying, ‘well, we want to enforce existing laws or come up with better protection for that issue,’ they rewrite the law and make life more difficult for everybody," he said.
"It’s pretty drastic and will put China in the neighborhood of where France and Germany used to be before they started reforming their labor systems.
"People went to China because of low labor costs and a flexible labor market. Will they continue to go to China if China is just becoming a new Europe?"
This is the big question authorities, and foreign employers, will no doubt be mulling, though reaction from the foreign business community appears mixed. Some claim it makes countries like Mexico and Vietnam more attractive, while others contend it will make little substantive difference. All agree that as it currently stands, the law will require much closer attention to human resource management.
While many are hoping some of the more controversial aspects will be changed, Lauffs believes the draft is likely to pass largely unchanged after its third reading this summer. According to a recent Hewitt Associates report, most foreign employers are already preparing for it becoming law. In a survey of 224 companies, 83% said they would review or audit HR policies, 56% said they would review their manpower strategy and 75% said they would audit existing employment contracts in order to ensure compliance.
This last could prove particularly important because, as Lauffs explains, it is the primacy of the open-term contract that has the most potential to trip up employers and make them unwitting contributors to the iron rice bowl. "It will be a nightmare because somebody that you hired with expectation of having them for one year can overnight become an open term contract that is potentially sitting on your payroll for the rest of your life."