China: workers’ protection versus labour flexibility

In the hermetic world of Chinese politics, where differences are often resolved behind closed doors, Finance Minister Lou Jiwei’s criticism of the Labour Contract Law, which he blames for the lack of flexibility on the Chinese labour market, was met with surprise.

In a setting as public as a press conference called during the annual meeting of the country’s legislative body, the National People’s Congress, Lou also insisted that there is a direct link between the law that was approved in 2007 and took effect in 2008 and the wage rises outstripping productivity increases in China - a situation he described as “unsustainable”.

“We are observing these problems and have to highlight them because they could affect economic growth,” he said, at the same time as acknowledging that reforming the law is not within his remit.

“There is an imbalance between the protection afforded to companies and their employees. The basic model is based on fixed working hours, which does not fit in with the model of labour flexibility,” said the minister in response to a question from a Taiwanese journalist, carefully choosing the words used in his answer. For Lou, the lack of labour flexibility is primarily affecting export companies, the country’s driving force since its economic opening in 1978.

According to Lou, the current legislation also discourages companies from training their workers, as they “are able to leave without any justification, by giving a month’s notice”. Conversely, “it is very difficult for companies to contend with workers that don’t pull their weight, to dismiss them, for example. They continue to occupy these jobs, which is also discriminatory for new employees.”

Another problematic issue for Minister Lou are the wage rises outstripping productivity increases, also due in part to the Labour Contract Law, which regulates minimum wages and establishes the companies’ obligation to observe pay reviews in line with Article 62.

Average real wages in China rose by 9 per cent in 2012 and 7.3 per cent in 2013. The average monthly wage, however, continues to be three times lower than in the United States, according to the International Labour Organisation’s 2014/2015 Global Wage Report.

It is not the first time Lou has voiced such opinions, but he has always done so within academic circles, not in his capacity as a minister. Moreover, his comments come at a time when the Chinese government is considering huge staff restructurings in its giant state enterprises, to make them more competitive.

Geoff Crothall, communications director of the pro-labour rights group China Labour Bulletin, tells Equal Times that the Labour Contract Law, along with the Labour Law of 1994 that preceded it “gave workers a reasonable level of protection, but they are by no means overprotected” and they continue to face problems in spite of the issues regulated by the law of 2007: “There are workers who are not being paid on time or in full and workers who are dismissed without the corresponding compensation or for whom social security contributions are not paid.”

Crothall also points to the “gradual erosion of the law’s application at local level and the failure of local labour arbitration courts to protect workers. Many provincial governments, especially Guangdong (one of the provinces with the greatest concentration of factories and export companies), are more openly positioning themselves in favour of companies when it comes to policies and directives on labour relations.”

The European Union’s Chamber of Commerce in China was among the organisations that congratulated the government in 2007 for having passed a law that, in its opinion, was set to improve workers’ conditions and in which many of the articles were inspired by European labour laws. Eight years on, however, it tells Equal Times that it believes “the changes in labour arbitration and litigation standards have led some workers to abuse the legal system, filing unfounded complaints after being dismissed, which result in long and costly legal proceedings”.

The Chamber of Commerce, which groups European entrepreneurs with interests and production units in the country, agrees with Minister Lou on the need for greater flexibility, “including greater freedom to agree on potential grounds for dismissal in employment contracts, in addition to those recognised under the law, to make it easier for companies to increase their staff when they are growing and to terminate contracts when they have reasonable grounds to do so”.

Under Article 39 of the current law, there are six grounds on which a company can dismiss an employee: if the worker proves to be insufficiently qualified during the trial period, violates the company’s rules, causes losses due to negligence or by seeking personal gain, engaging in a employment relationship with another company, whereby its work for the initial employee is affected, or if the worker is being investigated for a crime. The contract can also be revoked if it has been signed under coercion or through deceitfulness.

In addition, the following article also provides for the possibility of dismissing workers by means of thirty days notice or an extra month’s pay if they “prove incapable of doing their work and remain so after receiving training or being assigned to a different post”.


A law stirring opposition from the outset

The Labour Contract Law was approved in 2007 in a context very different to that of today, in the midst of intense campaigns, inside and outside the country, in favour and against the reform, and against the background of the social unrest unleashed by the discovery of brickworks and mines with working conditions verging on slavery.

Everyone, from pressure groups to NGOs, wanted to influence the final text of a law aimed in the main at filling the legal voids of the 1994 Labour Law. “It was approved following a campaign by domestic and foreign business groups to temper or to reinforce many of the clauses proposed,” explains Crothall.

The government headed at the time by Hu Jintao, ever keen to preserve the social harmony needed to maintain order and stability, drew up and passed the new legislation in 2007 after consulting with hundreds of organisations. It included, for example, the obligation held by companies to pay their workers within the timeframe established and the prohibition of unpaid overtime. It also set out the information that should appear in employment contracts (name of the company and employee, working hours, etc.).

“Most important, in any case, are not the law’s clauses but the fact that employers and government officials began conspiring to evade it even before it was implemented,” especially with regard to social security obligations, says Crothall.

Since the law came into effect, Chinese wages have been following an upward trend, not only because of the law but also because of the change in production model. The repercussions of the 2008 financial crisis and the sharp fall in the goods bought by the United States and European Union highlighted the flaws of a system built on cheap exports. The government reacted with a paradigm shift, focusing on domestic consumption as the economy’s main driver at the same time as promoting the service sector, technology and, more generally, businesses with higher added value.

Experts however warned that the success of this transition rested on greater purchasing power and job security in the country. This would help to create a more developed middle class with the power to increase their consumption (despite the deeply rooted culture of saving among Chinese families, ever fearful of the unforeseen).

In the meantime, the traditional export sector has seen a sharp fall in its competitiveness relative to other countries in the region, which are taking over the manufacture of cheap exports and are receiving the foreign investment hungry for low costs which fed on Chinese workers for so many years.

The EU Chamber of Commerce confirms that a number of companies have already left the Asian giant due to the rise in labour costs in sectors employing low skilled workers, such as the vast textile industry, a paradigm of the Chinese growth model over the last two decades which, come what may, seems unlikely to make a return.