In an effort to address unrest among the labour force and to create a more “harmonious” society, China has proposed new labour and union legislation.

In light of recent signs of labour unrest and in furtherance of a bigger goal to create a “harmonious society,” the government of the People’s Republic of China (PRC) has taken various steps, including drafting a new Employment Contract Law and unionising foreign-invested enterprises, to reach this goal.

In the last week of April 2007, the Standing Committee of the National People’s Congress (NPC) conducted the third reading of the proposed Employment Contract Law but did not pass it into law. It is likely that the earliest effective date of the new law will be January 1, 2008, but a prolonged legislative process is entirely possible.

On balance, the draft law represents a significant increase for the protection of employees compared to the current law. The law also remains a piece of legislation generally applicable to all employees, from the shop floor through general managers. Drafters rejected a proposal that was seriously considered last summer to exempt senior managers from the law.

Despite the extensive redrafting, the draft law still suffers from numerous instances of vague language. As a result, many provisions are subject to multiple interpretations, thereby reducing their effectiveness in providing reliable guideposts for employers to follow in managing their workforces.

Fixed-term Contracts Remain Discouraged

Because there are strict restrictions on termination of employees under current PRC law, most employers use fixed-term contracts because such contracts can be allowed to expire without having to pay severance.

The draft allows only two fixed-term contracts. If an employer wants to continue employing an employee after the expiration of the second term, an open-term contract must be signed at the request of the employee. This means that an employer only can renew an employment contract once before having to decide whether to retain the employee on an open-term contract. 

For existing employees, the clock starts ticking after the law becomes effective. In other words, employees who already have served two terms will not become automatically entitled to open terms when the law becomes effective.

 Because of the strict limitations on employee termination, this essentially represents a step back to the old “iron rice bowl” system where employees were guaranteed continued employment with an entity. Moreover, the draft law stipulates that severance must be paid to the employee on expiration of a fixed-term contract, though this would not apply if an employee rejects an extension offered by the employer that contains terms at least equal to the terms currently enjoyed by the employee.

Company Rules Must Be Negotiated

Codes of conduct, employee handbooks, and other types of company rules are important tools for companies in the PRC to maintain legal compliance among its employees. The draft law stipulates vague requirements regarding the procedure for issuing company rules.

The rules first must be discussed by all employees or by an “employee representative congress” before being determined through negotiations by the employer and a union or employee representatives.

This requirement may be difficult for foreign-invested enterprises to comply with in practice because most foreign-invested enterprises do not have employee representative congresses (these are seen mainly in state-owned enterprises) and discussing company rules with all employees would be a burdensome procedure.

New Provisions Regarding Secondment Contracts

An increasing number of companies use employment agencies rather than hiring directly. Migrant workers especially tend to be employed as agency workers.

The draft law provides that secondment shall “generally” be limited to temporary, auxiliary, or substitute job positions. A list of positions shall be announced later, thereby creating the possibility that secondment may be permitted only for employees in non-core positions or in certain industries.

One other change may result in increased costs for employers to use seconded employees. The Second Draft provides that seconded workers have the right to receive “equal pay for equal work.” This rule may require employers to increase salaries and benefits of seconded employees to meet those of direct hires and effectively prohibit two-tiered wage systems.

Requirements for Training Contracts Increased

One important tool that companies often use for retaining talent is signing a training contract under which the employee must work for an employer for a minimum period of time or otherwise reimburse the employer for some or all of the training costs. The First and Second Drafts called for minimum lengths of off-the-job training periods that an employer must provide to an employee in order for an employer to recover training expenses from employees who do not serve required term of service. Thus, employers likely could not recover expenses for in-house training programs or tuition for academic programmes.

Under the third draft, it appears that the NPC now will allow the recovery of training costs without requiring any minimum period of off-the-job training. The one requirement would be that such training expenses must exceed what the employer is legally required to pay under separate regulations.

The New Unionisation Campaign

Another recent development that also reflects the government’s attempt to increase stability in labour relations is the current unionisation campaign that commenced in late 2004. 

The most widely reported success in the unionisation campaign was in the summer of 2006 when it was announced that the first enterprise union was established at a Wal-Mart store in Fujian province on July 29. The All-China Federation of Trade Unions (ACFTU) in this case reportedly changed its tactics by engaging in grassroots organisation directed at the workers rather than company management as it has normally done in the past. By way of background, ACFTU is the government-sponsored umbrella organisation; independent labour unions are illegal. The ACFTU is not specifically authorised to organise strikes or other industrial action.

While in the Wal-Mart and other cases the ACFTU appeared to have begun using more grassroots organisation tactics, in other cases it appears that the ACFTU or its local chapters simply are using the same tactics during this campaign that it used in previous campaigns—i.e., trying to pressure company management to organise its workers into an enterprise union.

Is an Enterprise Union Required?

Despite the claims of some ACFTU officials, there currently are no national laws or regulations mandating that all enterprises establish enterprise unions among their employees. 

Employees should organise and join unions on a voluntary basis. Enterprises are explicitly prohibited from obstructing efforts by their employees or ACFTU officials in organising enterprise unions and there are no explicit requirements for what exactly an enterprise must do during this process.
Cooperate With ACFTU?

Some foreign-invested enterprises (FIEs) have decided to cooperate with the ACFTU in encouraging their employees to form enterprise unions and sign on as union members. Based on past experiences, the expectation is that enterprise unions are relatively passive, and refusing to actively cooperate in union organisation, therefore, may not be worth the negative publicity in the state-run press, the threat of being put on an ACFTU “blacklist,” or possible bad relations with the government.

However, the unions do have significant powers granted under the law that enable them to play a more active role in the future. For example, under various overlapping laws and regulations, a company should consult (“listen to the opinions of”) enterprise unions when discussing major operational matters (e.g., restructuring or changes in business operations). Furthermore, when a FIE holds a meeting to discuss matters directly related to the rights and interests of employees, a union representative must attend the meeting and the enterprise should “obtain the cooperation of the union.” The various laws and regulations when read together could be interpreted to essentially grant the enterprise union a veto power.

Another power granted to enterprise unions is to demand that company management engage in collective bargaining; if a request for collective bargaining is made by an enterprise union, management must respond to the request within 20 days and may not refuse to negotiate unless it has sufficient reason for doing so (the period in which a response must be given is less in certain localities). 

In addition, enterprise unions have the right to be notified prior to any unilateral termination of an employee and to make comments regarding the termination. While enterprise unions do not have direct powers to veto a unilateral termination of employment, they can raise objections that should be considered by the company.

If the company then goes ahead with the termination despite union objection, the union may assist the employee in bringing a claim against the company for wrongful termination.

In addition, many enterprises have attempted to co-opt the enterprise union by ensuring that mid-level managers (in particular, human resource managers or deputy general managers) are elected as union chairman and/or vice-chairman. However, trying to control an enterprise union no longer may be so easy because new regulations issued by the ACFTU in December 2006 prohibit persons responsible for the administration of an enterprise, partners, or any of their close relatives from being union committee members.

Reprinted with permission of Worldwide ERC®, from the July 2007 issue of MOBILITY  

Update 11 September 2007: according to Lauffs and Isaacs, the major provisions were passed as discussed in the article; however, the following deviations are worth noting and require further information:

• In the final version that was passed, any mention of the government issuing a list of job positions that would be considered “temporary, auxiliary, or substitute” has been deleted. It appears that these terms will remain undefined at least in the short term, leaving companies with unclear guidelines for seconded employees.
• The final version of the law no longer requires that a company’s expenditures on training costs must exceed those required under relevant regulations if it wishes to be able to recover training costs from employees who leave early. Instead, the law simply states that companies must use “special funds” for training expenses without defining what exactly is meant by this term.
  

Plus, as noted in a previous article in Mobility Magazine, China government trying to turn their “brain drain” into brain gain by implementing a series of incentives aimed at wooing talented Chinese nationals living abroad back to China. This legislation makes provisions such as exemption from salary limitations, free access to live anywhere in China, simpler government administrative processes, and certain advantages for spouses and children. The policy aims to attract back top-class scientists, economists and entrepreneurs, particularly those in hi-tech areas.

Andreas Lauffs is the head of the employment law group of international law firm Baker & McKenzie’s China offices. This group consists of lawyers based in Beijing, Shanghai, and Hong Kong, who are dedicated full-time to employment law and HR issues in China and Hong Kong. He can be reached at +852 2846 1964 or e-mail: andreas.lauffs@bakernet.com.

Jonathan Isaacs is an associate based in Baker & McKenzie’s Hong Kong office. He can be reached at +852 2846 1968 or e-mail: jonathan.isaacs@bakernet.com.

Reprinted with permission of Worldwide ERC®, from the July 2007 issue of MOBILITY  

September 2007
 
[Copyright Expatica 2007]