By Russell Brown
May 1 is Labor Day in China. A source of considerable controversy, China's first proposed Labor Contract Law in more than ten years, while not passed into law during the annual National People's Congress, is, according to experts, assured of passage soon.

The proposed law aims to expand worker protections by giving increased leverage to unions as well as attempting to outline some basic reciprocal employer-employee responsibilities. Among them, the law attempts to delineate the terms of probationary periods of employment, employment termination and severance compensation more favorably with respect worker interests. The proposal has been greeted by labor rights activists around the world as a much needed piece of legislation and a reassuring sign of Beijing's sincerity in confronting pressing labor issues and growing polarization between privileged, urban-dwelling Chinese their less fortunate peers in rural areas.

Late last year the proposed law attracted a bevy of media attention after revelations and accusations of a fierce advocacy campaign against the legislation by Western business interests. While advocacy from all sides has certainly occurred and has in fact been solicited by the PRC government, most everyone agrees that the initiative's intention is admirable, namely to improve labor conditions and create a more harmonious dynamic between employers and employees.

Where is the Problem?
China is often beset by a lack of a formalized enforcement infrastructure, and it is the contention of various business groups that many of the countries most persistent problems are the result not of faulty public policy but rather an enforcement vacuum.

Nevertheless, increased authority lent to trade unions to act as employee representatives, secure worker rights and function, more generally, as a workplace watchdog is a prominent feature of the legislation. Unions will be empowered to negotiate and consent to employer policies, regulations and mass labor terminations. Individual employees also stand to receive severance compensation should their “fix-term” contract expire without renewal.

The Consequences
These, and additional requirements of a similar ilk are, perhaps reasonably, viewed by western businesses as overly burdensome, ineffective and ultimately a counterproductive policy solution.

Dr. Keyong Wu, an expert with the British Chamber of Commerce, says, "Business is attracted to China not only because of its labor costs but also because of its efficiency. If regulation starts to affect that and flexibility, than companies could turn to India, Pakistan and South-East Asia."

And it is in this sense that worker interests are very intimately linked with their corporate employers.

IP Efforts
The scope of the proposed law extends to employee responsibilities as well. In an effort to improve the Chinese intellectual property environment, it provides employers avenues by which to use and enforce “non-compete clauses” in their labor contracts. Such laws charge current and former employees privileged with knowledge of trade secrets or IP with a set of fiduciary responsibilities aimed to protect confidential material of the company from which it came. These are encouraging efforts that should serve to promote an innovative and competitive Chinese business environment for both foreign and domestic enterprises.

Trends?
The loud international debate that has accompanied the labor law's proposal gives us pause to reflect on some macroeconomic forces perhaps at play. Labor rights activists around the world have lamented the global marketplace's tendency to cultivate "a race to the bottom" which rewards those economies with the fewest labor protections, lowest costs and least cumbersome regulations, which may "bring global wages and conditions down to the level of the least protected." So why has there been such sustained downward pressure on wages and costs? The selling of services certainly need not dictate it be so.

Harvard economist Richard Freeman interestingly posits that over the past twenty-five years or so, with the liberalizing of the Indian, Chinese and former Communist bloc economies, the global workforce has effectively doubled—China alone accounts for 50% of the increase. This workforce expansion, however, was not accompanied by a commensurate increase in capitol—these were then relatively undeveloped nations without tremendous inherent value—which had the effect of dramatically altering the global capitol/labor ratio. Workers around the world have then found themselves competing for essentially the same amount of capitol as before the market was labor saturated and thus capitol has emerged as an exceedingly valuable commodity.

In The End
Thus, given what may be a comparative disadvantage, labor legislation of the kind proposed is imperative to ensure that the most basic worker rights are guaranteed and that the Chinese economy and its constituent workforce enjoy a legal and stable work environment. Foreign enterprises operating in China generally do use more advanced labor relations standards than locally owned businesses and, while the ultimate version of the law is sure to impact them both, it will likely demand more thorough operational modifications from domestically owned entities.

As with so many meaningful policy reforms, however, practice and implementation will present the most significant hurdles and largely dictate both the scope of influence and success.

About the author:
Russell Brown, British, managing partner of the China practice at LehmanBrown, has over 18 years experience working across a number of countries in Asia, 14 years of which involved establishing and developing businesses in China. Brown draws on vast business and accounting experience, including his role as global chief financial officer of the world's largest public relations and communications consulting company, with 75 offices in 21 countries. He was also regional finance director for their Asia Pacific operations and involved in establishing their operations in China and Taiwan. Brown currently acts as CFO for a number of multinationals operating in China across many different industries, and as an advisor to international companies entering the China market. He is also a frequent speaker at conferences on taxation, accounting and business matters in China. Brown is a Fellow of the Chartered Institute of Management Accountants (CIMA) in the United Kingdom and also acts as their Beijing Representative.

 Loading ...

Leave A Comment: