Acres of print, and a ton of trees, have been used up in the past year on the subject of the new China Labor Law. It goes into effect on January 1st 2008.

As is common with Chinese laws, there is often enough space between the lines of the text to drive a coach and four horses through them, never mind the issue of actual enforcement. But you can definitively say that there is a tightening of rules and regulations, and a shift in power towards the employee.

The welcome news is that the target of this increased oversight is not likely to be international companies, who tend to employ a great deal of self-restraint on the issue of workers rights. The real target is local PRC companies that are still highly challenged in dealing with a legalistic environment about which they have only a rudimentary understanding. However, international companies may get hit by the flak. They have a tendency to be in the way when a target is needed.

The various elements of the law have been done to death but perhaps one way of approaching the new law would be to compare what we had with the old law, written in 1995, and what we have now. Then we can get a sense of how far the new law takes us.

Labour Contracts

The old law, commonly referred to as the PRC Employment Law (PEL) contract required employers and employees to enter into a written employment contract. This is very much different from the U.S. employment scene, where "at will" relationships between worker and employer are the norm. After that the PEL said little except that an oral contract was also enforceable. This left a lot of wiggle room for negotiation, or conflict, depending on how you see these things.

Overall, and this is only a personal opinion, the new PRC labor law is not a great threat but companies will have to document everything in more detail, specifically issues like Job Offers, Labor Contracts, NDAs, reasons for termination etc. This will be necessary to protect against possible actions, either by failed job applicants, terminated staff or by union officials. The possible range of actions by the latter is still not clear, given the undefined character of their role in protecting the rights of employees.

The new law introduces four basic ideas or principles to guide the signing of labor contracts.

Firstly, the conclusion of employment contracts should comply with the principles of lawfulness, fairness, equality, free will, negotiated consensus and good faith. This may seem like a typical motherhood statement but lawyers would tend to see this as a series of negotiating tools to play with. Watch out for the small print.

Negotiated consensus implies to me that any sense of coercion would contravene the law. Good faith implies a full sharing of information on both sides. Given the presumed disparity in power between professionals and companies, this could have implications for issues like how much information your company provides to job candidates, especially when third parties are involved.

Secondly, there is a requirement for a written labor contract in any employment relationship and the commencement date of an employment relationship commences on the onboarding day ie. first day actually on the job. This, and other clauses, appear to tackle the problem of 'continuous casual employment' in China, and it will be welcomed all across China by employees of all persuasions.

Thirdly, if an employment relationship has already been established, but a written labor contract has not yet been executed, then a labor contract must be executed within one month of the employee’s first day on the job. This clarifies things nicely and avoids the current situation of where employees find themselves actually doing the job but still without a labour contract. The number of 'quick exits' should drop significantly and we get a lot of those in China.

Lastly, the onus is on the employer to make sure that the contract confirms with the new law. The PEL said little, if anything, about this. If the employment contract is found to be invalid and the worker has already performed labor, the employer is going to have to pay the worker labor compensation.

Labour Contract Term

The PEL said that if an employee has worked for the same employer for more than ten years and both parties want to continue the relationship, the employee has the right to determine whether the contract should be for a fixed term or not.

Ten years is a very long time.

The new law also uses the ten year wording but it clearly defines fixed-term contracts and open-ended contracts. Under the new law a fixed-term contract is to be converted to an open-ended contract if the employee has been with the company ten years, but there is an additional clause that could bring the change in a much shorter time. It says:

'the renewal occurs following the conclusion of a fixed-term employment contract on two consecutive occasions.'

The implication that many people I talk to are taking from this is that the employee may suddenly move from a fixed contract to an open-ended relationship with their company ie. not firable without compensation, after only two 2-year terms, one of which may already be over. As with all legal issues it is best to consult a good employment lawyer but just in this clause alone I get the sense of an increased willingness to enforce provisions that protect workers' rights.

Termination

Under the PEL an employer could terminate an employee on 30 days notice, if the employee was not able to carry out the work which he had been contracted to perform. The proviso was that all treatment to remedy the illness or injury had been completed. In practice this meant two written warnings and then a final termination notice, and you're covered.

The new law is clearer and specifically prevents an employer from terminating an employment contract during the probation period. To comply with the new provisions you must provide specific evidence that show the employee has failed to meet the conditions for employment. In addition, if the employee is to be fired the union must be informed of the firing in advance of the event. If they feel that the firing is unjustified they are entitled to request that it be reversed, and they must receive a response in return from the company. (Insert coach and four horses here....)

Other New Provisions

Probation - The old law says that probation periods are limited by the length of the employment contract, not the job function. The new law says the probation period must be based upon the type of work. Specifically, probation periods will be no more than one month for workers in non-technical positions; no more than two months for employees with technical positions; and no more than six months for senior professional positions.

Non-Compete - Under the new law the issue of non-compete clauses is clarified. Such restrictions can only be applied to senior management, senior technical personnel and those bound to keep confidential information of the employer. The maximum term of a non-competition clause is two years, down from three years.

Training Bonds -    Repayment amounts payable to the the company for training cannot exceed the training costs. These amounts must be pro-rated over the agreed period of service after the training has been completed.

Unionization - The new law says that a labor union will assist and guide workers in the conclusion of employment contracts with their employer, and the performance thereof. This does not imply the creation of independent labor unions and it remains undefined to my mind. Again, this is purely an opinion, but if you operate a sweatshop and do not comply with the current labour law then watch out. Otherwise it should be business as usual. China is a boat that does not liked to be rocked.

Policy Manuals - Unless agreed by the labour union, company policies and internal rules are not binding. No mention of this in the old law.

Overall, I think we will see an increase in labour costs, simply because we have been seeing an increase in labor costs for many years now. This could be construed as a very bad thing if China were competing as a low cost country, and it hadn't been happening already.

China still has a low-cost advantage in labor for some sectors but mostly it has moved away from screwdriver jobs, or at least is trying really hard to achieve this. The government sees China as having a reasonable advantages in wages but strong advantages in terms of having a large local market, developed infrastructure, well-educated employees, political stability and so on.

Balancing the employer-employee relationship in favor of the employee has a cost but the bulk of the advantages that China bring to the table remain, so on balance the measure is measured, and there is still another year to go before it actually kicks in.