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


Contents
Overview - Companies on the move?
Company responses to implementation
Survey of standard contracts - five case studies

Overview

It has been six months since the new Labour contract law was implemented inside China. The implementing guidelines – to clear up inconsistencies in the law and help guide companies and labour bureaus in implementing the details – should be issued soon. They were first scheduled for last year and technically should have been issued at the same time as the law. That there has been a delay is symptomatic of the debate that has surrounded the new law and the often intense dialogue between the various stakeholders and opinion makers in legislation – including the ACFTU.

It has been reported that the implementing regulations will in fact aim to please the more conservative lawmakers and of course the interests of the companies and capital. They are believed to favour “flexibility” in terms of the conditions under which employees can be dismissed and veer towards making the transition easier for companies. In part this is a response to the immense lobbying of companies – domestic and international (through various chambers of commerce) and the Hong Kong business lobby which has been continuing its lobbying and threats to the government throughout the past year or so.

In terms of the impact of the actual law – hardly a week goes by without some reports of the number of companies leaving China – most specifically the south – because, they say, of the impact of the new law in raising costs for employers. Is this really the case?

To be frank – the answer is a resounding no. There is a multiciplity of issues which are making the situation more difficult for companies using low paid and labour intensive methods to keep their profit margins – the push factor away from China.  These are also having an effect on the higher end companies too. In addition the same factors which brought companies to China (apart from the obvious potential of China as a market) -  the pull factor - is also making companies seek further profits by moving to nearby states with even cheaper labour and other costs – including Vietnam and Cambodia.

Among the main reasons contributing to the closure of enterprises are increasingly high and rising inflation, local and regional labour shortages (especially in skilled labour), the continued strength of the Chinese currency, rising taxes, tougher environmental standards, rising costs of raw materials and the end of certain government subsidies.

Wages which have remained stagnant and barely moving are increasing – sometimes simply to keep up with massive inflation and food costs. This is impacting employers who generally observe Chinese minimum wage levels and employ the semi skilled and skilled workers. Urban residents have seen high wage increases while migrant workers are also seeing rises – in downtown Shenzhen, the minimum wage reached a symbolic 1,000 Yuan last month (to start from 1 July 2008) . Despite the fact that for many migrants the minimum wage represents the maximum and is obtained through extensive and often illegally high – overtime work, labour costs are rising. In some industries, the wages have been estimated to be rising at 25 percent a year.

Companies – even those who threatened to pull out of China if the new law was implemented - will not leave China; the potential market remains crucial to long term development and labour remains relatively cheap with the added bonus of improving logistics. Other Asian states are also seeing costs increase – Vietnam also has rising inflation – May 2008 saw a rise of 25.2 percent.

While China is more expensive, the costs of importing from other countries is also high – in part due to currency related issues - the American labour Department reported in June 2008 that import prices were 4.6 percent higher in May than a year earlier for goods from but 6.4 percent higher for goods from southeast Asia.

What we are now seeing is the internal race to the bottom as companies move out of the Pearl River delta and other areas inside China which have long been the base for foreign investment towards the inland areas where business parks and economic zones are rapidly gaining popularity. For example, in June it was announced that Foxconn, the mobile phone producer (and subject of several major disputes) was shifting its factories from Shenzhen to northern Chinese provinces such as Hebei and Shanxi where the average salary is more than 60% lower than that of Shenzhen, to save costs, while maintaining research and development operations in Shenzhen.

The contract law only speeded up this process – it was already underway long before the law came into force.
This internal race is mirrored by a more general Asian race to the bottom as companies move towards Vietnam – the new China – and then to Cambodia – the new Vietnam. Domestically owned and labour intensive Chinese factories have long been establishing factories in Cambodia to keep costs low and now MNCs are increasingly joining them. Vietnam and Cambodia are now seeing foreign investment expand rapidly and along with it – wages and costs are increasing. Another few years and perhaps Laos will become the “next Cambodia” and so on.
China remains the most popular destination for foreign industrial investment in the world, attracting a reported $83 billion USD in 2007.  But according to some observers companies are developing a strategy of “China plus One,” - retaining a base in China and establishing or expanding a base within Asia but outside China. * [NOTE 1]

" We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest makers of cotton and spandex fabric.

To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand. Gerald Evans, the president for global supply chain at Hanesbrands, said that compared with China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia. *

The New York Times summed up the actual reality of the new law well – “New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.”  It is not the actual law so much as the fear that this law, which gives teeth to existing legislation, may actually be implemented and as such is causing firms to seek out and rectify existing areas of non-compliance. The law is not the only one – there have been a raft of various labour related laws and regulation son social security payments, pensions, employment promotion etc which are all together having a an effect.

So it is precisely those companies who have not previously paid the minimum wage or paid worker benefits who may well claim the new law will add costs of up to 40 percent - a 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.

But if you put these costs next to rising cost of materials and other factors then there are more reasons why low-end manufacturing will be moving. In a sense this is part of 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. For example, the authorities are beginning to stop lower tax rates for foreign owned companies – whereas neighbouring states still offer preferential rates for foreign investment.

China’s economic boom has been built on the backs of its low paid workers – many of them rural residents. This reliance may well now change emphasis as China encourages more technology transfer and companies are required to invest in employee training and general vocational training is encouraged (see for example the Employment Promotion Law). Low paid workers are not however to be phased out – they will continue to service the manufacturing industries and their wages will not be increased to match those of their urban counterparts any time soon.

One major result of the new law – if implemented - will not necessarily be the automatic improvement of workers rights and living conditions but perhaps the shift in industrial relations to a situation where employers no longer routinely flout the laws – as is common now – but instead seek to legally circumvent the new law. Thus we will see rising numbers of companies employing part time workers with working hours just under the amount needed for them to be covered by the new law, or employers ensuring the bare minimum are contained in the new contracts – even if all workers get a copy. Then perhaps we will see a situation common in the west where company lawyers and human resource management are more important in ensuring costs are kept down – in a situation all to familiar to those in Europe and America.

Company responses to implementation - How has the new law impacted on workers?

Contracts
One of the main aims of the new law was to regularize the employment relationship – to ensure that more and more workers had formal contracts – at the time the law came into force an estimated 60 – 80 percent of workers had no written contract, much less a personal copy of such a contract. From the workers point of view this made them more vulnerable when it came to claiming unpaid wages or compensation as they had to prove a relationship with the employer. It also meant that for most, they were unaware of the detailed terms and conditions of their employment. This was exacerbated by the fact that most contracts where available were very simple and failed to give details of wages, piece rates and working hours.

New contracts were meant to end this and provide a detailed overview of working conditions and terms. To this end many provinces and municipalities put forward draft contracts, which were then sometimes commented on by local labour bureaus, the public (in some cases) and other authorities. Final contracts were then published for employers to download from the internet and use in their individual enterprises.

It stands to reason then that these contracts should at the very least follow the letter of the law, if not the spirit of it. IHLO earlier surveyed a draft contract for the Dongguan area however which introduced a clause stating workers would be fired if they went on strike – an addition not in the law. The final version removed this claim but instead added a clause on adherence to reproductive policy.

IHLO looked at five different standard contracts published online for employers in each particular region to use (see last section). In addition IHLO also interviewed staff with a local labour group dealing directly with worker complaints about how they had found the law’s implementation, how their bosses had reacted to the law and how their situation had changed in the past few months since 1 January 2008.

For more details on the Dongguan Contract, the law itself and the mass layoffs of long term employees that preceded the law, please see here.

New and old tricks

We found that a growing number of employers provide contracts for workers to sign, but how effective, how legal these contracts are, is an unanswered question. Many workers reported that the employers have given them “strange” contracts to sign; some are blank, some are covered by another piece of paper and workers are asked to sign without the chance to read through it, some even sign English contracts which they cannot read. Many workers reported that they did not get a copy of contracts.

Mostly bigger, labour-intensive cities have put out their own sample contracts on the website, which are free for the employers to download .[NOTE 2]Factories often download the sample contract, make revisions to match their own interests and ask workers to sign it. However, they would not tell workers the revisions they have made to the standard contract, which misleads the workers to think that the contracts they sign are the official contracts released by the local authority.

Details in the contracts

Work hours

The Guangdong provincial labour bureau states that a five-day-week is the norm but companies who want workers to work longer, e.g. 6-day-week, will have to apply at the labour bureau. However, it is not clear if the labour bureau ever rejects anyone’s application and if it ever punishes any company which goes ahead without approval. Therefore, in order to avoid paying high amount of overtime wages, factories surveyed state in the contract a 6-day-week, often without any approval from local labour bureau, but each day is 6.66 work-hours, in order to make it look like a 40-hour-week. By law, overtime wages should be paid at 1.5 times and 2 times on normal work day and rest days, respectively. Such a strategy can help to legally reduce the double rate of overtime required on rest days. In practice many companies do not even pay the required rates. For example One Nine Dragons company worker wrote to a newspaper on 20 April 2008, after the launch of a much publicized report into poor working conditions there, staying that Nine Dragons always asked its workers to do non-paid overtime (weekdays and weekends) and only paid them 200% for working on Statutory holidays (while the legal requirement is 300%) [NOTE 4] More detailed analysis of the Nine Dragons’ case can be found here

Wages & Welfare

In almost all ordinary workers’ contracts, we would see the figure of the local minimum wages stated as their wages. In fact, while many of them earn higher than the minimum wages, especially when they are paid by piece rate, they actually work extremely long and illegally hours to generate this higher income. The reason to keep two different types of wages – the paper one and the actual one - is, if the factory only pays the workers legal minimum wages, given current inflation, many workers would quit and cause an ever-worsening labour shortage. However, factories would try hard not to have the real wages being recorded, because once workers notice that they are not paid properly, e.g. for overtime, they would claim compensation and if workers can prove that they usually have a higher wage, they would be entitled to get a proportionally higher wages from other factories, which is to be avoided. Therefore, instead of paying wages, employers create other types of welfares which are untraceable by the labour bureaus. A worker offered on paper the legal minimum wage is ore likely to accept higher wages in practice even if he or she cannot fully understand the exact mechanism of its computation whereas a worker expecting a higher basic wage would quickly lose patience if the wage failed to live up to  the one offered or failed to exceed it.

One example of such a company – is the China Petroleum & Chemical Corporation (CPCC). However as this company is in some cases the major employer in a specific city it has an added incentive to keep offered wages at a minimum. [NOTE 5]

Skilled workers, middle-management and white-collar workers receive a contract, with a higher but all-inclusive wage figure given, which is illegal but at the same time, a common practice. Workers complain that when signing such a contract, the employers expect the workers to work 40 hours a week and an extra 36 hours legal overtime a month at usual pay rates. In many cases, they are required to work further hours without any pay, so the hourly wage for them is in fact very low, especially when they are considered as skilled workers. Additionally, if a company wishes to pay a fixed amount without extra overtime payments, such a practice must be first approved by the local labour department but in practice, this normally does not happen. According to some worker activists /representatives dealing with the local labour bureaus, when receiving a complaint, the officials would simply check if the actual wages workers received would be able to cover all hours s/he worked in the factory using a calculation based on the local legal minimum wage, instead of the scale of her/his real wages. This practice does little to help workers obtain due compensation for underpaid wages.

Dismissals

The contract law requires a 30-day-notice or one-month wages to be given, at the time of dismissals. Employers can only dismiss workers under certain conditions (article 40 & 41) and provide workers with  compensation (for each year of service, a month of wages). However, on most of new labour contracts, the employers actually delete the phrases; “under which conditions” and “financial compensation”, thus many contracts read : “employers can terminate a contract by giving workers 30-days notice”, to make it seem like the notification period is the only criteria for a dismissal. Workers could then be misled to believe that there is no other protection against dismissal and therefore do not know how to claim in cases of unfair or illegal dismissal.

Factory rule books

The formal contract is not the document which rules in the factories nor is it generally the ultimate arbiter of practice and punishment. In most contracts, there is a clause on “factory rules” which says workers must observe “factory rules” or face disciplining, a fine or ultimately dismissal. Each factory has its own set of rules and very often they remain mysterious. The new contract law has not done anything to change this particular situation which can result in  workers being paid very low wages and at worst for some living in a climate of fear, especially those living in dormitories onsite.

Most workers know that there are a set of rules but seldom would they be given a rule book at the time of recruitment, signing contract or even when being punished due to violation of those rules. The labour contract law allows the existence of factory rules, but says that the labour bureau has to monitor them, without does not give any detailed procedure for such monitoring or specific punishments when rules are found to be in reach of law. In practice rules are rarely monitored. Being governed by factory rules without knowing the contents, workers are in the dark as to the legal basis of the fines they face and this undermines any confidence they may have in their actual contract.

What are these rules and how are they legalised? According to the “Explanation of legal issues related to labour disputes”, Article 19 [NOTE 6] states that factory rules have to be drafted through a democratic procedure, abide by national law, administrative regulations and policies and be publicly shown to the workers. Most rules are not known to workers, let alone being democratically passed by them. Rules usually cover fines, which is the workers’ main concern.

What is a reasonable fine? For example, many factories charge workers for falling asleep at work, despite the long hours they have to work, and the fine can be as high at 1,000 Yuan Again using the example of Nine Dragons; the rule book at the Dongguan factory stated that entering the factory by the wrong gate will result in a fine of 300 Yuan (there are four gates at ND’s plant) while severe mistakes, such as using a  mobile phone at work costs 1000 Yuan; smoking at the workplace results in a 2000 Yuan fine while calling for strike / slow-down would also result in a fine of 1000 Yuan or more. [NOTE 7] Some factories fine workers for visiting washrooms too often, for taking sick leave, for accidents in the productions; some simply use excessive fines as a way of forcing workers to resign, so that the factory can avoid paying any compensation. Article 16 of “Regulations on rewards and disciplinary measures of employee” suggests that the total fines incurred in one month’s work  should not be higher than 20% of a worker’s basic monthly wage – thus a worker earning the basic salary of 800 Yuan could be fined – legally – a total of 160 Yuan. [NOTE 8]

Workers’ reactions to their new contracts

According to local Pearl River Delta worker representatives, many workers are skeptical about work contracts, especially when all of a sudden employers offer them something suspicious to sign. The majority sign, having little option.  In theory, the enterprise level ACFTU branch or the local ACFTU has to give advice in drafting the contract, but in practice, most unions play no role or they don’t exist in those small factories where the work conditions are the worst. According to recent research, smaller factories, employing fewer than 1,000 workers  remain likely not to give out any contracts while bigger factories tend to give contracts but problematic ones as detailed above and below.

One of the most interesting and empowering aspects of the new law surrounds the increasing worker awareness of the new law and the importance of contracts. The new law, unlike the majority of laws was subject to a massive public debate which resulted in several hundred thousand internet comments before it was finally passed. Many labour centres and related worker supporters have been publicizing the new law and its contents to their constituents. Even before the law was passed, in the wave of lay offs (of the long term workers who may be able to secure non fixed term contracts under the new law after 1 January 2008), many workers protested against the illegality of the layoffs as opposed to simply the layoffs themselves. This is an important distinction and the awareness of the new law and what it may mean – in theory – for workers has been one of the most important and immediate impact of the new law – regardless of whether or not it is implemented properly.

According to our research, some workers who are better informed about the law have refused to sign new improper or illegal contracts. In turn they have received warning letters from the factories, saying that they have given up their right to sign a contract and the company will inevitably sack them. Some of these workers, in  reply and especially when they plan to quit their job, have written back a formal letter, stating “the contract you, as an employer, offered is improper and illegal. I have a proper one ( directly downloaded from legal or government websites) which I suggest you would adopt, or I recommend you prepare a proper contract by the end of next week (or a certain timeframe), before I go to the labour bureau.”  At the time of writing, we have not learned what happened to these workers, but their action is a very positive consequence after a long time of campaigning for worker awareness.

Analysis of standard Contracts: Five cases studies

Beijing sample contract

http://www.51labour.com/zhuanti/labour_model/fanbenyemian/beij.asp

This model is a very simple contract and generally lacks the information workers would need to decide if their employers are following the law.

The model leaves the amount for wages blank, without stating clearly that wages provided should not be lower than the local legal minimum wages. Neither does it give the Beijing minimum wage rates. Article 10 says that the employer has to provide a certain wages even it doesn’t have enough work for employee, however, it failed to mention that such a low-season wage must not be lower than the legal minimum wages.

In many of the most fundamental clauses, such as dismissals, termination of contracts, OSH related issues and compensation, the model does not state clearly the rights and responsibilities for both employee and employer, but simply states that such measures should be “in accordance with the national and Beijing legislation” which is not very helpful to say the least. All in all, this sample contract would be very un-informative to workers and shows little progress towards a detailed and useful work contract.

Shanghai sample contract
http://www.51labour.com/zhuanti/labour_model/fanbenyemian/shanghai.asp

This model is more detailed but fails to provide the exact clauses outlined in the new law, instead leaving crucial aspects deleted.
Article 17 states that the “employer should systemically provide education and training, in accordance to his own characteristics, on political thought, (Zhengzhi Sixiang) work ethics, professional skills, OSH and related matters in order to promote the workers intellectual enlightenment, professional ethics and professional skills. The employee shall participate the training organized by the employer attentively.” However, while professional training is welcomed, the new law does not mention any need for “political thought” training and the provision of such “training” which requires the ‘attentive” participation of the staff member is problematic.

Article 34 states that a “penalty of _____ is to be paid by employee, when s/he fails to complete the contracted period of service. This is in potential breach of Article 37 of the new law which states that for an employee to terminate the contract, a 30-day-written-notice should be given after the end of the probation period or upon giving a three day-notice during the probation. The labour contract law does not give any ground for stating a fixed penalty amount in a labour contract for not fulfilling the whole contract period, unless under the condition that special training is arranged for workers and workers need to sign an extra contract for not terminating the contract for a certain time. Generally this applies primarily to white collar professionals. This is not explained clearly in the Shanghai sample contract. Workers who are not informed about the original law would be easily confused and may face difficulty in resigning. As of now there are often many practical obstacles to worker resignation.

Article 35 of the Shanghai model contract states that a penalty of ______ Yuan is payable by the employee when s/he breaches non-compete clauses in the labour contract.

This clause is very unclear, when compared with the original labour contract law.  For example, article 23 of the labour contract law states that an employer may enter an agreement with his employees in the labour contract to require the employees to keep the business secrets and intellectual property of the employer confidential. For an employee who has this obligation of keeping confidential secrets, the employer and the employee may stipulate non-compete clauses in the labour contract or in the confidentiality agreement and come to an agreement that, when the labour contract is dissolved or terminated by the employer, the employee shall be given economic compensation within the period of non-compete. If the employee violates the stipulations then s/he shall pay the employer a penalty for breaching the contract. However, the Shanghai contract does not mention the potential economic compensation within the non-compete period given to the employee, just those payable to the employer.  

Guangdong province’s sample contract

In most articles, a direct quote from the original labour contract law is given, which is a sensible way to limit confusion when one of the parties is not well informed about the law. For example: It states clearly that the wages must be not lower than the legal minimum wages and probation wage should not be less than 80% of minimum wages. It also states what the compensation, duties and rights are relating to business confidentiality when employees leave the company.

All in all, it is so far the most detailed sample and most closely observes the original labour contract law.

Shenzhen Municipal sample contract

This model contract is very brief and in many respects very similar to the Beijing standard. It is however slightly better in that it states that wages can not be lower than the legal minimum wage levels.

Suzhou Municipal sample contract for Suzhou Industrial Park

This particular model gives the local labour bureau at the industrial park a lot of room to decide on work hours and does not even contain a specified limitation on hours. For example, article 3.1.c states that with the approval of the Suzhou Industrial Park’s labour and social security bureau, an employer could adopt irregular work hours. Workers could, in accordance with the job nature, arrange their own work time and rest day after being guaranteed that they could finish their work quota on time.  Such a clause is very easily abused, as it doesn’t give an objective quota and workers might find themselves forced to work long hours, without proper rest or overtime payment.

Most industrial park districts, including this one, have their own set of regulations and normally these regulations are not transparent and also often differ from the local labour regulations in neghbouring districts. For example, some industrial parks would waive the employers’ responsibility to pay pension premiums for the first two years of investment, as a means to attract investment, which is contravention of national. If the contract is then following the very local – perhaps Park based – regulations then these are generally very favourable to the employer and often include many opt out clauses for new businesses – such as waiving provisions on maximum overtime hours even if, as sometimes happens, the local authorities deny that they have allowed employers these exceptions – leaving some open to legal action by labour bureaus in the case of high profile complaints. We have been unable to obtain a copy of the Suzhou industrial park local labour related regulations but have monitored the domestic discussion sites where workers discuss common concerns. Many have commented that enterprises in the industrial park do not follow labour laws and are not monitored. Many enterprises do not pay overtime and while the industrial park requires workers to pay social security premiums according to the law, they require only a very low premium from the companies as their contribution.

__________

While the labour contract law is meant to protect workers, we have discovered that the new law has led companies to find loopholes, and subvert standard contracts designed to follow the letter of the law and so far, these problems are not being adequately monitored by the local labour bureaus and the local ACFTU branches. Much more work needs to be done to ensure that employers do not simply circumvent or flout the new law or it will end up being yet another wasted piece of good labour legislation on China’s law books.

 

IHLO

June 2008

 

NOTES

NOTE 1: And * New York Times, 18 June Investors Seek Asian Options to Costly China

NOTE 2: IHLO has compared five of these contracts, to check if they are in line with the original contract law.

NOTE 3: (see http://finance.ifeng.com/news/hgjj/200804/0421_2201_499649.shtml

NOTE 4: http://finance.special.fivip.com/080118/1643,0191605,00.html

NOTE 5: The highest People’s court: http://www.law-lib.com/law/law_view.asp?id=15286, implemented since 30 April 2001. There is a second explanation implemented on 1 October 2006 but this does not refer to factory regulations nor does it expressly clarify the legal status of the first explanation. As of now, many lawyers still use the first explanation to assist workers.

NOTE 6:

NOTE 7: State Council: “Regulations on rewards and disciplinary measures of employee”, http://www.law-lib.com/law/law_view.asp?id=2416, implemented since 10 April 1982. Note: at that time, this regulation refers mostly to urban, SOE workers, as migrant workers did not exist. However, I couldn’t find a more updated regulation in terms of fines.

NOTE 8: http://zhidao.baidu.com/question/18007388.html?fr=qrl

 

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