An uncertain victory for China’s workers

China’s passage of a law aimed at bringing more rights to its workers has been heralded as a breakthrough for improving labour rights in China. But businesses view the law as the twilight of the age of cheap labour in China, undermining one of the country’s prized economic advantages in globalised economy.

China’s economic boom and low consumer prices in the West were delivered largely on the backs of an overworked and underpaid labour force, which lacks fundamental protections that labourers in developed countries enjoy. The new law signals the Chinese government taking steps to rein in what they see is an unacceptable gap between economic expansion and poor condition of workers.

On January 1, 2008, the Labor Contract Law went into effect, ushering in sweeping changes to Chinese labour policy. The law - brought about after a spate of headline-grabbing incidents of severe worker abuse in China - is to curb worker abuse and promote harmonious and sustainable relationships among employers and employees. Apart from offering tacit admission of mistreatment of the workers, the law is also in line with efforts by President Hu Jintao to cement his legacy as promoter of a “harmonious society”.

Under the law, which affects both domestic and foreign companies operating in China, workers will see increased protection from labour unions and significant overhauls in policy ranging from contract formation to severance packages and job training. Arguably the most influential - and controversial - change centres on an open-term clause for long-term employees. The clause states that workers with 10 consecutive years, or having signed two consecutive fixed-term contracts with a company, are entitled to a contract without a fixed end date - essentially giving them lifetime employment.

Many foreign businesses bemoan what they claim will add unnecessary bureaucratic steps to management practices, making business in China more costly and restrictive.

“It will be more difficult to get rid of unsatisfactory employees,” says Andreas Lauffs, partner at Baker & McKenzie in Hong Kong and expert on Chinese labour law, adding that the law will reduce management autonomy.

Still, experts within China and labour groups abroad call it the most significant labour law since China was first introduced to market forces in the 1980s - and necessary to protect employee rights.

“Before, companies hired and fired employees at will, adding to mistrust among employees and employers,” said Chang Kai, dean of research at the Institute of Labour Relations at Renmin University in Beijing and one of the law’s drafters. “This law will not only urge companies to improve their management practices, but will help bring businesses in line with international labour standards.”

China is hoping the law will help put to rest negative images of sweatshop labourers toiling in inhumane conditions, being fired at will and struggling for years to collect unpaid wages from unscrupulous employers. Chinese law requires labour contracts to be signed between companies and their staff, but contracts are typically for one or two years, and companies are notorious for not providing written contracts and being delinquent in paying workers on time. Workers typically are compelled to take short-term contracts, with little chance of advancement.

During the law’s formulation, a one-month comment period generated huge reaction - almost 200,000 responses - and the process of public inclusion was hailed by many as a seminal achievement in Chinese legislation, reflecting the state's desire to tap a wider base of expertise to ensure laws suited to an increasingly complex economy and society.

Many foreign enterprises voiced discontent with the law. Among them was Serge Janssens de Varebeke, then-president of the European Union Chamber of Commerce in China, who warned in a 2006 letter to the National People's Congress that the “strict regulations" could raise production costs and "force foreign companies to reconsider new investments or continuing their activities in China".

Concerns over increased operation costs, especially when labour, energy and land costs are all on the rise, portend a markedly more expensive business environment for companies in China. Already, multinationals heavily reliant on cheap labour and low manufacturing costs have begun relocating some of factories to countries like Vietnam, where cheap labour is still abundant. Olympus Corporation, the world's fourth largest digital camera manufacturer, and Yue Yuen Industrial, the biggest maker of shoes for brands such as Nike, are among companies shifting some production facilities to Vietnam to cut costs.