McDonald's, KFC, and Pizza Hut Under Fire for Wage

UNCLAS SECTION 01 OF 02 GUANGZHOU 000421 SIPDIS SENSITIVE SIPDIS USPACOM FOR FPA E.O. 12958: N/A TAGS: ELAB ECON PGOV CH SUBJECT: McDonald's, KFC, and Pizza Hut Under Fire for Wage Violations (U) This message is sensitive but unclassified. Please handle accordingly. ¶1. (SBU) SUMMARY: McDonald's, KFC, and Pizza Hut deny that they are violating any Chinese regulations with regard to payment to their employees, however they are consulting with local authorities to assure they are in compliance. The allegations of under payment, made in a recent article by a Guangzhou newspaper, come in the context of a campaign by Guangdong authorities to target companies violating wage laws. There has been virtually no discussion of the labor practices of Chinese-owned businesses or the inconsistency and lack of transparency in Chinese labor regulations in local press accounts of this story. Chinese newspapers have run a number of other stories in recent months accusing foreign companies of committing labor and safety violations. END SUMMARY A Newspaper Story Leads to an Investigation -------------- ¶2. (U) The Guangzhou daily New Express published an investigative story on March 28 accusing McDonald's, KFC, and Pizza Hut restaurants in Guangzhou of violating labor laws by underpaying some of its part-time employees by up to 40 percent. The article states that the employees, who are part-time student workers, should be paid Guangzhou's minimum wage of RMB 7.5 (USD 0.97) per hour. Reporters allegedly found that that McDonald's, KFC, and Pizza Hut pay the workers between RMB 4 (USD 0.52) and RMB 5 (USD 0.65) per hour. The article also accuses the restaurants of forcing workers to work more hours than permitted for part-time employees. ¶3. (U) The director of the Guangdong Labor and Social Security (LSS)'s labor supervision division told the press that city officials are investigating the matter and would fine the companies if they are in violation. A representative of China's official All-China Federation of Trade Unions was quoted as saying that "no company should enjoy special privileges in China." He also threatened legal action against the fast-food chains, if appropriate. Companies Say the Labor Law is Unclear -------------- ¶4. (SBU) Publicly and privately, representatives for Yum! Brands (which owns KFC and Pizza Hut) and McDonald's have insisted that their companies are in compliance with Guangzhou labor laws. Peter Kao, Guangdong General Manager for Yum! Brands, told Congenoff that China's labor law and relevant local regulations are ambiguous on wage issues. He said the primary issue in this case is whether part-time student workers must be paid the same minimum wage as other employees. McDonald's Government Relations Officer Greg Gilligan told Embassy Laboff that China's labor rules vary from location-to-location and are often vague, for example, how to define part-time work, and whether or not meal allowances are included in wages. Both Kao and Gilligan said they are cooperating with Guangzhou labor officials and will comply with the labor laws once they are clarified. ¶5. (U) According to an April 3 Wall Street Journal article, the Guangzhou LSS issued a new regulation on April 1 - after the story first broke in the New Express - stating that student workers should receive the minimum wage. The article also says that Shanghai labor authorities do not apply minimum wage laws to part-time student workers and noted that Chinese fast-food chain Yonghe King does not pay its student workers the minimum wage. High-Profile Targets in a Government Campaign -------------- ¶6. (SBU) This story comes in the early stages of a well-publicized campaign by LSS offices in the Pearl River Delta to crack down on enterprises, domestic and foreign, that violate wage laws. Liu Kaiming, who heads a prominent labor rights NGO in Shenzhen, told Congenoff that McDonald's, KFC, and Pizza Hut may have been targeted because they are "big balloons to shoot." Both Yum! Brand's Kao and McDonald's Gilligan said they believe their companies are being used as high-profile targets. Gilligan said that McDonald's has been a target for acts of "economic nationalism" carried out by local governments in several jurisdictions in the last 18 months. Media Spotlights Foreign Companies -------------- GUANGZHOU 00000421 002 OF 002 ¶7. (SBU) This story is the latest in a string of stories by Chinese newspapers highlighting reported unlawful conduct by foreign companies. PRD factories producing goods for McDonald's, Apple, and Disney made news in 2006 when media and labor groups reported poor working conditions. Chinese media has also targeted foreign companies for violating safety standards - including Proctor & Gamble (beauty products that reportedly caused skin irritation), Advanced Medical Optics (contact lenses that allegedly caused eye damage),Dell (batteries that were reportedly a fire hazard),and Mead Johnson Nutritionals (baby formula that allegedly caused respiratory problems). In the flurry of Chinese press reports and commentaries since March 28, there has been virtually no discussion of the labor practices of Chinese-owned businesses or the inconsistency and lack of transparency in Chinese labor regulations. Comment: Easy Targets -------------- ¶8. (SBU) At this stage it is unclear whether McDonald's, KFC, and Pizza Hut have violated China's labor law. However, it is highly unlikely that they would be the only restaurants in Guangzhou paying their employees at these wage levels. With local newspapers looking for a big story and government officials more than willing to highlight abuses by foreign companies, U.S. companies will probably be dealing with more of these types of situations in the future. ¶9. (U) This cable was coordinated with Embassy Beijing. GOLDBERG