COMMENTARY
Commentary: A New Law for Labor
July 13, 2007
Christopher Bjorke, AFP

The abundance, skill and low cost of China's labor has fueled its economic growth and attracted massive foreign investment. Now, new regulations could limit foreign companies' ability to take advantage of that vast and talented workforce.

On June 30, China's legislature passed a labor law that strengthens protections for employees and the position of unions. The regulations follow recent disclosures of grievous worker abuses, including forced labor, by some domestic operations. However, it could also limit the flexibility employers have to negotiate contracts and hire and fire staff, according to legal advisors of multinational companies.

Jonathan Isaacs, a Hong Kong-based lawyer with the firm Baker & McKenzie, said companies are most concerned with three provisions in the law:

• Companies that want to create rules for employees, such as codes of conduct, must consult with employee representatives. There is now a set procedure of proposals, negotiation and publication in cooperation with employee unions.

• Fixed-term contracts are now limited to two consecutive terms. Because firing employees is difficult, companies have relied on short-term contracts, which can simply be allowed to expire if employers are not pleased with workers' performances. Under the new law, employers have to offer open-term contracts, that is, permanent employment, after two fixed contracts.

• Workers hired through temp agencies, which companies often used to hold down wage and benefit expenses, now must be paid the same as workers hired directly. Also, the law limits the types of work for which temp workers can be hired.

Imposing control

"If unions and employees become more assertive about their collective rights after this law comes into effect, the management autonomy of the company ... will be decreased," Isaacs wrote in an e-mail. "It also may become more difficult to get rid of employees who have already served two fixed terms with the company. Finally, the rights of assigned workers (i.e. those hired through temp agencies) will be increased so costs of hiring through temp agencies will likely increase as well."

Companies should review their contracts to make sure they are compliant with the law, according to Isaacs. They should also look at how they create codes of conduct and other company rules and decide earlier whether new employees will be hired permanently or just for a couple of fixed terms.

"This means that companies will need to step up their employee performance and evaluation capabilities," he wrote.

China's progress toward becoming an economic power has hit some bumps on the way, often due to lack of regulation and control. We have seen this with the recent consumer safety concerns, which resulted in a crackdown on corrupt producers and officials. Lack of control over certain industries and companies spurred these new employee protections.

Foreign companies need to recognize that China's shifting regulatory landscape is a reaction to the great economic and social changes that the companies helped bring about, and also accept that change is constant in such a dynamic country.

Commentary on developing China issues appears in every edition of China Headlines. Comments can be sent to Christopher Bjorke at cbjorke@chinaforum.com.

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