Nearly 2,000 workers walked out of Honda’s transmissions factory in Guangdong province in May 2010 demanding higher wages, better working conditions and the right to elect their own representatives to the national labor union.
The strike forced Honda to stop production at its four auto assembly plants in China for 10 days, crippling operations until the company offered the workers a 24 percent pay increase. It also led to strikes at two other Honda parts factories in southern China that subsided only after the company offered those workers higher wages and better benefits.
While the
wave of unrest this summer has quieted down in recent months, Chinese workers creating the consumer products that have made the country a manufacturing powerhouse are increasingly challenging common labor practices such as low wages and excessive overtime.
“We’ve been preaching for years that China’s wage-and-hour laws are strict and should be followed,” says Andreas Lauffs, head of Baker & McKenzie’s Employment Practice in China. “For years people haven’t listened to us.”
But since the passage of China’s Employment Contract Law (ECL) in 2008, workers have gained more rights and are much more likely to exercise them — creating new challenges for domestic and foreign companies. With labor disputes on the rise, here are five things employers should know about Chinese labor law to avoid costly mistakes.
1. Overtime Under Chinese labor law, it’s illegal for workers at any company to work more than 36 hours of overtime a month. In the past, the law was widely disregarded because it was rarely enforced by labor authorities. Factory workers routinely work an extra 60 to 100 hours per month beyond the standard 40-day work week.
In the two years since the ECL took effect, more and more employees have filed claims for overtime pay. They often file these claims when facing non-renewal of their employment contracts or termination. They normally can’t force a company to renew their contract, but they can recover years of unpaid overtime through the courts, which have been upholding the law and frequently awarding employees large payouts.
Once a few employees have won claims against a company, other employees are likely to follow suit. Companies that don’t take the overtime law seriously put themselves at greater risk for labor disputes — and losing those disputes now that noncompliance has begun to have real consequences.
Even if employees contractually agree to work extra hours or waive their right to overtime pay, it’s still illegal and could cost a company millions if brought to light in the media, by unions or workers themselves.
2. Termination
There is no “at will” employment in China. All terminations must be for cause, even during a worker’s probationary period. Those causes must be stipulated by law and clearly proven, making it difficult for companies to terminate employees during the term of their employment contracts.
The ECL entitles employees to a permanent contract after they have worked for a company for 10 years, making it even more difficult to lay off employees and creating costly challenges during economic downturns and company restructurings.
Since 2008, it has also become easier for employees to file wrongful termination claims. New legislation, the Law on Mediation and Arbitration of Labor Disputes, extended the filing deadline for these claims from 60 days to one year and eliminated filing fees. Even if an employee loses the first round before the local Labor Arbitration Commission, it is very inexpensive for them to appeal the decision to a People’s Court.
Employees who win a wrongful termination case can request reinstatement or compensation equal to double the severance pay they would have received if lawfully terminated. The employer must also pay an employee’s salary and benefits up until the judgment date. Since the proceedings can be lengthy and courts are frequently siding with employees, this can lead to substantial damages for companies.
3) Employee handbooks Employee handbooks in China must be comprehensive and tailored to the local workforce. Many provinces have different requirements for what must be in the employment handbook. Thus one written for employees in Beijing may not work for those in Foshan.
To be legally binding, employee handbooks cannot simply be distributed to Chinese workers. They must be created in collaboration with workers, similar to management’s relationship with Works Councils in Europe. Companies may have to call an all-employee meeting to discuss the contents, confer with a worker representative on its provisions and then publicize the finalized version to all employees.
Failure to follow this procedure can be costly for companies in wrongful termination cases. If the company fires an employee for violating a company rule in the handbook, it must prove the handbook was developed and publicized in accordance with the requirements.
“Most companies get this wrong,” Lauffs says. “Many of these cases are lost in court because a company can’t prove it consulted with employees on the handbook.”
Another common mistake is failing to make the handbooks detailed enough, such as including provisions outlining specific punishments for different levels of misconduct. If the company can’t prove the employee knew a certain behavior was prohibited and what the consequence was, it will likely lose the case.
4) Collective bargaining There is only one legal labor union in China and it is controlled by the Communist government. The All China Federation of Trade Unions (ACFTU) serves a different function than those in the US and Europe. It does not advocate for workers rights, but supervises the workforce.
Under the ECL, employees have the right to form an in-house union, which management is required to recognize. But those in-house unions must belong to the ACFTU and follow the federation’s leadership — a point of contention in recent strikes by workers who claim the ACFTU does not protect their interests.
When it comes to issues like collective bargaining, the Chinese government is in a precarious position. It doesn’t want to alienate foreign investment drawn to the country for cheap labor, but it also wants to avoid a full-scale worker uprising that could threaten its political power.
The government also has an interest in shrinking the gap between rich and poor that has widened during the manufacturing boom of the 1990s and 2000s. Establishing higher wages is a key part of the government’s plans to shift China’s economy from one dependent on exports to one fueled by domestic consumption. Establishing a middle class is a major factor in that equation.
To that end, the ACFTU introduced the “
Rainbow Plan” in 2008 to establish unions and collective bargaining in all private companies in China by 2012. The initiative struck fear in the hearts of many executives who worried it would lead to higher labor costs that would compromise their ability to be competitive in the global market.
Since the global economic crisis, however, the Rainbow Plan has lost steam and the government hasn’t seemed able to reach a consensus on how to make collective bargaining a nationwide reality. There have been
developments at the local level. But for now, how and when the practice will take hold in China remains an open question.
5) New M&A considerations The new labor laws and growing awareness among workers has made China a more precarious place to conduct mergers and acquisitions. In the past, when a foreign company was making an acquisition in China, it could pick and choose which employees to keep with few repercussions.
Today the employment aspects of these deals require much more attention. While there is no automatic transfer of employment, employees who stay on with the acquiring company do so with the same seniority. If they already have permanent contracts with the previous owner, for example, they would be entitled to huge payouts if terminated in the future.
In an asset deal, any employee, whether taken over by the acquiror or terminated by the seller, are entitled to severance of one month’s wages for every year of service. In an M&A deal, a major issue between the buyer and seller is who will pay the severance, which in some global deals can amount to millions of dollars.
Another issue is that laid off workers are much more likely to file wrongful termination and overtime claims, as well as those seeking compensation for unpaid social insurance. With courts increasingly siding with workers, buyers face significant liability when acquiring a company that has ignored labor laws — a common practice.
“It’s all real money now,” Lauffs says. “Before it was not.”
Buyers and sellers in China are finding themselves having to negotiate issues that didn’t used to be on the table. Having the right law firm to guide them through the shifting employment landscape has never been more crucial.