It's not what is on paper, but what is in practice: China's new Labor Contract Law and the enforcement problem.

• Date: 22 September 2009
• Published date: 22 September 2009
• Author: Zheng, Yin Lily
• Author: Zheng, Yin Lily

INTRODUCTION

After decades of implementing a lifetime employment system, China has decided to shift gear and rely on private contracts to regulate domestic labor relations. (1) The new Labor Contract Law, which officially took effect on January 1, 2008, memorializes this change. (2) Proponents of the new law lauded it as "the most concerted effort to protect workers' rights." (3) Yet many provisions in the law touched the nerves of quite a few domestic and foreign businesses in China (4) and are criticized as overly generous to labor rights. (5)

Around the same time the new law passed the national legislature, a slough of media reports uncovered a labor scandal that victimized over one thousand rural workers in China. A total of 1,340 people, including minors and the mentally incompetent, had been kidnapped to work in small brick kilns in central China as forced labor. (6) Owners of the brick kilns used fierce dogs and thugs to prevent the slave labor from escaping. The laborers worked without receiving any pay and some were beaten to death for working too slowly. (7)

The stark contrast--on one hand, a legal framework that almost excessively empowers workers, and on the other hand, atrocious labor exploitation that brings to mind China's reputation as the world's largest sweatshop--begs the question: what is wrong with China's labor system?

This Note argues that even with a pro-labor legal framework on paper, the real problem for the Chinese labor system is the disconnect between the legal standards spelled out on paper and the rules actually enforced on the ground. Even before the promulgation of the Labor Contract Law, China had already established a sufficient legal framework on paper, the 1994 Labor Law for protecting workers' rights. The missing link is the effective enforcement of the law. Part I of this Note describes China's current labor conditions and summarizes some major features of the new Labor Contract Law that tilt the scale further toward protecting labor rights. Part II examines the existing labor law enforcement regime from the points of view of four parties: employers, individual workers, government administration authorities, and trade unions. These four parties have either incentives or obligations to enforce the law. The action and/or inaction by these four parties reveal practical problems in grassroot law enforcement in China, some of which this author predicts are unlikely to be resolved in the near future. Still, the Chinese government seems interested in channeling the discontent and anger brewing in the workforce through legal mechanisms and addressing them in a peaceful way. Part III explores the possibility for workers to bring class action lawsuits in China and discusses whether collective actions could overcome some of the identified enforcement problems. This Note concludes that, even though class action lawsuits in China still face institutional difficulties, they may lead to better enforcement of labor law than under the current system and are a politically viable option.

I. BACKGROUND AND HIGHLIGHTS OF THE NEW LAW

Labor relations have been a "sensitive and contentious" subject in China. (8) The Chinese government first introduced the concept of labor contracts in the 1980s to phase out the "iron rice bowl" system--a figurative term for lifetime employment--that resulted in low productivity in state-owned enterprises ("SOEs"). (9) The 1994 Labor Law codified the policies and regulations that had been issued previously for this purpose. (10) It explicitly requires that a labor contract be formed before an employment relationship can be established. (11)

In the meantime, China's economic reform gave rise to booming development of the private sector, which consists mostly of foreign-invested enterprises ("FIEs") and domestic private enterprises. (12) The private sector hired rural migrant workers at a lower cost, (13) and according to official statistics, approximately 120 million rural workers migrated to and are currently working in cities. (14)

The move toward privatization has caused labor practices in China to shift "overwhelmingly toward favoring firm autonomy, flexibility, and managerial control of work organization." (15) As FIEs and domestic private enterprises took advantage of low labor costs, manufacturing sweatshops staffed by rural migrants started to appear. (16) Migrant workers from rural areas "bear the brunt of labor abuses." (17)

The new Labor Contract Law, adopted more than a decade after the 1994 Labor Law, reiterates the government's determination to formulate and regulate labor relations on the basis of a contract system. It is worth noting that the main reason for adopting the 2007 Labor Contract Law is different from the motivation behind the 1994 Labor Law. While the 1994 law was aimed at removing inefficiency in state-owned enterprises, the 2007 law has more of a political undertone. It seeks to appease discontent and anger among migrant workers who experienced substandard labor conditions in cities and took out their fury and frustrations in the form of social unrest and violent crimes. (18)

The 2007 Labor Contract Law makes the following significant amendments and additions to the 1994 Labor Law:

1. Requirement of a Written Labor Contract

   The law requires the formation of a written labor contract at the commencement of a labor relationship (19) or within one month thereafter. (20) In the event that an employer fails to sign a written contract within one year of the commencement of the labor relationship, the employer shall be deemed to have entered into a non-fixed-duration contract with the employee and must pay double the amount of the agreed upon wage. (21)

   An employer may choose from three types of contracts: fixed-duration contracts, non-fixed-duration contracts, and contracts that expire upon completion of a certain task. (22) However, the employer must enter into a non-fixed-duration contract after an employee has continuously worked for the employer for ten years, or if he has previously renewed a fixed-duration contract with the same employer twice, unless the employee opts out. (23) Again, if the employer fails to enter into the required non-fixed-duration contract, it must pay double the agreed upon wage. (24)

2. Termination of the Contract

   The new law gives employees the right to terminate a labor contract with just cause. (25) However, it prohibits the employer from terminating contracts with those who have been working continuously for the employer for fifteen years and have less than five years before reaching the legal retirement age. (26) When there is a need for downsizing, the law requires the employer to consider last those who have longer fixed-duration contracts or non-fixed-duration contracts, or who are the only one employed in their family and have an elderly person or a minor to support. (27)

   What is most troubling to employers is that the law renders the termination of a contract more expensive to the employer, regardless of whether it was terminated by the employer or employee, or whether it was terminated for just cause. (28)

3. Union Power

   The law adds that any management decision regarding the establishment or modification of remuneration, work time, holidays and vacation, workers' safety conditions, insurance and benefits, training, discipline, or any other conditions of employment, must first be subject to equal negotiations with the union or workers' representatives. (29)

4. Notice and Record

   The law requires that any major changes concerning workers' interests must be publicly posted on the premises of the workplace or provided in some other ways. (30) It also requires employers to establish and preserve a roster of all employees for inspection purposes. (31)

5. Other Provisions

   The law shortens the length of the probation period. (32) It provides that employers may not force employees to work overtime and that employees must be compensated if they do work overtime. (33) It provides rules for regulating labor dispatch and part-time employees. (34) It also requires that a recruiting employer must truthfully inform applicants of all relevant information and may not hold applicants' IDs or other documents hostage. (35)

   The 1994 Labor Law already established a sufficient legal framework for protecting labor rights, which is comparable to those in Western developed countries. (36) The 2007 Labor Contract Law favors labor rights even more. The law has many detractors who claim it will take China back to the "iron rice bowl" era. (37) Whether the new law will really bring back the lifetime employment system and cause productivity to drop is yet to be seen. The one thing certain is that China's notoriety for labor abuse should not be attributed to the way the law is written, but rather to how the law is enforced in practice. (38)

   II. THE CURRENT ENFORCEMENT REGIME

   The lack of effective and meaningful law enforcement is a chronic problem in China. In the realm of labor and employment law, employers have refused to take laws and regulations seriously and instead adopted a flexible approach to managing labor relations. (39) Individual workers lack law-enforcement initiatives due to ignorance, culture, and scarcity of resources. (40) State and local labor administrations have the legal authority to enforce labor laws but lack incentives to do so. (41) Trade unions, whose interests have been aligned with the Communist Party, do not have the legal power to seek law enforcement on behalf of workers. (42)

1. Voluntary Compliance by Employers

   Domestic private enterprises and FIEs do not have a good track record in complying with labor and employment laws, including establishing contracts with employees and maintaining labor standards.

   According to unofficial statistics, only twenty percent of domestic private companies signed contracts with their employees before the 2007 Labor Contract Law was adopted. (43) Only twenty...