Global Policy Forum

By Jeremy Brecher, Brendan Smith and Tim Costello

A major debate is underway in China on a proposed Draft Labor Contract Law that would grant new rights to Chinese workers. When the Chinese government opened a 30-day public comment period on the draft proposal in spring 2006, nearly 200,000 comments were received. A majority of these came from ordinary workers. But some of the comments were from big U.S.- and European-based global corporations and their lobbying groups that came out squarely against the new law. Wal-Mart's recent agreement to recognize unions in China has made headlines worldwide. But Wal-Mart and other corporations, including Google, UPS, Microsoft, Nike, AT&T and Intel, acting through the American Chamber of Commerce in Shanghai (AmCham) and other industry associations, are trying to block legislation that would increase the power and protection of workers.

The proposed legislation will not eliminate Chinese labor problems. It will not provide Chinese workers with the right to independent trade unions with leaders of their own choosing and the right to strike. But foreign corporations are attacking the legislation not because it provides workers too little protection, but because it provides them too much. Indeed, the proposed law may well encourage workers to organize to demand the enforcement of the rights it offers.

China's Long March to Labor Rights

Despite Chinese extraordinary economic growth, most Chinese workers live on the edge of poverty. They earn little and often work under abysmal conditions. Most lack basic rights or access to those rights. About 150 million Chinese urban and rural workers are unemployed - more than the entire workforce of the United States. China abandoned its so-call "iron rice bowl" cradle-to-grave social security system in the 1980s, when it ended traditional central planning and embarked on its wide-open, laissez-faire, development model. During the 1990s, state enterprises closed, private enterprises mushroomed, foreign investment skyrocketed and workers were left to fend for themselves.

In 1994, China adopted a labor law that mandated individual contracts between workers and companies. Soon after, it also adopted a law allowing collective contracts negotiated by trade unions in some industries. Labor contracts are supposed to stipulate wages, basic terms of employment, and the duration of employment. The reality is that many workers lack contracts and basic protections. Seventy percent of all rural workers and about 15 percent of urban workers do not have a contract, which means they cannot access even minimal rights or benefits. In China's booming construction industry, 40 percent of all workers have no contract. Even those with contracts lack real security: countrywide, 60 percent of all the contracts are for three years or less.

To address some of these problems, the People's Republic of China in April released a Draft Labor Contract Law whose proclaimed purpose is to protect workers' rights and interests. The protections it offers are modest. Most importantly, it does not provide for independent unions with leaders chosen by their members and the right to strike.

Yet U.S. and other foreign corporations indicate that they are engaged in a concerted campaign to prevent improvement of the notoriously low wages and conditions of Chinese workers by blocking the proposed reforms. Large corporations like General Electric and Procter & Gamble have themselves directly addressed Chinese lawmakers. And three major organizations representing foreign corporations operating in China are promoting the campaign publicly:

These organizations have also issued barely veiled threats that foreign companies will leave China if the new legislation is passed. As AmCham comments on the draft legislation put it, the law may "reduce employment opportunities for PRC workers" and "negatively impact the PRC's competitiveness and appeal as a destination for foreign investment."

The affection of U.S. corporations for the status quo in China is revealed by the emphasis in the AmCham document on the desirability of maintaining present Chinese labor law. In its comments submitted to the Chinese government, AmCham claims the law has "significantly promoted standardized operation of enterprises and establishment of modern enterprise system." AmCham criticizes the proposed changes in the law for making it harder to fire workers and for "rigid" restrictions on "business administration of enterprises." It concludes, "we doubt whether it is necessary to carry out such significant changes."

The Multinationals' Objectives

Foreign corporations are fighting against the very aspects of the proposed legislation that might ameliorate some of China's most blatant labor problems:

Contract protections for all workers: Foreign corporations want to maintain the current system which creates a large underclass of highly precarious workers with no rights.

Access to labor rights and benefits - however limited - depends on the existence of a written labor contract signed individually or collectively by workers and companies. But millions of workers currently work without one. The new law would create an implied contract for any worker who receives a wage, giving millions of workers rights and benefits now denied them. It stipulates that any ambiguities in the interpretation of a contract will be made in the employees' favor. AmCham opposes these provisions on the grounds that "these provisions are not consistent with the recruitment system of modern enterprises." Instead, companies want to set pay and terms of work for all workers without signed contracts unilaterally. Management alone would determine "all problems -  such as pay confirmation, the way of handling the social insurance, the method of dismissal and the standard of compensation."

Collective bargaining with employees: The new law provides for negotiations over workplace policies and procedures, layoffs, health and safety, and firings with a union or an "employee representative."

Foreign corporations demand unilateral authority, not negotiation. The U.S.-China Business Council writes, "It is not feasible to state that an employer's regulations and policies shall be void if they are not adopted through negotiation with the trade union....Requiring the consent of the trade union before such changes can be made is overly burdensome and may prevent important company policies from being implemented in a timely manner...Final authority and responsibility for company policies should rest in the hands of the employer."

Freedom to change jobs: Non-compete agreements prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer. For a developing economy like China, knowledge transfer is essential. The new law caps damages employers can seek for workers who change jobs, makes it more difficult to claim confidentiality has been breached, and allows for geographic exemptions to foster the spread of skills throughout the country.

The opposition to this provision comes with a threat: "If carried out," according to the comments on the bill submitted by the AmCham, "it will seriously affect the individual technology innovation of the Chinese enterprises and thus multinational corporations would not introduce their advanced technology, let alone allow the Chinese staff members expose [sic] to and master [sic] the core technology."

Limited probationary periods: Currently, corporations in China can set probationary periods unilaterally, often for an entire year, keeping people in a highly precarious employment status. The new law sets standard probationary periods of from one to six months depending on the type of job.

AmCham argues a longer probationary period is justified, because one to six months is "not long enough to provide sufficient time for enterprises to examine new staff."

Payment for training: Under current practice, employees sign a separate contract that allows companies to recover any training costs if a worker terminates his or her employment. Under current law, almost anything that management considers "training"" - including many of the kinds of on-the-job training that are standard for any new job - can be subject to re-payment, leaving a departing worker either in debt or, if unable to repay the training expenses, bonded to his/her current employer. The new law limits the costs employers can recover by, for instance, defining "training" as instruction that takes place "off-the-job," on a full-time basis, and lasting for at least six months.

The U.S.-China Business Council says the new law is misguided, because "the employer would not be entitled to claim compensation from the departing employee for [on-the-job and other types] of training experiences."

Severance payments: There is theoretically no at-will employment in China; all workers are supposed to have labor contracts - although in practice many do not. Most contracts are for a "fixed term," after which an employer can dismiss a worker without penalty and a worker can leave without penalty. This system encourages highly unstable employment relationships. The new proposal encourages stable employment by requiring employers to provide severance pay to workers whose contracts end, but not to those whose contracts are renewed. AmCham opposes this provision as "most unreasonable."

A pathway from temporary to permanent work: Chinese companies employ a large number of temporary workers hired through temp agencies. Temporary work encourages management to avoid the protections and commitment that come with standard employment. Under the new law, temp agency workers would become permanent employees after one year of employment at a client firm, thus reducing the number of insecure, contingent jobs. According to the U.S.-China Business Council, "This stipulation impedes the right of the employer to find the best person for the job and will reduce the flexibility of human resource allocation."

A fair system for lay-offs: In practice, corporations frequently lay off workers at their own discretion. Under the new proposals, corporations would have to lay people off on the basis of seniority.

AmCham opposes seniority-based lay-offs in part on a novel argument: "It is a discriminative policy against the new staff to fire them while they work for the [same] enterprise as the old staff."

Corporate Fear and Money

While the extraordinarily rapid growth of the Chinese economy has often been noted, it is less often realized how much of that growth actually reflects the role of foreign corporations. According to Morgan Stanley's chief economist Stephen Roach, 65 percent of the tripling of Chinese exports - from $121 billion in 1994 to $365 billion in mid-2003 - is "traceable to outsourcing by Chinese subsidiaries of multinational corporations and joint ventures." The obvious motive for such foreign corporations to oppose the law protecting Chinese workers is their fear that it may eliminate the cheap labor costs they now enjoy.

Even if the law itself is poorly enforced or does little to improve Chinese wages and employment conditions, it may set the stage for more organized demands from Chinese workers. Historical experience in the United States and around the world has shown that when workers realize that they are entitled by law to certain rights, they may well create the institutions needed to access and enforce those rights.

Experience in many countries indicates that labor laws are often unenforced unless workers exercise the right to organize, bargain collectively, and strike. For that reason, corporations have reason to fear that even a limited guarantee of rights to Chinese workers will encourage their further efforts to form independent unions, elect their own leaders, and utilize their potential bargaining power. They fear, in short, that the proposed labor bill may be but one step in a new long march for Chinese workers as they fight for the legal rights due them and the institutional supports to enforce those rights.