Working Conditions

Labour contract law: Implementing regulations finally issued

Emphasis on neutral application of law and that open ended contracts do not mean jobs for life

Finally, after almost a year of waiting, months of internal debates and much speculation, the Chinese authorities (the State Council) have issued the implementing regulations for the Labour Contract Law which came into force in January 2008. These regulations were initially promised last autumn after the law was finalised but are only now being issued. They take effect immediately. A draft was issued in May 2008 and opinions solicited. By 20 May, there had been over 80,000 responses. 

The regulations are designed to help companies, authorities, workers, the ACFTU and the law courts among others know exactly how to deal with some of the complex or vague articles in the law. They are crucial to the law’s implementation and to the “spirit” in which the law is assessed and interpreted. As such there has been immense debate over what the regulations may tighten up and if they will come down in favour of the workers or the employers.

The general consensus was that the regulations would favour more the employers as the law was generally seen as a triumph for the more ‘pro-labour’ drafters in involved in the drafting. However in the end the regulations are in fact highly neutral and appear to adhere very closely to the text of the law – neither adding more to one side or the other.

The Standing Committee of the National People’s Congress  also stated that it would begin a law enforcement inspection at the end of September in 15 provinces, municipalities and autonomous regions.

The regulations include six chapters and 38 clauses covering the details involved in terminating a contract, legal liabilities, dispatch or contract labour and other sensitive issues. They cover the main aspects of the law and in many cases simply reiterate the law itself.

One notable absence is further elaboration around the clauses (41/43) requiring the employer to “explain’ to the official trade unions in regard to restructuring requiring dismissals and in cases where the union finds the employer has breached the terms of the contract.

The regulations and the official media attention given to the regulations make it clear – indeed they stress – that the prospect of a “job for life”, one of the biggest issues surrounding the law is over emphasised.  One of the most controversial terms in the draft law and final law was the one that entitled long term employees to sign contracts without specific time limits. This was publicised by companies and trade federations as way too onerous a clause and one which could threaten their livelihood.

According to Xinhua: "By issuing the regulation, we hope to make it clear that labour contracts with no fixed termination dates did not amount to lifetime contracts," a Legislative Affairs Office of the State Council official told Xinhua’.

At the same time, as IHLO previously noted [New Labour Contract Law: Myth and reality], the claim that the new law would increase costs by up to 40 percent made by many companies in advance of the law really only applied to those companies who were ignoring existing laws and policies on wages, social insurance and other benefits.

One commentary by the official central TV network (CCTV) included the following comments; “Liu Rui, the professor of law from the China National School of Admin., said, "In the long run, the law is healthy for all firms. The worst hit firms were those low efficient ones, who only became profitable by taking advantage of their employees. It's one of the points of the law to drive those firms out of business anyway."”

The law is not the only one contributing to rising costs – there have been a raft of various labour related laws and regulations on social security payments, pensions, employment promotion etc which are all together having a an effect. And it is precisely those companies who have not previously paid the minimum wage or paid worker benefits who may well claim the new law is costing up to 40 percent - the figure often quoted by corporate observers. If a company has been compliant in most areas of the law then the new law will not cause more than a fraction of the estimated 40 percent.

If you put these costs next to rising cost of materials, transport, fuel and other factors then there are more reasons why low-end manufacturing will be moving. In a sense this is part of wider government policies aimed at transforming – at least to an extent and at least in certain areas and industries – the transition from traditional reliance on low-cost cheap labour and labour intensive industries – or “sweatshops” to higher end industries. This has been standard practice in Shanghai for example where higher end industries have long been encouraged over low end which have traditionally been the norm in the Pearl River Delta. 

Main clauses

The regulations state that the government at all levels, the relevant administrative departments and the official trade union are asked to promote the implementation of the Labour Contract Law to further promote “harmonious labour relations”

A full translation of the regulations can be found here (unofficial Translation Prepared by Baker & Mc.Kenzie)

The regulations state clearly that if the employer fails to sign a written contract with the employee within one month the employer is liable to pay double the alary for the whole period without a contract excepting the first month. In the event an employer does not sign a contract within one year then it shall pay the employee twice his/her wage for the 11 month period.

Importantly it also makes clear that if an employee has worked for the employer for over 10 years continuously, the employer shall sign an open-term contract with the employee for as long as s/he requires. The 10 year period is counted from the date the employee started worked for the company and includes any time prior to the implementation of the law.

Thus the regulation makes it clear that the actions of companies laying-off long term employees and re-hiring them in the run up to the law, does not in fact get round this clause and their employment relationship is seen as unbroken.

For more details see here: New Labour Contract Law : Opportunities and Threats [an analysis]

In addition they also (article 12) state that the provisions concerning open-ended contracts and severance payment does not apply to “community service jobs” that are established for providing employment for the “difficult to employ” and those which have addition subsidies and social insurance provisions. Presumably then this includes the number of disabled workers required (by law) to be employed in an enterprise and for which tax and other incentives are given – such employees then can be dismissed without severance pay and can work for over ten years without ever becoming  long term employees.

In the event of termination, the regulations restate the conditions in the law and the procedures for cancellation or termination on both sides. The employer may terminate a worker’s fixed-term employment contract, open-ended employment contract or employment contract to expire upon completion of a certain job, in accordance with the conditions and procedures specified in the Law, if:
(1)the Employer and the worker so agree after consultations;
(2) the worker is proved during his probation period not to satisfy the conditions for employment;
(3)the worker materially breaches the Employer’s rules and regulations;
(4)the worker commits serious dereliction of duty or practices graft, causing substantial damage to the Employer;
(5)the worker has additionally established an employment relationship with another Employer which materially affects the completion of his tasks with the first-mentioned Employer, or he refuses to rectify the matter after the same is brought to his attention by the Employer
;(6)the worker used such means as deception or coercion, or took advantage of the Employer’s difficulties, to cause the Employer to conclude an employment contract, or to make an amendment thereto, that was contrary to its true intent;
(7)the worker has his criminal liability pursued in accordance with the law;
(8)after the set period of medical care for an illness or non-work-related injury, the worker can engage neither in his original work nor in other work arranged for him by the Employer;
(9)the worker is incompetent and remains incompetent after training or adjustment of his position
(10)a major change in the objective circumstances relied upon at the time of conclusion of the employment contract renders it un performable and, after consultations, the Employer and the worker are unable to reach agreement on amending the employment contract;
(11)the Employer is undergoing a restructuring pursuant to the Enterprise Bankruptcy Law;
(12)the Employer experiences serious difficulties in its production and/or business operations;
13)the enterprise switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce;
or(14)another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contract occurs, rendering it un performable.

One clause which remains unclear is Article 14. This covers the circumstances of an employee signing a contract with an employer registered in one place but performing the work in another place. In this case, then IfF “such matters as the minimum wage rate for workers, labour protection, working conditions, protection against occupational hazards and the preceding year’s average monthly wage of employees in the area” are different to the place where the employer is registered then they shall be handled in accordance with the relevant regulations in the place where the employment contract is performed. If  there are higher rates in the place of registration but both sides agree then the rates and standards in the place where the employer is registered can prevail. While this is clear  in legal terms, it does raise questions about how contracts – which are supposed to be much more detailed than previously – can in reality be detailed if they do not take into account when signing (and are not clearly written when signed) the exact terms and conditions.

Finally the regulations also state that any complaint or report of violation from an organisation or individual shall “be handled by the labour administration authority of the local People’s Government at the county level or above in accordance with the Regulations for Monitoring Labour Security”. Any disputes between a worker and an employer in connection with the “conclusion, performance, amendment, termination or ending of the employment contract” shall be dealt with in accordance with the Law on the Mediation and Arbitration of Employment Disputes.

Further reading on the contract law

Contract Law (full text in English)

New Labour Contract Law: Myth and reality Six months after implementation

Contract Law - Lose-lose situation? Comments from inside China

New Labour Contract Law : Opportunities and Threats [an analysis]