Meganshank.com has an excellent post up on China’s new labor law, entitled, Dealing With It: MNCs learn to cope with the Labor Law. [link no longer exists] Ms. Shank is a reporter with Newsweek’s China Edition who writes her articles in Chinese.
This post is an English language version of a story Ms. Shank did for Newsweek China, the thesis of which is that China’s new Labor Contract Law is not as bad for business as often made out to be.
I agree, despite having written China’s New Labor Law — It’s A Huge Deal. Huge I Tell You.
The death of foreign business in China is greatly exaggerated. The new labor law is a huge deal to the extent it means China is moving from a country where workers had virtually no power to one where the employer/employee relationship is becoming more even. It is a big deal because it aims to prevent employers from running completely roughshod over their employees.
Yet, as we have repeatedly said (and as many of you have commented), it is usually not terribly difficult or expensive for employers to comply with the new rules. But doing so does require employers to “get on the gird” in terms of becoming a legal entity in China and it does require employers to have written contracts (in Chinese) with their employees and to have a written policy manual (also in Chinese).
But I do not believe it has caused or will cause very many profitable foreign businesses to shut down or leave China. Though the new labor law has increased costs for businesses operating in China, I believe those businesses claiming to have shut down or left because of it were right on “the edge” before China’s new employment law came down:
China’s new labor contract law is a big deal (as I have noted on countless occasions), but it is not earth shattering or paradigm shifting. It is a big deal because it shows China’s continuing evolution to rule of law and it is a big deal because the employees (pretty much for the first time in a long time) have won one. But, in terms of factories closing or moving to Vietnam because of it….I am just not seeing it.
I was asked about the impact of China’s new labor law by a Newsweek reporter the other day. She wanted to know about the impact this new law is having on my law firm’s clients in China. I told her how they have had to pay anywhere from $5,000 to $25,000 to clean up their employment contracts and policy manuals, including getting them into Chinese. I also told her how we are concerned about how to handle matters for those of our clients who typically hire employees seasonally. And that was it.
She wanted to know what our clients were saying about the new law and I told her they were just asking us whether and how we could help make sure they were complying. What about the impact on their business, she asked. Are they talking about that? Yes, a few of them have complained about the new law the same way people always complain about taxes. Have any of them left China because of the new law? No. Are any of them threatening to leave China because of the new law? No.
I then flipped the questioning and asked her if she was aware of a single well-run Western company that is claiming to have left China because of the new law and she was not aware of one either. She quoted me an AmCham survey saying that 20% of American companies are thinking of leaving China because of rising costs. I said that sounded about right to me and that there will probably always be around that number looking to move to a cheaper locale and that of these 20%, I would guess at the overwhelming majority of them will stay in China when they discover the grass is no greener on any other side.
Ms. Shank begins her post by noting how multinationals generally opposed the new labor law but are now “coping” with it:
Last year, several multinational corporations, such as Microsoft and General Electric, fought a clause of the Labor Law that made it difficult to fire workers. The Labor Law, which went into effect January 1 this year, shifts power and rights from the employer to the employee and grants labor unions greater agency. Among several objections from multinational companies was that to a clause stating a worker’s probation period for a one-year contract should not exceed two months. Although MNCs lost the battle—that clause and many contended others stuck—they’ve gained coping strategies that have turned out to be less painful than previously conceived, while smaller companies that can’t adjust are leaving.
She then discusses the new law’s impact on various companies:
Centaline Property Agency human resources manager Jiang Yifan says if the firm has incurred any new costs from the Labor Law it has come from investing money and time in a stronger HR department. “In the past, business managers only had to think about performance. Thinking about human resources was a secondary consideration,” says Jiang, whose HR management costs have increased by 5% in the past six months. “The Law has made them equally important.”
Although some smaller companies have explored the option of firing entire staffs and then rehiring people with new contracts, most MNCs, already plagued with HR issues, don’t have the time or inclination to take this route. Instead, Jiang says in regards to hiring and promotions, the company won’t take old talent for granted or new prospects lightly.
Stephen Maloy, general counsel of Asia-Pacific General Electric, concurs: “The labor law reduces probation periods, which forces management to make an earlier decision. This may make managers more risk averse.”
In other words, some impact, some increased costs, but nothing warranting successful companies shutting down or leaving the country:
Good riddance, says Liu Cheng, a law professor at Shanghai Normal University who helped craft the Law. He says there’s still tremendous room for companies to profit, but “some industries here just want to run sweatshops here.”
It is not just the new labor law that is driving up costs for foreign businesses in China (domestic businesses too) and it is always hard to pinpoint what causes a company to close down or move, but the foreign companies themselves:
MNC representatives admit to Newsweek Select that, despite some firms’ claim of as much as a 40% spike in operational expenditures directly due to the Law, in reality, inflation and appreciation of the RMB have been greater factors in rising costs. “We’ve not seen that great of an impact (directly due to the Law),” says Sony vice president of human resources Liu Wushuyun.
Much of the reason for the small cost influence of the new labor law is that better run foreign companies in China already were operating at 90-100% of what the new law now mandates:
General manager of Fayat China Machinery Limited Jania Zhao adds that while smaller companies have traditionally cut corners and saved on “luxuries” like social services and fair wages for employees, most major corporations with long-term commitments to China already had such expenses built into their contracts. Although Zhao says her company has seen a 20 to 30% increase in operational costs this year, “there has been no direct increase due to the Labor Law, and we’ve not had to make great adjustments.”
Indeed, at the time of writing, no significant authoritative evidence has yet revealed a recent MNC flood into surrounding nations or news of any major multi-national corporation’s departure from China in direct response to new costs invoked by Law.
The post then quotes me as saying businesses are not shutting down just because of the new labor law:
Daniel Harris, an international lawyer with Harris Bricken, a boutique international law firm, and author of the award-winning website, China Law Blog, says the companies that are shutting down are those based on a model no longer viable in China: “A lot of these businesses seized an opportunity that will never be available again – pollute like hell and pay really cheap prices. They’re shutting down because their businesses essentially operated illegally.”
Ms. Shank then provides some interesting support for my contention:
Dongguan municipal government numbers back that up—as of April, an investigation found that of approximately 6,000 companies inspected, nearly 1,000 hadn’t signed labor contracts with workers. Not only will the departure of such companies from China end this treatment, Liu Cheng says, it won’t hurt the overall market.
I am then quoted on the minimum steps companies must take to comply with the new labor law:
Harris says the most important adjustment companies can make to the new law is to do what they should have already done: sign contracts with all workers and create an employee policy manual.
The article goes on to note some impacts of the new law and some changes companies should make in light of it:
For companies operating at the fringes, severance pay might be a new concept, but Christina Yu, communications and human resources director at Dow Chemical, says it’s old hat to most MNCs who instead must only make minor contractual adjustments. “Our separation process is through performance or job reviews, and we never make a decision to lay off an employee simply because the contract is up. If we do, we pay severance regardless of contract status. “
Liu Wushuyun of Sony says other necessary housekeeping includes, “going through and making sure all existing contracts without existing end dates are provided with such.”
China’s new labor law: a big deal and no big deal.
UPDATE: I love how the Chinese Century blog [link no longer exists] summarized our views on the new labor law as “a big deal (for workers) and no big deal (for businesses).” Wish I’d thought of that.