Dilemma of the New Chinese Labour Contract Law. By Luka Lu, Managing Partner, Capital Associates

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There has been a lot of focus on the new Chinese Labour Contract Law recently, not only because of the major changes triggered by the law, but also because of the current situation brought about by the financial crisis.

In addition to the presentation I made at Danish-Chinese Business Forum’s member meeting on January 22, 2009, I would like to make a brief written description of the implications of the new Labour Contract Law here.

Background
The PRC Labour Contract Law was announced on June 29, 2007, and came into effect on January 1, 2008. The legislation process of the Labour Contract Law thus proved to be very short, only two years. This is reflective of the political trends embraced by the current Chinese leaders, who wish to demonstrate that they do care for workers, especially emigrant workers.

During the legislation process, there has been a fair amount of debate as well as a lot of objections to the Labour Contract Law. This seems to be the most controversial law China has ever had.

Examples of Major Changes
It is difficult to talk about the Labour Contract Law without knowing some of the major changes it has induced:

i. Companies’ rules and regulations, such as the staff handbook, will from now have to be discussed with the employees first. Otherwise they may not be legally effective.

ii. It has become more difficult to terminate employees, even during the probation period.

iii. The employer can sign an agreement with the employee that requires the employee to work for the employer for a minimum period of time, only after the employer has provided technical training to the employee. If the employee leaves the employer earlier than the minimum service year, the employee has to pay back the expenses related to the training.

iv. Without a written labour contract, a double salary is effectuated and employment may become permanent.

v. After signing two terms of fixed term contracts for the same employee, a non-fixed term contract will have to be signed. In case of violation, a double salary will have to be paid to the employee.

vi. In case of an early termination of an employee, the labour union will have to be notified.

vii. Severance fee will have to be paid even upon the expiration of a labour contract.

viii. Massive layoff is defined as a layoff of over 20 staff members, or 10% of the total number of employees.

ix. In case of an unlawful termination of an employee, the employee may choose to be reinstated or paid double severance.

Effect of the Labour Contract Law and the Current Situation
The Labour Contract Law does make it more difficult to terminate employees, and in the meantime it also makes it more costly for the employers, as the severance payment is larger. It is viewed by many people as pushing China back into the time of the “iron rice bowl,” where people were guaranteed jobs for life.

However, with the unexpected financial crisis, the Labour Contract Law is regarded as an obstacle rather than a stimulator. Even before the financial crisis, it had been reported that some foreign investment companies and Chinese companies had been relocating from China due to increasing costs and the new Labour Contract Law.  China is currently facing the biggest employment challenge in its history, which makes social stability an issue for the government (it has been recently reported that 20 million emigrant workers are currently unemployed). Many companies are required or encouraged by the government not to downsize, which is why the Labour Contract Law does not appear to be strictly enforced. The government has also issued certain incentives (such as tax incentives) for unemployed workers in order to help them start their own business.

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