Agenda
 

I. Presentation on the Draft Labour Contract Law (Mr Jeffrey Wilson)

II. Questions and Answers

Meeting Minutes
 

I. The Presentation
a) Current status of the law

The first draft of the Employment Contract Law was released in March 2006 and after a period of comment was revised. The second draft of this law was then submitted to the PRC’s Standing Committee on 24th December 2006. Another period of informal comment is currently underway, after which further revisions will be made. It is expected that the law will be approved around March and will be implemented in May 2007, although this is not yet clear. The law could be subject to further revisions even after implementation if obscurities remain.

b) Overview

The first draft of the Employment Contract Law gained a lot of interest from overseas including comments from European and American labour unions. Within the PRC, a total of 190,000 comments regarding the draft law were received. Whilst the first draft was focused around the interests of the employees, the second draft is more favourable to the employer, possibly as a result of the standing committee’s pro-business stance and the reduction in the role of the labour unions.

There are many inconsistencies and vagueness in language which remain in the law since the first draft. It is likely that there will need to be many amendments to the law after it is passed in order to resolve these ambiguities. Furthermore, many real life issues within the law have not been dealt with for the law has primarily been written to apply to the context of factory working and does not take into account the evolution of the Chinese labour force. For example, no provisions are made for the swift termination of the contracts of senior managers in the case of poor performance.

c) Simplified Probationary Periods

This ruling recognises the fact that people on probation are often treated poorly and aims to improve the existing situation. In general, it will be harder to terminate the employee’s contract during probation if the law is passed. However, it is unclear under which circumstances, it will be possible to terminate these contracts. The new legislation targets local companies in particular who do not always abide by the present laws and forces them to pay increased penalties. The stipulation of three different types of probationary periods according to the type of position held by the employee, contained in the first draft of the law, has now been removed because it was difficult to determine what these different job positions were. The maximum probation periods under the new law would be one month for an employment contract of under one year; two months for a contract of one to three years, and six months for a contract of over three years or for an open contract. Employees on probation should be paid 80% of the total salary for that position.

d) Fixed term contracts

The government wishes to encourage the use of open term contracts. The law therefore provides only two types of fixed term contracts of one to two years. Furthermore, employees must be given an open term contract, at the request of the employee, if they have already served two fixed term contracts.

The Second Draft, however, deleted a provision in the First Draft that gave employees without written contracts the right to demand open-term contracts. In the Second Draft these employees are only entitles to a fixed-term contract. In addition, the new draft restored provisions in the current law which means that fixed-term contracts may be terminated by employers when employees are shown to be ”incompetent”.

The Second Draft retains the requirement in the First Draft that employers must pay severance to employees whose fixed-term contracts are not renewed. The Second Draft, however, added an important exception to this rule. After the termination of a fixed term contract, employers are not required to pay severance pay if the employee refuses the offer of equal or better terms to those in their existing contract. In some areas of China, these rules were already in place and much of the legislation repeats the existing requirements.

e) More flexibility on employer rules

Company rules are important since employees’ contracts may be terminated on the grounds of their violation. However, the law is not clear as to how the rules should be enforced. In the first draft it was stipulated that company rules must be approved through “democratic procedures”. This was clarified to some extent in the second draft whereby employers were obliged to “consult with employers and unions”. Nevertheless, it is not explicit whether this actually requires the employer to act upon the proposals of the labour union. The second draft states that if the company rules were found to be in violation of the Employment Contract Law, the Labour Union would have the power to force the company to amend them.

When asked by a member of the meeting whether their company ought to re-write their company rules, Mr Wilson replied that they need not do this. However, companies should ensure their labour union approve the rules if this was not already the case. He added that companies might like to oblige employees to sign a code of conduct and rules each year or, at least, to sign a document stating that the rules had been discussed. If the Labour Union were to approve a rule that was contrary to the Employment Contract Law then the employer could object to this. Similarly, the Labour Union could force the employer to amend a rule if it breached the law.

When asked whether the Labour Union would have the right to review the law as it desired, Mr Wilson said that it would have the right to issue comments, but that it was unclear whether the Labour Union would have the right to do this on a regular basis.

One of the purposes of the law is to make sure that the employees are further consulted on issues that affect them in the workplace. To this end, employees must be consulted on major decisions made by general managers. However, the exact definition of such a matter remains unclear.

f) Secondment (dispatching)

Secondment is the hiring and sending of someone to another company. In the second draft, it is stated that a secondment contract has to be for at least two years. The intent is to encourage long-term employment, although many believe that the terms of the law are unworkable. 

The contract of an employee on a two-year secondment contract would have to be renewed according to the new law, unless the employee was found to be incompetent. In this respect, the secondment contract becomes similar to an open contract.

It is believed the government may produce a list of positions authorised to be filled by seconded employees. The list of positions will be announced later, thereby creating the possibility that secondment may be permitted only for employees in non-core positions or in certain industries. It is expected that list will not offer the scope for senior managers to be seconded, meaning that a company would have to hire these people directly. This step can be seen as further evidence of the government’s desire to move away from short-term employment.

One of the most ambiguous clauses is the one stating that seconded employees should be given “equal pay for equal work.” This aims to ensure that seconded employees are not paid on a different scale to permanent employees within the business doing the same job. This may encourage employers to favour directly hiring workers instead of using secondment. Employers, however, would be permitted to reduce the pay of seconded employees (for example, those of construction workers) the minimum wage during periods of no work.

One member of the meeting asked how this idea would relate to seconded employees such as security staff where corresponding directly hired positions did not exist. Mr Wilson replied that normally the third party organisation would be responsible for ensuring that the seconded employee was paid a fair wage. The host company could only urge the third party to pay a certain amount, but could not be sure whether this was actually being done. Mr Wilson said the idea would only be applicable if two people, one directly hired and one permanent, were doing the same task within the company.

One member of the meeting commented that the new regulations concerning secondment would discourage employment as many secondees were used for project work where contracts often lasted for under two years.

It is unclear whether the new regulations will apply to Rep Offices as these cannot directly hire PRC nationals; they have to be seconded.

g) Expanded scope for mass lay-offs

Most employers favour this new part of the law, as it would make it easier to get rid of workers. Employers would be able to lay off workers if economic circumstances were to change as long as this was already agreed in the employee’s contract. In the first draft of the law, the legislation regarding mass lay-offs only applied to more than fifty employees. In the second draft, this was reduced to twenty workers or 10% of the total staff. Despite these improvements, the requirement that protection should be given for those responsible for supporting families, those with long terms of service, those with long fixed-term contracts and employees with open-term contracts appears to make the law less easy to apply, as the possible range of people which could be categorised under this term is immense.

h) Non-compete rules

Non-compete rules are included in contracts so that people leaving a company cannot sell their products when leaving the company. To ensure this post-termination compensation must be paid employers are required to pay compensation because an employee will not be able to work in this specific field again. In the first draft, the level of compensation was set at one annual salary, whilst in the second draft, this provision was removed, so there is now no specific level of compensation that must be paid.

Liquidated damages is the amount received from someone who competes after having left the company and having agreed to non-compete rules. In the first draft, this was set at three times the compensation given for non-competing, whilst in the second draft the amount is left at the company’s discretion.

Geographical limitations were removed in the second draft. This means that the extent of the geographical area in which the rules would be applicable is unspecified.

Non-compete rules are limited to senior management. This is probably most practical as it would be undesirable to pay compensation to all employees leaving the company in the first place.

i) Training contracts

In the second draft, the minimum length of a training contract was reduced from six months to one month. The contract also means that employees must be sent outside of the company to a vocational college for further training. This means that the company could not send employees to their home office abroad or on an MBA programme on a training contract.

j) Conclusion

The law is more balanced than it was in the original draft and is more favourable to the interests of the employers. However, in many respects the law is vague and ambiguous. The clause that exemptions cannot be made for senior managers is perhaps and unreasonable. Also, the fact that there is no clarification for the termination of employees’ contracts is undesirable. Another area where clarity is required is on the issue of mass lay-offs: how can a labour union be notified of such a lay-off, if no union exists at present? Apparently, higher level union authorities should be informed; nevertheless, confusion remains. There are also enforcement issues as many feel that Western companies are disadvantaged because they follow the rules to the letter, when other local companies are acting less rigorously. It is highly desirable that new regulations should be applied equally across all companies operating within China.

II. Question and Answers
 

a) Ideas for companies’ response to the law

The Chairman asked if Mr Wilson had any tips on how the law might be dealt with by the member companies of the Chamber.
Mr Wilson suggested that companies should accrue money to prepare for severance obligations. He also suggested looking at company rules and making sure they were fully comprehensive.

Some clients were re-writing contracts and that Baker & McKenzie were consulting with the Labour Bureau when problems arose. Companies should consult with the local authorities. For example, companies might like to ask how much compensation should be offered in relation to the non-competing rules.

b) Labour Unions

One member asked if companies were required to have a union in China.
If a company has 25 people who are members of a national labour union then the company should establish a labour union. Companies do not have an obligation to form a union, but they should not obstruct employees if they wish to form a union. Previously unions had been formed according to a ‘top-down’ approach, whereas now a ‘bottom-up’ approach was favoured, as was the case with Walmart in China. There is increasing pressure from the government to form unions. The role of unions is likely to be increased in order to ensure the rights of workers. In the future, management will not be allowed to be in charge of the union as had sometimes previously been allowed.

The Chairman said that he believed companies should form labour unions without having to react to the demands of employees; an active rather than a reactive approach. Mr Wilson said that this positive attitude towards unions was characteristic of European enterprises, but was rather less popular among US companies.

c) Final version?

The Chairman expressed the opinion that the training article and the competition article were both useless. He asked whether the second draft was more or less the final version.
Mr Wilson stated that laws in China normally had three or more readings, so it was not certain the law would remain in the same form as presented in the second draft.

d) Two fixed contracts followed by open contract

Mr Wilson asked if members of the meeting perceived the clause relating to the obligation to give an open contract after two fixed contracts as problematic.
The Chairman said that this was not of concern to him, but that the problem lay rather in the fact that the law would make it harder for companies to get rid of staff.

Hans Pihl (Exel Composites (Nanjing) Co., Ltd) commented that local employees, surprisingly, did not like to be employed on open term contracts, preferring fixed term contracts. This was perceived to be because fixed term contract offered some stability because the length of employment is clear.

e) Probation contracts

Mr Wilson asked if members of the meeting found the length of the probation contracts difficult.
Lily Li (Nanjing Quay Magnesium) said that the problem was rather that contracts could not be terminated during probation. Xiaocui Wang (Wartsila CME Zhenjiang Propeller) said that companies ought to be able to hire people for three months without having a probationary period at all.

g) Terminating contracts

Mr Wilson suggested that an effective way to quantify incompetence in employees, and thus terminate their contracts, was by giving them a certain set of criteria that they must fulfil within a certain period. If the criteria were not fully met, their contract could easily be terminated.

One member asked if it was possible to terminate an employees’ contract for violating rules for example by smoking on the job.
Mr Wilson replied that it was difficult as this was the employer’s word against theirs. In most cases, employees tend to win in such cases.

One member asked how they could prove that an employee had been warned about a breach of contract.
Mr Wilson said that this could be communicated through a registered letter that the employee would sign for.

h) Enforcement of the law

One member asked what percentage of Chinese companies followed the rules laid out in the Employment Contract Law.
Mr Wilson replied that often companies are unaware of the rules and that breaches are often the result of ignorance rather than intended malpractice.

Mr Wilson suggested that if the main bulk of a company’s HR staff are based abroad that local staff need to provide extra guidance on China-specific HR issues. He advised companies to bring in an external company to carry out a company audit to ensure things are running smoothly. He insisted that sometimes the penalties for infringement of the law were often insignificant. However, companies that have infringed the law can sometimes be blacklisted with customers as they will not buy products from companies that have violated labour laws.

Emmanuel Le Flem (A Raymond Fasteners Zhenjiang) asked whether the government would improve their investigations to make sure that local companies conformed to the rules.
Mr Wilson replied that he doubted that this would be the case and that foreign companies would continue to be at the centre of the Labour Bureau’s attention. He added that in localities where there were labour disturbances, the government would be more likely to investigate.

One member of the meeting asked if the government would react to denunciations of local companies by Western companies.
Mr Wilson said that this could possibly be the case.

Mr Wilson said that it might be a good tact for foreign companies to campaign on the strict enforcement of regulation once the law is implemented.

One member asked if local company violations would breach the rules of the WTO to which China has signed up?
Mr Wilson said that labour standards were not currently part of the standards set down by the WTO, but that perhaps they would be in the future.

i) Secondment

Ms. Lily Chen (Aeroflex Microelectronics) asked whether it was the service company or the employing company who had the obligation to sign two-year contracts.
Mr Wilson replied that this would normally be the service company.

Ms. Lily Chen asked whether it would be possible to use the same service company again if an employer wanted to replace a seconded member of staff.
Mr Wilson confirmed that this would be possible.

The Chairman said that in the case of secondment that there were two applicable contracts. The first contract was between the labour and the service company. The second contract was between the service company and the host company. Mr Marxen asked whether the concept of “equal pay for equal work” should relate to the service company or the host company. He said he believed that it should be applicable only in the contract between the labour and the service company.

Mr Wilson reiterated that the government wished to deter the use of service companies and, in so doing, encourage the direct employment of workers.

l) Part time workers

Mr Wilson said that those working an average of four hours per day or 24 hours per week were classed as part time workers. They could be employed at will and that the other provisions of the Employment Contract Law did not apply. He suggested that companies might increase the number of part time workers they employ. These part time workers would not receive much labour protection at all.

Ms. Terese Bareth (ZF Steering Jincheng (Nanjing) Co.. Ltd ) asked what would happen if these part time workers were to work over 24 hours per week. Mr Wilson said that they would not be classed as part time workers and would be subject to the rest of the labour law.

Ms. Lily Chen asked who would be responsible if a part time worker were injured.
Mr Wilson replied that service companies would be responsible for the compensation, not the host company.

The next meeting of the HR Working Group is scheduled to be held on 28th February 2007.

 for the presentation by Baker & McKenzie

 click here for the list of attendees

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