Employers in China Have Issues Shedding Workers

By Staff Report

Dec. 29, 2008

Companies that rushed into China during the boom years may find it difficult amid the global downturn to extract themselves, labor law attorneys say.

“It wasn’t too long ago when the burning issue was hiring, recruiting and retention,” said Joseph Deng, a labor contract attorney with Baker & McKenzie in China. “Now it seems the No. 1 issue for many companies in China is cost cutting, termination and redundancies.”

Landmark labor laws enacted in China this year have strengthened protections for workers, including wage standards and Social Security benefits. But worker protections against employers looking to downsize their workforce may be among the most stringent, China law experts say.

Chinese labor law prohibits “at will” firing practices common in the U.S., which means employers must have a legal basis for firing any employee.

“The first thing you have to keep in mind is that employees have contracts,” Deng said. “You cannot unilaterally terminate a contract.”

Before making any layoffs, employers need to present their plans to employee-represented work councils at each company—called employee representative congresses, which are union organizations elected by employees. For employers whose workers have not organized into unions, any indication that the company intends to lay employees off could incite workers to organize.

Deng recommends that employers file a report of a strategic plan with local labor bureaus.

“They don’t approve a plan, but they play an important role in providing guidance,” he said.

Firing workers remains something of a taboo in China, as it is in much of Asia. Employers should present layoffs as part of a strategic plan rather than a cost-cutting measure, said Baker & McKenzie attorney Guenther Heckelmann, otherwise employers open themselves up to challenges from workers regarding how companies calculate their costs.

Employers are unlikely to be able to lay off groups of workers using criteria usually reserved for firing individuals, like showing a worker is incompetent or has behaved improperly. Employers must show a change in the company’s circumstances. For example, a company’s decision to idle a plant could qualify. Employers must then attempt to find new work for the employee before giving that person 30 days’ notice of his termination.

Dan Harris, a Seattle lawyer with the firm Harris & Moure, wrote in his China Law Blog that restrictions against at-will terminations may be the most stringently enforced requirements in China’s new labor law, which took effect January 1, 2008, and was preceded by a backlash among workers to worsening working conditions in China.

Harris wrote of a client who was told by a Chinese government official in Shangdong, a coastal province southeast of Beijing, that “so long as this company did not lay off any of its approximately 250 Chinese employees, the government would look the other way regarding other labor law violations.”

The popularity of the new law has tripled the number of disputes brought by workers against their employers, said Andreas Lauffs, the Hong Kong-based head of the employment law group at Baker & McKenzie.

“There’s not a single worker that doesn’t know this law inside out,” Lauffs said.

Earlier this year, a large multinational corporation represented by Baker & McKenzie negotiated severance packages with employee-established labor unions as a precondition for laying off the workers, Lauffs said.

All unions in China are organized under the nationalized All-China Federation of Trade Unions. While striking is illegal in China, workers have been known to engage in work stoppages and slowdowns. China legal experts are watching to see whether the economic slowdown will loosen the new contract laws in China.

The Chinese economy has been growing at around 12 percent a year. Officials have worried that a lower growth rate of 8 percent is the minimum needed to forestall public unrest. For now, though, the new labor laws remain intact.

“For multinationals, if they want to downsize as a result of the current economy, they’ll have to tread very, very cautiously,” Lauffs said. “China is no longer the place where you can go and set up shop with cheap labor and no labor laws.”

—Jeremy Smerd

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