January 9, 2008 -- A new labor contract law went into effect Jan. 1, following a string of staff-sacking scandals in many companies.
According to the new 98-article-long Labor Contract Law, employees of at least 10 years' standing are entitled to contracts that protect them from being dismissed without cause. The new law also requires employers to contribute to employees' social security accounts and sets wage standards for employees on probation and working overtime.
"China's new labor contract law targets, primarily domestic companies that didn't have labor contracts and that generally failed to comply with China's old laws," Ming Chen, a lawyer with the Jiangsu Labor and Social Security Bureau told Emerging China. "Foreign companies have a stronger track record of signing contracts with employees and bringing to China their global work rules and environmental, health and safety practices."
According to statistics from the All-China Federation of Trade Unions, 40 percent of private-sector employees lack labor contracts and there are many cases of wage default and forced labor.
The new law will strengthen China's overall economy, Chen said.
"The law prompts companies to improve their management, capital-labor relations and productivity," said Chen. "A sound market economy system will benefit businesses -- both domestic and foreign companies."
"Compared to the old contract law issued in 1994, the new law is supposed to provide greater job security," Jicheng Liu, a spokesperson from the All-China Federation of Trade Unions said in a statement. "To employers, it may mean better image at higher cost."
Ever since the law was approved by China's top legislature in June 2007, it has aroused heated discussion and concern among domestic and foreign companies.
China appeals to foreign investors with its cheap labor, its preferential investment policies and its immense market. Now employers fear the new law will mean bigger severance payments and higher operational costs, according to Jun Ma, a senior economist at Deutsche Bank China.
"In the short term, foreign companies [investing] in supermarket chains, restaurants, building industries and those low-end manufacturing, which abuse cheap labors and avoid paying social security will suffer some losses," Ma said in a recent report. "But in the long run, the new labor contract law won't negatively impact China's competitiveness and appeal as a destination for foreign investment."
Small and medium enterprises in particular will particularly feel the effects of the law, he said.
For example, some Korean companies have already decided to move their business from China to Vietnam or other developing countries where labor is much cheaper, according to statistics by China's Association of Foreign Enterprises. About 98 percent of Korean enterprises in China are independent small and medium firms.
Other companies reacted to the law by proactively firing employees who would have come under the new guidelines.
In October, US-based retail giant Wal-Mart fired about 100 employees at a sourcing center in China. The company said the the layoff was part of its global restructuring. LG and Olympus have respectively announced plans to lay off employees. Carrefour China has asked over 40,000 of its Chinese employees to re-sign a two-year labor contract before December 28, 2007 regardless of an employees' service length or the expiration of their current labor contract.
"Such moves are a result of the fear over the new law," said Wang Yiming, an expert in personnel management from Chinese Talents Society.
It will take time for companies and industries to restructure themselves around the new law, said Deutsche Bank's Ma. But the new law changes neither China attractiveness to investment attraction nor its competitive advantages, according to Ma.