Draft Labor Contract Law: Companies are Concerned but

UNCLAS SECTION 01 OF 02 GUANGZHOU 000475

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ELAB ECON EINV CH
SUBJECT: Draft Labor Contract Law: Companies are Concerned but
Cautious


1. (U) SUMMARY: Most foreign companies with offices in South China
have negative impressions of China's draft labor contract law, but
few companies believe the law will significantly impact their growth
plans in China, according to a survey jointly released on April 11
by Hewitt and Baker & McKenzie. Most companies are uncertain of the
implications of the law, with one quarter having done nothing at all
to prepare. Companies that lack employee representation plan to
establish either formal or informal representative bodies. European
companies are less concerned with the law than U.S. companies
because of similarities with European labor laws. END SUMMARY

Background of the Survey
--------------


2. (U) A total of 436 companies with offices in South China
participated in the survey on February 7-14, 2007. Three-quarters
of respondents were wholly foreign-owned companies and half were in
manufacturing, with a wide range in terms of company size. Hewitt
and Baker & McKenzie conducted the survey and discussed the results
at an April 11 conference in Guangzhou. Hewitt's Christian
Doeringer said company response to the survey was unprecedented,
with 250 companies completing the survey within the first day. The
National People's Congress will reportedly finalize the draft labor
contract law in summer 2007, with implementation in late 2007.

Impact of the Law, Actions Taken
--------------


3. (U) Slightly over one-half of companies said the new law will
have a negative impact on their business, with the rest neutral.
Almost no companies believe the law will positively affect their
business. Nevertheless, very few companies have revised their
growth plans in China - suggesting that they expect growth to
continue despite the new law. European companies are generally less
concerned than U.S. companies with the new law, according to
Hewitt's Doeringer, because of provisions on layoffs, duration of
contracts, and unions that reflect European labor law.


4. (U) Companies are highly uncertain of the implications of the new
law, according to the survey. Most companies have not yet decided
how to adapt company operations to comply with the law, which
contains no grandfathering provisions. Most HR sections have
briefed senior management about the law and one-third have sought
the help of outside consultants. However, more than a quarter of
companies have done nothing at all. This is particularly true for
smaller companies.

Employee Representation and Unions
--------------


5. (U) Approximately half of the respondents currently have no
employee representation in their companies. Manufacturing companies
are more likely than service providers and small companies to have
either formal or informal employee organizations. Those companies
that lack employee representation are split 50-50 on whether to
establish formal unions or informal representative bodies to comply
with the draft law. Only a small number of companies have plans in
place to address the potential new requirement to negotiate a
collective agreement with their workforce - and most do not
understand the implications of this provision.


6. (U) Under the new law, employers must consult with employee
representatives before making changes to employment policies.
Doeringer said this will give employee organizations, many of which
are currently little more than social groups, more input on
compensation issues. How much input is unclear, as the draft law
uses the term "consultation" (the first draft used the term
"approval"). Baker & McKenzie's Jonathan Isaacs said the drafters
left this provision vague in order to reduce criticism from
business. On a separate but relevant issue, several companies noted
at the conference that they have recently been pressured to set up
unions by the All-China Federation of Trade Unions, which is in the
middle of a campaign to organize more unions in foreign-invested
enterprises.

Employment Contracts and Temporary Workers
--------------


7. (U) The draft law will encourage the use of open-term contracts
or longer fixed-term contracts by limiting the number of fixed-term
contracts per employee to two. Most companies surveyed use
fixed-term contracts that range from one to three years. Service
companies and small companies are more likely than manufacturing
companies to use open-term contracts. U.S. companies are more
likely than European companies to use open-term (permanent)

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contracts. To comply with the new law, almost half of companies
plan to adjust their mix of fixed-term, open-term, and temporary
employees. One-third of companies have no plans to make changes.


8. (U) Three-quarters of respondents use temporary (seconded)
employees. Despite provisions in the draft law that require more
expenditures on training and benefits to temporary employees, few
companies plan to reduce the number of temporary workers or stop
using them altogether. However, a majority of companies plan to
negotiate new agreements with labor agencies to comply with the law.
The draft law also reduces the maximum hours of part-time employees
from 30 to 24. Only one-third of companies plan to hire part-time
workers in the future (the survey did not say how many companies
currently hire part-time workers).

Firing Workers
--------------


9. (U) Two-thirds of companies said the law's provisions on mass
layoffs will not affect their operations in the foreseeable future.
The new law requires that, in cases of mass layoffs, companies must
first fire employees whose social circumstances are least affected
by the job loss (people without dependents). Doeringer said similar
provisions exist in Germany - thus European companies are less
concerned about this provision than U.S. companies. In addition,
because more open-ended contracts will be used under the law,
companies will need to provide stronger evidence of unsatisfactory
performance before firing workers. Though the draft law requires
more extensive record-keeping in general, Doeringer said
documentation related to job performance will be particularly
burdensome.

GOLDBERG