Will Draft Labor Contract Law Improve Conditions

UNCLAS SECTION 01 OF 08 BEIJING 009677

SIPDIS

DEPARTMENT FOR EAP/CM, DRL/IL
DEPARTMENT PASS USTR FOR KARESH, ROSENBERG
DEPARTMENT PASS USTR FOR STRATFORD, WINTER, ALTBACH, CELICO
LABOR FOR ILAB NEWTON, LI ZHAO, SCHOEPFLE
TREASURY FOR OASIA/ISA-DOHNER AND KOEPKE
USDOC FOR 4420/ITA/MAC/MCQUEEN
GENEVA FOR CHAMBERLIN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ELAB ETRD PHUM PGOV CH
SUBJECT: Will Draft Labor Contract Law Improve Conditions
for Workers?

Ref: A) Guangzhou 10741 B) Beijing 01355 C) Beijing 01153

D) 05 Beijing 10998 E) 05 Beijing 09446 F) 04 Beijing
19514

Sensitive But Unclassified; Handle Accordingly


1. (SBU) Summary: The draft Labor Contract Law (LCL),
considered by the National People's Congress (NPC) at its
March session and published for comment through April 20 by
the NPC Standing Committee, gives workers increased
protections by providing fixed-term contract protections
for workers whose employers fail to provide a written
contract, by regulating Labor Service Agencies (LSAs) that
provide employers with temporary workers, and by increasing
penalties for employer violations of workers rights, such
as failure to pay wages, defaults by unlicensed companies
and LSAs on wages, use of illegal guarantees by employers,
use by employers of violence, coercion and force against
workers, and abuse of authority by labor bureaus. Although
the draft adds new protections for workers and gives labor
bureaus stronger penalties to use to deter employer abuses,
the draft cannot resolve the longstanding problems that are
clearly the biggest barriers to improved working conditions
in China: inadequate numbers of labor inspectors in the
labor bureaus; the failure of local governments, wed to a
development model premised on cheap labor and steeped in
local protectionism, to enforce the law; and the
unwillingness, or inability, of the central government to
force lower levels of government to enforce the law. End
Summary.


2. (U) The Labor Contract Law of the People's Republic of
China (LCL),considered by the National People's Congress
(NPC) during its March session and published by the
Standing Committee of the NPC for a one-month comment
period on March 20, has generated significant controversy.
While reportedly the bulk of the more than 80,000 comments
received by the NPC as of April 14 are from workers
supporting the draft, employers are rallying to point out
problems with the proposed law. Laboff's analysis below is
informed by review of comments published by law firms,
review of submissions by companies to the NPC and by
interviews with labor law professors and attorneys.

Core Change: Protection for Workers Without Contracts
-------------- --------------


3. (U) One of the most significant changes in the law is
the inclusion of statutory protections for workers who do
not have employment contracts. Draft Article 9 provides
that all labor contracts shall be in writing, but also
provides that where there is an actual labor relationship
between an employer and employee without a labor contract,
the employer and employee shall be deemed to have concluded
a non-fixed term contract. Article 9 also specifies that
if the employer and employee differ as to whether there is
an employment relationship, the employee's view is to
prevail, unless evidence to the contrary is provided.
Article 10 provides that when there is no contract, the
date the employee renders service to the employer is the
day the employment relationship is established. (See also
Paragraph 8: Penalties for Employer's Failure to Provide a
Labor Contract.)


4. (U) Articles 9 and 10 protect workers whose employers
fail to sign employment contracts with their employees, or
who sign contracts that do not comply with the law. The
December 2005 Report to the Standing Committee of the
National People's Congress (NPC) on the Implementation of
the 1994 Labor Law documented the continuing problem of
employers who fail to sign contracts with their employees.
Surveys and other investigations showed that fewer than 20
percent of employees in small/medium-sized non-public-owned

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enterprises have signed labor contracts with their
employers. The Report also identified contracts that give
employers rights but employees only obligations, that
provide no specifics as to employee salary, that contain
provisions exonerating the company from liability for
accidents, and that have not been negotiated with the
employee as a continuing problem. Transasia Lawyers, an
international law firm, said in its March 31 Employment Law
Newsletter: "The unwillingness of many employers to sign
contracts is driven by their desire to drive down labor
costs. In the absence of a formal employment relationship,
unscrupulous employers not only avoid having to contribute
to the various mandatory social insurance schemes on behalf
of their undocumented workers, but also dodge their
liability to pay workers monetary compensation for early
termination."

Core Change: Regulation of Labor Service Agents
-------------- ---


5. (U) The draft LCL for the first time regulates Labor
Service Agents (LSA; also known as Labor Dispatch
Agencies). The law defines these agents as employers
engaged in providing human resource services by assigning
workers for employment in other companies. Article 12 of
the draft LCL requires that an LSA must have registered
capital of RMB 50,000 (USD 6,250),and must maintain a
reserve fund of RMB 5,000 per assigned worker as a
guarantee that the assigned worker will receive wages.
The article also requires that the LSA have a contract with
the assigned workers, which contract sets out the name of
the company accepting the assigned workers, and includes
the term of employment and job description, in addition to
the contract terms required by Article 11. Article 12
makes the LSA responsible for supervising the company
accepting the assigned workers, and for assuring their
compliance with labor standards and labor conditions. LSAs
are required to enter into labor force assigning contracts
with the companies receiving assigned workers, and are also
required to inform workers of the contents of these
agreements.


6. (U) Transasia Lawyers, in its March 31 newsletter,
describes the problems regulation of LSAs is intended to
remedy: " ... Some employers recruit through an (LSA) as a
means of avoiding their lawful obligations towards staff.
In some cases, an employer has dispatched its employees to
an (LSA) in order for them to be seconded back to their
original positions with that same employer. By changing
the nature of the employment relationship, the employer is
able to circumvent various obligations that it would
otherwise have toward such personnel in terms of wages,
benefits and other entitlements. Some employers have
simply terminated employees in order to replace them with
alternative staff seconded by an (LSA). Other cases
involve irregular employment practices by newly established
(LSAs),such as the unlawful deduction of so-called
"management fees" from employees' wages and failure to pay
social insurance contributions on behalf of employees. In
the interests of profit, some employers turn a blind eye
when (LSAs) sign contracts with employees that clearly
violate employees' legal rights. For their part, some
(LSAs) are unconcerned when employers fail to provide
adequate safety measures for their secondees, deprive
secondees of their lawful entitlement to rest periods and
holidays, or violate their rights in other serious ways."
(Note: See also Paragraph 7: Violations by Labor Service
Agencies.) Large LSAs, such as FESCO, the Foreign
Enterprise Service Corporation, reportedly contend that the
capitalization requirements will be unduly burdensome.

Core Change: Increased Penalties
--------------

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7. (U) The December 2005 Report to the Standing Committee
of the NPC on the Implementation of the 1994 Labor Law
notes the inadequacy of Labor Law enforcement capability by
the local labor bureaus, which have insufficient employees
in general, have insufficient employees and mechanisms
dedicated to preventing problems, and can only handle
complaints that are filed. Where complaints are filed, the
Report said, the labor inspection units do not have
punitive measures sufficiently powerful to deter employers.
To address the latter problem, the drafters provided for
significant increases in civil penalties on certain
prohibited practices, and added references to criminal
penalties for some prohibited practices as well.

-- Failure to Pay Wages or Other Economic Compensation:
Draft Article 55 provides that if an employer fails to pay
wages as required under the contract, fails to pay the
minimum wage, or fails to pay other economic compensation
as provided by law, the labor protection authority can
order the employer to pay within a stipulated time. If the
employer does not pay within that time period, the labor
protection authority shall order the employer to pay the
employee an additional 50 - 100 percent of the amount due.
Article 55 of the draft increases by 25-75 percent current
penalties on violations of the wage laws. Currently, the
Rules on Economic Compensation for Violating or Terminating
Labor Contracts, effective January 1, 1995 provide that for
failing to pay wages in a timely fashion or for making
illegal deductions from wages, the employer shall pay the
unpaid portion plus an additional 25 percent of the unpaid
amount (Rules, Article 3); for paying a wage below the
minimum wage, the employer shall pay the insufficient
portion plus an additional 25 percent of the insufficient
portion (Rules, Article 4); and for not paying the employee
economic compensation upon termination of a labor contract,
the employer shall pay the unpaid compensation plus 50
percent of the unpaid compensation. Article 39 of the
draft LCL sets a new minimum payment upon termination at 6
months of salary, and lifts the current limit on
compensation (limit: 12 months of salary) in the current
Rules (Rules, Articles 5 and 7). By raising penalties,
which are intended to give employers an economic incentive
to obey the law, the draft addresses a series of problems
identified in the December 2005 Report to the Standing
Committee of the National People's Congress on the
Implementation of the 1994 Labor Law. The Report stated
that 12.5 percent of employees surveyed in April 2005
received wages below the local minimum wage, that 7.8
percent of employees surveyed experienced wage arrearages
averaging RMB 2,184 withheld for an average of 3.2 months;
in another province where the problem was particularly
severe, the 16.1 percent of employees have experienced wage
arrearages, the Report said.

-- Defaults by Unlicensed Companies on Wages: Draft
Article 61 provides that if an entity that does not have a
business license or fails to go through other procedures
required by law recruits workers, the labor protection
authority shall impose a fine of from RMB 1,000-5,000 (USD
125-625) per employee. The draft LCL also requires that
the party awarding a contract to an unlicensed company
shall be liable for the wages owed by the unlicensed
company to its employees.

-- Violations by Labor Service Agencies: Draft Article 59
provides that a Labor Service Agent that violates the law
shall rectify the violation upon the order of the labor
authority. For "serious cases" (Note: The draft does not
define "serious case." End Note) a fine of from RMB 1,000
to 5,000 (USD 125-625) shall be imposed. When an employee
assigned by a Labor Service Agent has his/her rights and/or
interests violated, the Labor Service Agency and the

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receiving entity shall be jointly liable for compensation.
If a Labor Service Agent fails to deposit a reserve fund,
the labor authority shall impose a fine of from 10 to 50
percent of the reserve fund to be deposited. If the Labor
Service Agency does not pay the fine, the administrative
authority for industry and commerce shall cancel its
business license.

-- Use by Employers of Illegal Guarantees: Article 14 of
the draft LCL forbids an employer from requiring an
employee to provide any guarantee, collect any money or
seize the ID of the employee as security. Article 54
provides that if an employer performs any act that violates
Article 14, the money or property taken as a guarantee
shall be returned to the employee and a fine of from RMB
500-2,000 (USD 62.50-250) per employee shall be levied on
the employer. The Article also provides that the employer
must compensate the employee for any loss incurred. The
current regulation governing this issue is Article 3 of the
Provisions on Economic Compensation for Violating or
Terminating the Labor Contract, effective January 1, 1995,
which provides that the labor inspection authority may
require any employer who fails to compensate an employee
with overtime premium pay shall be liable for the unpaid
amount plus an additional 25 percent of the remuneration.

-- Violence, Coercion, Force Against Workers: Draft
Article 55 provides civil penalties of from RMB 2,000-
20,000 (USD 250-2,500) on an employer who enters into a
labor contract with an employee through fraud or coercion.
Article 56 of the draft makes it a criminal offense to use
violence, coercion or illegal restriction of personal
freedom as a means to force an employee to work or to work
under dangerous conditions which violate the rules and
jeopardize personal safety. Furthermore, Article 56 states
that the use of insults, physical punishment, beatings and
illegal searches or detention of an employee shall be
investigated, and if the act constitutes an offense, shall
be punished pursuant to the Criminal Law.

-- Abuse of Authority by Labor Bureaus: Draft Article 62
provides that labor authorities in charge of labor
protection who exercise their authority in violation of the
law, and infringe the rights of employers or employees,
shall be liable for compensatory damages and for
administrative penalties. In addition, such officials
shall be investigated and if their acts constitute an
offense, shall be punished pursuant to the criminal law.

But Draft Leaves Some Penalties Unchanged
--------------


8. (U) The draft leaves unchanged penalties for several
practices prohibited by the Labor Law and regulations:

-- Failure by Employer to Provide a Labor Contract: The
draft LCL makes no change in current penalties, set forth
in the Regulation on Economic Compensation for Violating
Provisions Regarding Labor Contracts in the Labor Law,
effective May 1, 1995, for failure to provide a labor
contract. Article 3 of the regulation provides that an
employer shall compensate the employee for his/her loss in
remuneration plus an additional 25 percent of the
compensation for 1) intentionally failing to conclude a
labor contract after hiring an employee, and for not
renewing a labor contract when it expires; 2) for
concluding an invalid or partially invalid labor contract;
3) for infringing the rights of a female or underage
employee in violation of the regulations; or 4) for
terminating the labor contract in violation of the
regulations.

-- Failure by Employer to Pay Social Insurance

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Contributions: Article 55 of the draft provides that if
the employer fails to pay "other economic compensation," as
provided by law, the labor authority can order the employer
to pay within a specified time. The regulation Punitive
Measures for Violating the PRC Labor Law, effective January
1, 1995, provides in Article 17 that an employer who fails
to pay the Social Security contribution on behalf of the
employee shall pay the unpaid contribution within the time
period imposed by the labor authority plus two percent of
any unpaid contribution that has not been paid within the
time period imposed.

-- Forced or Uncompensated Overtime: Article 11 of the
draft LCL provides that the contract shall include, among
other provisions, "working hours and rest and vacations."
Current regulations governing this issue are the Provisions
on Economic Compensation for Violating or Terminating the
Labor Contract, effective January 1, 1995. Article 3 of
the regulation provides that the labor inspection authority
may require the employer who fails to pay overtime premium
compensation to give the employee the unpaid amount plus an
additional 25 percent of the remuneration. Punitive
Measures for Violating the Labor Law, a regulation
effective January 1, 1995, provides in Article 4 that the
labor inspection authority shall pay a fine of no more than
RMB 100 per hour for forcing a worker to work extended
hours without negotiating with the labor union. Article 5
of the same regulation provides for a punitive fine of not
more than RMB 100 per person for three hours of overtime
work per day, or over 36 hours of overtime work per month.
The December 2005 Report to the Standing Committee of the
NPC identifies uncompensated overtime as a common
occurrence and that workers frequently work over 10 hours
per day without receiving premium pay.

Could Draft Nullify Portions of Inspection Regulations?
-------------- --------------


9. (U) Article 45 of the draft LCL gives labor inspection
authorities the right to examine and inspect materials and
to inspect workplaces in connection with the conclusion of
labor contracts and collective contracts, and Article 47 of
the draft specifies that in carrying out inspections
officials shall enforce the law "in a civilized way." By
contrast, Article 15 of the Regulation on Labor Security
Inspection, effective December 1, 2004, gives labor
inspectors a series of powerful tools to use in enforcing
the 1994 Labor Law, including the right to enter the work
site to make inspections, the right to inquire of relevant
persons about the issues, the right to compel the employer
to produce documents and to make statements and
explanations; the right to collect information by means of
photocopying, photos, video recordings and other means; the
right to engage an accounting firm to audit the company's
payment of wages and social insurance premiums, and other
rights. It is unclear whether these provisions of the LCL,
when passed by the NPC, would restrict the existing powers
of inspectors, and thereby reduce, not increase, labor
inspectors' ability to enforce the law.

Stricter Provisions for Employers Draw Company Complaints
-------------- --------------


10. (SBU) The drafters also tightened certain provisions
prohibiting employer practices regarded by some as unfair
to workers. The changes are opposed by some employers on
the grounds that they are unduly burdensome.

-- Non-Compete Compensation and Damages for Breach:
Article 16 of the draft LCL requires that where a non-
compete agreement is reached, an additional agreement
providing for economic compensation to the employee must
also be reached. The article limits the scope of the

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restriction to the territory within which the company
competes, and limits the term of the restriction to two
years. (Note: A 1996 notice issued by the Ministry of
Labor and Social Security MOLSS) limits the non-compete
period to a maximum of three years. End Note.) The
Article further provides that the compensation provided to
the employee shall be not less than the employee's annual
wage. (Note: Jiangsu Province, Shenzhen Special Economic
Zone and Tianjin Municipality all have published
regulations that establish a formula for the amount of
employee compensation. Jiangsu requires a payment of one
third of the employee's annual wage, Shenzhen requires a
payment of two thirds of annual wage, and Tianjin requires
a payment of one half of the employee's annual wage. End
Note.) Article 16 also provides that any damages for
breach of the contract by the employee shall be not more
than three times the amount paid by the employer as
consideration for the non-compete agreement. Transasia
Lawyers, in its March 31 newsletter, says the provisions
"provide important clarifications to the current legal
framework of national law, which is widely felt to be
inadequate to the task of protecting the rights and
interests of both employers and employees in a balanced
fashion." The law firm newsletter notes that "Some
employers, rather than seeking to retain key staff by
offering competitive remuneration and benefits packages,
attempt instead to prevent employees from leaving to join
another employer midway during the term of their employment
contract by insisting that they agree to an unreasonably
broad and punitive breach of contract clause. Such a
clause typically requires a prohibitive amount of monetary
compensation from the employee in the event that they
terminate the contract prematurely, and in effect, deprives
the employee of their lawful right to choose alternative
employment." However General Electric (GE) takes the
opposite view. In comments to the NPC, the company says
that this provision will force companies to make the hard
choice between paying high compensation and protecting
trade secrets, and recommends that the draft be amended to
provide that compensation be not less than 50 percent of
the annual wage of the employee. (Note: The drafters
appear to be setting a ceiling while companies want to set
a high floor for such compensation. End Note). GE also
recommends that the cap on compensation for breach be
amended to make the employee liable for all economic
damages caused by the employee's breach of the non-compete
agreement.

-- Dispatched Employees: Article 40 of the draft LCL
provides that the contract of an employee assigned by a
Labor Service Agent (LSA, also known as a Labor Dispatch
Agency) to the same company for a full two years shall be
terminated and a new contract signed. GE Labor Policy
Counsel argues that corporations need a flexible workforce,
and should not be forced to convert temporary workers into
permanent ones.

-- Probation Period: Article 13 of the draft LCL provides
for probationary periods not to exceed one month for non-
technical personnel, two months for technical personnel and
six months for senior technical and professional personnel;
the regulation also provides that the same employer can
have only one probation period per employee. The December
2005 Report to the Standing Committee of the NPC notes that
employers abuse probation periods. Transasia Lawyers says
in its March 31 newsletter "Many employers continue to
misuse the current system of probationary periods as a
means of maximizing their profits to the detriment of their
employees' interests. Under current regulations, if an
employee can be proven not to meet the criteria for a work
position during their probationary period, the employer may
unilaterally terminate the employment contract with
immediate effect without having to pay severance. To

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exploit this system to their advantage, some employers hire
employees during peak production periods, stipulating
relatively long probationary periods, and then terminate
the employment contract on the day before the probationary
period expires." GE, on the other hand, contends that
these probation periods are too short to allow an employer
to judge whether an employee is qualified for the job, and
suggest a probation period of six months. The company also
suggests that the regulation permit one probation period
for each job to allow for promotions. Under Article 21 of
the current Labor Law, the allowable probation period is
six months.

-- Severance Pay Upon Expiration of Labor Contracts:
Article 39 of the draft LCL provides that employers shall
pay compensation to an employee when the employee's labor
contract expires or terminates according to its terms.
Currently, Article 3 of the regulation governing Economic
Compensation for Violating Stipulations Regarding Labor
Contracts in the Labor Law, effective May 1, 1995, states
that when an employer does not renew a labor contract when
it expires, he shall be liable to compensate the employee
for his/her lost remuneration plus an additional 25 percent
of such remuneration. The December 2005 Report to the
Standing Committee of the NPC on the Implementation of the
1994 Labor Law states that the terms of most contracts are
not longer than one year, which allows employers to
"circumvent" legal obligations to employees. GE argues for
deletion of the provision, contending that it is
inconsistent with the policy of allowing short-term
contracts.

-- Effect of Merger on Labor Contracts: Draft Article 26
provides that following a merger the new employer succeeds
to the contract of the merged company's employee, or, with
the consent of the employee, is terminated and a new
contract concluded. GE says the provision conflicts with
Article 37 of the draft which provides that a labor
contract terminates when an employer ceases business or is
dissolved, and that the provision should be amended so that
labor contracts in a merger are deemed to have the same
legal effect as under Article 37.

-- Making f Company Rules: Article 5 of the draft LCL
rovides that the employer shall adopt regulations and
policies having a direct relation to the vital interests of
employees through discussion and approval by the trade
union, workers' congress or workers' representative
assembly or by equal negotiation. Article 51 provides that
rules made by the unilateral decision of the employer shall
be null and void. In contrast, Article 4 of the 1994 Labor
law provides that employers shall establish and improve
their rules and regulations according to the law and ensure
that the workers enjoy their rights and perform their
obligations. GE claims that making rules should be the
right of the employer and that such rules should be deemed
valid unless in violation of laws, regulations or
collective contracts.

Will the Labor Contract Law Improve Enforcement?
-------------- ---


11. (SBU) Comment: A key question is whether the LCL as
drafted will improve the ability of provincial and local
governments to enforce the law. New statutory protection
for workers without written contracts, increased penalties
with arguably stronger deterrent effect, and clear
regulation of entities providing temporary workers appear
to be provisions that will help provincial and local labor
bureaus better protect workers. However, the draft cannot
resolve the longstanding problems that are clearly the
biggest barriers to improved working conditions in China:
inadequate numbers of labor inspectors in the labor

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bureaus; the failure of local governments, wed to a
development model premised on cheap labor and steeped in
local protectionism, to enforce the law; and the
unwillingness, or inability, of the central government to
force lower levels of government to enforce the law.

Randt