Many countries have adopted plans designed to help their economies recover from the global financial crisis. Unfortunately, those have mostly concentrated on saving banks and companies on the one hand, and on stimulating consumption on the other. Amazingly, there has been relatively little emphasis on the labor market policies needed to save jobs and protect wages. One wonders who is meant to do all the consuming if unemployment keeps rising and wages keep falling (at least in real terms)?
The FLA has been drawn to the impact the crisis is having at the bottom-end of the global supply chain, far from the banks and brokerage houses where the crisis first erupted. The countries that make the consumer goods that our consumption-driven economic bubble fed on have experienced a tsunami of factory closures and layoffs. In an attempt to help buyers, suppliers and worker representatives deal with that tsunami, the FLA has been on the ground in a few locations convening meetings to see how governments, employers and trade unions can work together to handle retrenchments in a socially responsible way.
Recently, the FLA was in Guanzhou, China, where we conducted a meeting that brought together a major brand-name buyer, its local suppliers and representatives from the Ministry of Commerce, Ministry of Human Resources and Social Security and the All China Federation of Trade Unions (ACFTU) for this purpose. This type of discussion has really been eroded in many countries around the globe, but in China the crisis is strengthening this collaborative process.
Protecting jobs to preserve social harmony
In China, 20 million migrant workers had no jobs to return to after the Chinese new year, creating social pressures that could not be ignored. The government and social partners have adopted a two-prong strategy to stop the hemorrhaging of jobs and loss of wages in order to maintain social stability. One prong involves measures to reduce employers' statutory labor costs. The other involves increased vigilance by local authorities and trade unions toward companies who are not paying wages or are closing their doors without meeting their legal obligations. New regulations and policy statements from the government feature a carrot and sticks approach.
Tripartite cooperation has been very much in evidence in the Chinese response. On January 23, the Ministry of Human Resources and Social Security, the All-China Federation of Trade Unions and the China Enterprise Association issued a joint statement urging employers to avoid or reduce mass layoffs by reducing wage costs, placing workers on leave or adopting flexible working arrangements. This was followed on February 3 by a notice from the State Council that advised local governments to cut employment costs through temporary measures such as reducing social security rates or even suspending the payment of social security premiums altogether. Tax breaks are to be offered to companies in economic trouble.
Labor law enforcement and labor relations also feature prominently. The Ministry of Human Resources and Social Security has advised local governments to establish a wage arrears reporting system: if a company finds itself constrained to pay wages, then it is obliged to negotiate an agreement with its union or workers’ representatives and to file a report with the local labor and social security office.
Local authorities also have been instructed to crack-down on companies that are not paying wages, as reflected in new rules issued by the Ministry of Human Resources and Social Security in January. The measures go as far as stating that shareholders or holding companies will be held liable if the company is shuttered without meeting the company's liabilities to workers. Foreign-owned companies may even be pursued in countries that have reciprocal agreements with China.
Handling retrenchments in a socially responsible way
At our meeting in Guanzhou, we learned more of the nuts and bolts of how China was managing the crisis. Contrary to speculation, representatives from government agencies explained that China was not permitting the highly protective provisions of the Labor Contract Law and Minimum Wage regulations to be breached. The ACFTU representatives pointed out, however, that the Minimum Wage is based on an 8-hour day and if companies put workers on short time, they only need to pay a proportional share of the minimum wage. The law allows companies to go down to 75% of the minimum wage. They also noted that workers who are on short time, forced holidays or alternative work arrangements, such as job sharing, can receive training paid for by the Government.
The company participants were surprised to learn that employers facing economic difficulties could apply to the Government for a moratorium or reduction in Social Security payments. No one could tell us, however, whether the employer would have to pay the backlog when the moratorium is lifted.
The ACFTU representatives were very engaged and stated that they were open to negotiating (or re-negotiating) collective bargaining agreements to reflect such new arrangements. The ACFTU had already negotiated a number of short-time agreements with foreign-invested companies, we were told, and was open to approaches from employers. Their only concern was that any changes to work arrangements (and hence wages) be negotiated.
As one would expect in China, the negotiation approach had been piloted in a designated area before being applied more widely. A city in Guangdong Province had been chosen to test out collective agreements with special provisions regarding wages, working hours, labor protection, women workers and work-related welfare. Agreements were negotiated at a select group of enterprises and then submitted for a number of rounds of broader consultation before being finalized. Draft agreements were then distributed to enterprises for their use. One of the provisions relates to transparency about the financial and business situation of the enterprise. Once an agreement has been concluded it is registered with the local labor office.
The FLA has agreed to continue to bring together the parties concerned at both the provincial and the national level to discuss socially responsible retrenchment. The next such meeting will be held in Jiangsu province in June. You can read more China’s National and Local Labor Market Policies on the FLA website.
Auret van Heerden
Wednesday, May 20, 2009
Monday, March 9, 2009
Impact of the Economic Crisis on China's Labor Contract Law
China has been through 30 years of unbridled growth based on its low-cost labor market structure. During this period, the state’s priority was employment creation. The laws and regulations issued were intended to support the low value-added processing industries that were flourishing at the time, but they were poorly enforced and created an unstable labor supply.
By the end of the 1990’s, Chinese policy makers realized that their economic future did not lie in these low value-added industries and that jobs alone would not ensure the social stability they sought. The strategic objectives of industrial restructuring and social cohesion necessitated the development of longer term, more stable employment relationships – hence the need for labor contracts.
China's Labor Contract Law (LCL) therefore had two objectives - the need to protect workers and to upgrade industry - and both contribute to the overriding objective in Chinese policy at present, namely to maintain social stability or harmonious society as it is officially described. The runaway growth that the Chinese economy has enjoyed has produced many cleavages between urban and rural, rich and poor, and employed and unemployed. The hundreds of millions of people affected could threaten social stability if not protected, so the Chinese state has opted for a social market economy model in which labor protections and a social safety net moderate the potentially negative consequences of a relatively unregulated market economy.
Labor market reforms inevitably engender conflict and to deal with this, the state enhanced the arbitration system rather than improve the industrial relations system. The Government had anticipated the upsurge in disputes arising from the introduction of the LCL and had specifically expanded access to arbitration services but they were nonetheless swamped. In Guangzhou for example, the number of cases lodged with the Arbitration Council from January to November 2008 doubled (to 60,000) while in Beijing they leapt 104% to total 33,000 in the first 9 months of the year. To put this in perspective, consider that in the period 1987-2005 the growth rate in labor disputes was 27% annually. Delays in cases up to one year have become common.
There are those commentators who argue that government opted for the legal protection of workers as an alternative to trade union protection and that if the government had not moved to protect workers through the LCL, vulnerable and abused workers would have chosen industrial action either through their unions or through wild-cat strike action. The policy-makers and party leaders realized that the employment relationship needed more sophisticated regulatory mechanisms if labor unrest was to be kept in check, but they preferred the option of providing individual legal protection to that of collective trade union protection of workers. They launched a major publicity and awareness-raising campaign six months prior to the LCL going into effect to educate workers about their rights under the new law and to encourage them to sue for enforcement against employers who did not respect those rights. Another law was passed that extended the time period in which workers could avail themselves of free arbitration in employment disputes to support this strategy.
Industrial relations in China in 2008 were driven mainly by two factors – the entry into force of the LCL and the impact of the international financial crisis. The former prompted many employers to avoid or blunt some of its effects, such as using temporary or interim workers or outsourcing the functions of certain categories of workers (such as catering, security and cleaning staff) to avoid signing longer term contracts and paying full social security benefits. In the first year of LCL implementation, the number of interim workers ballooned from seven million to 27 million. Other employers issued bogus contracts of one sort or another, or moved to cheaper provinces or countries. In many cases workers, newly aware of their rights, opposed the moves through demonstrations or wild-cat strikes. Lawyers, either activist or mercenary, encouraged workers to sue with the promise of major cash payments for back pay and benefits. The ACFTU, which acts in the national interest as a broker between workers and employers, was overwhelmed by the situation and workers generally turned to local government officials for help. Surprisingly, the official local position was usually to support the workers and to urge management to settle as quickly as possible in order to avoid negative publicity in the build-up to the Olympics. This lack of leadership by the ACFTU partly reflects their bureaucratic structure but may also be a conscious decision on the part of the government not to shift the ACFTU into a more conventional trade union role.
The second driver, namely the worsening economic conditions, included rising costs for labor, energy and materials and worsening market conditions, particularly as the financial crisis hit consumer markets in the US and Europe. Factory closures accelerated and workers were frequently not paid their full termination pay and benefits. Once again they demonstrated and turned, not to the ACFTU, but to local government which urged some settlement for the workers and even provided some financial compensation from the public coffers in some high-profile cases. For example, when Smart Union Group Limited closed two factories without any notice and abandoned workers without paying three months back wages, the township government promised to pay workers using township revenue.
Factories continued to close and clashes with the police grew, particularly as the Olympics receded and local governments were less worried about negative publicity. In response to the increasingly difficult position of export industries, local labor authorities began relaxing the obligations of the LCL and reducing the rates of Social Security coverage a company had to carry. These moves to reduce the burden on enterprises was largely aimed at saving jobs since the growth of unemployment was seen as a factor driving potential social instability. Even the Shanghai Minhang district federation of trade unions appealed to more than 200 companies not to lay off employees.
While the factory closures, strikes and demonstrations were grabbing headlines the day-to-day work of industrial relations was continuing. The ACFTU reported at its conference in October that it had signed 1.091 million collective contracts covering 1.834 million enterprises/work units and 140 million workers. The ACFTU also announced at the end of the year that 313 unions had been set up at the headquarters of multinationals in China (83 percent of the total) and at about 3,843 of their corporate entities across China, bringing-in around 2.13 million union members. Union membership had grown from 123 million to 209 million and migrant workers had become the “emerging force” of the union with 66 million new members in the past five years.
So what does 2009 hold? The ACFTU will continue its drive to sign-up multinational enterprises, but this will be a top-down strategy and will only involve organization of workers if a high-profile company resists the overtures of the ACFTU. At the same time, the tight economic conditions and industrial restructuring are likely to generate lots of work for human resource departments whose room for maneuver will be restricted by the expanding application of the Labor Contract Law and other laws, especially if the government stimulus package takes hold and growth rates improve. Dissatisfied workers still do not have enough channels for resolving grievances and are likely to resort to wildcat strike action to gain the attention of employers or local government (who will probably be less accommodating than in 2009). The hot-button issues will be written labor contracts, social security coverage, hourly minimum wages (particularly in areas where local governments have been ambitiously raising minima), overtime premiums and interim or “dispatched” workers. Local governments can be expected to ease enforcement of these provisions but when caught between the conflicting interests of employers and workers they will choose social harmony, i.e. the protection of workers.
Auret van Heerden
By the end of the 1990’s, Chinese policy makers realized that their economic future did not lie in these low value-added industries and that jobs alone would not ensure the social stability they sought. The strategic objectives of industrial restructuring and social cohesion necessitated the development of longer term, more stable employment relationships – hence the need for labor contracts.
China's Labor Contract Law (LCL) therefore had two objectives - the need to protect workers and to upgrade industry - and both contribute to the overriding objective in Chinese policy at present, namely to maintain social stability or harmonious society as it is officially described. The runaway growth that the Chinese economy has enjoyed has produced many cleavages between urban and rural, rich and poor, and employed and unemployed. The hundreds of millions of people affected could threaten social stability if not protected, so the Chinese state has opted for a social market economy model in which labor protections and a social safety net moderate the potentially negative consequences of a relatively unregulated market economy.
Labor market reforms inevitably engender conflict and to deal with this, the state enhanced the arbitration system rather than improve the industrial relations system. The Government had anticipated the upsurge in disputes arising from the introduction of the LCL and had specifically expanded access to arbitration services but they were nonetheless swamped. In Guangzhou for example, the number of cases lodged with the Arbitration Council from January to November 2008 doubled (to 60,000) while in Beijing they leapt 104% to total 33,000 in the first 9 months of the year. To put this in perspective, consider that in the period 1987-2005 the growth rate in labor disputes was 27% annually. Delays in cases up to one year have become common.
There are those commentators who argue that government opted for the legal protection of workers as an alternative to trade union protection and that if the government had not moved to protect workers through the LCL, vulnerable and abused workers would have chosen industrial action either through their unions or through wild-cat strike action. The policy-makers and party leaders realized that the employment relationship needed more sophisticated regulatory mechanisms if labor unrest was to be kept in check, but they preferred the option of providing individual legal protection to that of collective trade union protection of workers. They launched a major publicity and awareness-raising campaign six months prior to the LCL going into effect to educate workers about their rights under the new law and to encourage them to sue for enforcement against employers who did not respect those rights. Another law was passed that extended the time period in which workers could avail themselves of free arbitration in employment disputes to support this strategy.
Industrial relations in China in 2008 were driven mainly by two factors – the entry into force of the LCL and the impact of the international financial crisis. The former prompted many employers to avoid or blunt some of its effects, such as using temporary or interim workers or outsourcing the functions of certain categories of workers (such as catering, security and cleaning staff) to avoid signing longer term contracts and paying full social security benefits. In the first year of LCL implementation, the number of interim workers ballooned from seven million to 27 million. Other employers issued bogus contracts of one sort or another, or moved to cheaper provinces or countries. In many cases workers, newly aware of their rights, opposed the moves through demonstrations or wild-cat strikes. Lawyers, either activist or mercenary, encouraged workers to sue with the promise of major cash payments for back pay and benefits. The ACFTU, which acts in the national interest as a broker between workers and employers, was overwhelmed by the situation and workers generally turned to local government officials for help. Surprisingly, the official local position was usually to support the workers and to urge management to settle as quickly as possible in order to avoid negative publicity in the build-up to the Olympics. This lack of leadership by the ACFTU partly reflects their bureaucratic structure but may also be a conscious decision on the part of the government not to shift the ACFTU into a more conventional trade union role.
The second driver, namely the worsening economic conditions, included rising costs for labor, energy and materials and worsening market conditions, particularly as the financial crisis hit consumer markets in the US and Europe. Factory closures accelerated and workers were frequently not paid their full termination pay and benefits. Once again they demonstrated and turned, not to the ACFTU, but to local government which urged some settlement for the workers and even provided some financial compensation from the public coffers in some high-profile cases. For example, when Smart Union Group Limited closed two factories without any notice and abandoned workers without paying three months back wages, the township government promised to pay workers using township revenue.
Factories continued to close and clashes with the police grew, particularly as the Olympics receded and local governments were less worried about negative publicity. In response to the increasingly difficult position of export industries, local labor authorities began relaxing the obligations of the LCL and reducing the rates of Social Security coverage a company had to carry. These moves to reduce the burden on enterprises was largely aimed at saving jobs since the growth of unemployment was seen as a factor driving potential social instability. Even the Shanghai Minhang district federation of trade unions appealed to more than 200 companies not to lay off employees.
While the factory closures, strikes and demonstrations were grabbing headlines the day-to-day work of industrial relations was continuing. The ACFTU reported at its conference in October that it had signed 1.091 million collective contracts covering 1.834 million enterprises/work units and 140 million workers. The ACFTU also announced at the end of the year that 313 unions had been set up at the headquarters of multinationals in China (83 percent of the total) and at about 3,843 of their corporate entities across China, bringing-in around 2.13 million union members. Union membership had grown from 123 million to 209 million and migrant workers had become the “emerging force” of the union with 66 million new members in the past five years.
So what does 2009 hold? The ACFTU will continue its drive to sign-up multinational enterprises, but this will be a top-down strategy and will only involve organization of workers if a high-profile company resists the overtures of the ACFTU. At the same time, the tight economic conditions and industrial restructuring are likely to generate lots of work for human resource departments whose room for maneuver will be restricted by the expanding application of the Labor Contract Law and other laws, especially if the government stimulus package takes hold and growth rates improve. Dissatisfied workers still do not have enough channels for resolving grievances and are likely to resort to wildcat strike action to gain the attention of employers or local government (who will probably be less accommodating than in 2009). The hot-button issues will be written labor contracts, social security coverage, hourly minimum wages (particularly in areas where local governments have been ambitiously raising minima), overtime premiums and interim or “dispatched” workers. Local governments can be expected to ease enforcement of these provisions but when caught between the conflicting interests of employers and workers they will choose social harmony, i.e. the protection of workers.
Auret van Heerden
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