China Labor Law Reform

To:Primary Contacts, WRC Affiliate Colleges and Universities
From:Scott Nova
Date:March 1, 2007
Re:China Labor Law Reform


This memo concerns recent important developments related to labor conditions in China, which is now the single largest exporter of university logo apparel to the United States. In this memo, we:

  • Provide background on important labor law reforms that have been proposed recently by the Chinese government – reforms that, if enacted, would bring about significant improvements in China’s bleak labor rights environment;
  • Report on the unfortunate efforts of many American corporations and business associations to opposethese reforms, including the actions of the American Chamber of Commerce in Shanghai, which counts Nike and Adidas among its members;
  • Review Nike’s recent letter distancing itself from the American Chamber’s opposition to the law, issued after the Chamber’s position was criticized by international labor rights organizations;
  • Explain why we believe it is important for all licensees that want to see progress in China to support the proposed reforms, which would help to reduce the large gulf between labor conditions in China and the labor standards of universities.

There are four attachments to the memo:

  • An informative article from The New York Times on the proposed reforms and the response of business groups
  • A chart prepared by the WRC outlining the key elements of the proposed reforms, discussing their significance, and identifying changes to the proposed reforms that were made in a new draft now being circulated by the Chinese government
  • A copy of a letter on this issue recently sent by the WRC to licensees
  • A copy of Nike’s letter in January to the American Chamber of commerce in Shanghai, which includes Nike’s comments on specific provisions of the law

I hope you will have time to review the memo and the attachments and that you will contact us if you have questions or would like to discuss the issue further.

The proposed reforms

As you know, China falls far short of international standards both in terms of the labor laws that are on the books and the level of enforcement. Independent unions are effectively banned and other violations of fundamental worker rights are widespread.

The proposed legislation is known as the Labor Contract Law. While this proposed law by no means addresses all of the serious deficiencies in Chinese labor law and practice, it does represent a significant step forward. The changes would mean better protection for the rights of many workers and would hopefully open the door to more fundamental progress.

As the attached chart explains, the proposed reforms address two major areas of labor law and standards: (1) labor contracts and their enforceability, and (2) collective bargaining. It is important to note that a new draft of the law was issued recently; some of the proposed reforms are weakened in the second draft or have been removed entirely. In the following overview, we refer to the original draft of the law; the new draft has not been translated officially into English and all of its details are not yet clear.

Employment Contracts and Protection of Basic Worker Rights

The proposed reforms aim, first and foremost, to improve compliance with basic labor standards by ensuring that workers are provided enforceable employment contracts that include these standards. Labor contracts are the primary guarantor that a worker will be afforded the limited rights and protections in current Chinese labor law – including protection from forced overtime, the right to be compensated in the case of workplace injury, freedom from arbitrary dismissal, and the right to be paid on time, among other rights. Workers can use employment contracts to seek legal redress and defend these rights – which is crucial, because labor law enforcement by the authorities is weak. Workers without a contract can usually be mistreated with impunity. Employers frequently fail to provide contracts to employees for exactly this reason. The proposed reforms would make such evasions harder. In addition to extending contracts to more workers, the reforms would correct imbalances in the judicial process that can result in a stacked deck against workers when they go to court. This will make it easier for workers to defend their rights.

The reforms also seek to expand the rights of workers who presently do not enjoy the status of regular, permanent employees. In China, workers hired through employment agencies, workers on short-term contracts, and workers on probationary status do not have the same rights and protections as permanent employees. Employers therefore often seek to keep as many employees as possible on non-permanent status. They do this by dragging out probationary periods for as long as possible, keeping workers on a string of short-term contracts, and/or hiring as many workers as possible through employment agencies. The proposed reforms would restrict the ability of employers to deprive workers of basic rights by maintaining them in non-permanent status. Employees hired through agencies would become permanent employees after one year, probationary periods would be restricted, and short-term contracts would be discouraged.

The overall effect of this set of reforms would be to improve compliance in areas where violations are presently widespread: minimum wage, overtime compensation, injury compensation, forced overtime, etc. In these areas, existing Chinese law is generally adequate, but it applies to too few workers and is poorly enforced. The reforms would expand coverage and strengthen enforcement. These proposed changes are of particular import to migrant workers from the Chinese interior (who make of the large majority of apparel workers) because their migrant status means they have fewer legal protections than urban dwellers and are more vulnerable to mistreatment.

Freedom of Association and Collective Bargaining

The reforms also introduce some new legal rights for Chinese workers in the area of freedom of association. The proposed law includes a clause that would prohibit an employer from firing any worker who is acting as a representative of other employees in a negotiation with management, whether this is collective bargaining or a less formal discussion of grievances or other matters. This protection would apply not only to officials of the Communist Party-controlled union, but to workers representing independent worker committees. While the government’s intentions with respect to enforcement are not known, this ban on the dismissal of worker representatives has the potential to be meaningful in the effort to create space for workers in China to exercise their right to organize and bargain.

The law would also require employers to negotiate with unions, or other employee representatives, over such matters as work rules and procedures, layoffs of substantial numbers of workers, and health and safety practices. The existing ban on independent unions, which the government intends to maintain, will greatly limit the utility of this reform, but it is still significant. The Communist Party-controlled unions, at the factory level may, in some cases act, in workers’ interests and the reform would increase their ability to do so. More importantly, these negotiating rights would also apply to independent worker committees, which are the most likely vehicle for Chinese workers to engage in meaningful collective action. Given the huge deficiencies in China on associational rights, any significant reforms in this area are particularly welcome.

The Response of American Corporations Doing Business in China

American corporations doing business in China have generally acknowledged the very significant labor rights problems in the country and the need for change; and they have argued that the presence of American firms will encourage such change. It is therefore both surprising and disturbing that American companies that have weighed in on the proposed reforms have with few exceptions opposed them. As the New York Times put it in a front page story on the subject (see attachment), the Chinese government’s proposed reform has “set off a battle with American and other foreign corporations that have lobbied against it by hinting that they may build fewer factories here.”

The Role of the American Chamber of Commerce and Other Business Associations Representing Foreign Corporations

The Chinese government circulated the original draft of the proposed reforms in the spring of 2006. The government invited comment from a range of interests, including business groups.

Business associations representing multinational companies with interests in China quickly became active in opposing the reforms. These groups include the American Chamber of Commerce in Shanghai (known as AmCham), the US-China Business Council, and the European Union Chamber of Commerce in China. In addition to submitting extensive briefs arguing against most major elements of the proposal, these groups have engaged in what The New York Times describes as “an intense lobbying campaign” to derail the reforms.

The Positions of Nike and adidas

Both Nike and adidas are members of AmCham. Until December of 2006, neither company had commented publicly or, to our knowledge, been directly involved in any communications with the Chinese government. However, since the companies had staked out no independent position on the proposed reforms, and since AmCham speaks on behalf of its collective membership, the companies’ status as members had the effect of lending weight to AmCham’s position.

For this reason, international labor organizations began to criticize these and other companies late last year, urging them to distance themselves from the position of the American Chamber and other opponents of the reforms. In December, the international union representing apparel workers (the International Textile, Garment and Leather Workers’ Federation, known as ITG) issued a press release, based on the union’s communications with Nike, stating that Nike had repudiated the Chamber’s position. It is not clear whether Nike would have characterized its differences with the Chamber that strongly, but in January Nike sent a letter to AmCham stating a position on many of the key elements of the proposal that differs sharply with AmCham’s.

There remains significant ambiguity in Nike’s position. In part, this is because Nike’s comments to AmCham were on the newly-circulated second draft of the reforms, which is in some respects significantly weaker than the first. For example, in the second draft, the provision requiring companies laying off more than 50 workers to negotiate the terms with worker representatives is significantly weakened: the new language requires that worker representatives be notified, but does not require any negotiation. In its letter, Nike states support for “discussing” layoffs with worker representatives, but it is not clear whether Nike is supporting the original requirement that there be a genuine negotiation or the much weaker language of the second draft. The difference is night and day. If management is not affirmatively required to bargain where representative worker bodies are present, as is required in the US and most other countries, then the right to bargain is meaningless – management can simply refuse to bargain.

It is also unclear whether Nike has communicated its position on the proposed reforms to the Chinese government. Absent such communication, the government may not be aware that Nike’s views do, in fact, differ from those of AmCham.

Nike does, however, take a reasonably clear stand in favor of a number of the key elements of the reform proposal and it has made its letter to AmCham available to the public. Despite the remaining ambiguities – and despite the company’s failure to speak out in the crucial early months of the debate, as AmCham was aggressively attacking the proposed law – Nike’s newly announced position is generally positive. Nike is also the only American company we know of that has taken a favorable stance.

Nike could now make a substantially greater contribution to the reform process by (1) clarifying that it is in favor of mandatory collective bargaining – not just consultation – on layoffs, work rules and other matters, in cases where workers have representation; and (2) communicating its position on the reforms directly to the Chinese government, if it has not already done so.

Adidas, which is a member of the European Chamber, as well as AmCham, has not taken a position in favor of the proposed reforms. ITG has communicated with adidas’ headquarters in Germany and has been told that adidas agrees in general with the position of the European Chamber. In a nutshell, the European Chamber, while commending the “aim” of the reforms, has urged the government not to adopt them – on the grounds that China should just do a better job of enforcing existing laws, which the European Chamber argues are already of a high standard. Needless to say, we do not agree with this view, because (1) there are significant deficiencies in Chinese law, particularly with respect to freedom of association; and (2) the primary effect of the reforms would be to generate exactly the increased compliance with existing worker protections that the Chamber says it wants. The WRC has asked adidas to clarify its position; we have not received a response.

The Arguments Made by the Business Associations

Most of the business associations and corporations working against the reforms have asserted that they are not opposed to the goal of greater protection for worker rights, but only to the approach the government is taking. The European Chamber, in particular, has responded to criticism of its stand by adorning its opposition to the reforms with positive commentary on the government’s good intentions. In a public statement, the European Chamber expressed the following:

The declared aim of the employment contract law is to protect employees and create harmony between the employer and the employees. Such objectives are commendable and certainly deserve further attention from both government and industry. Nevertheless, in order to ensure that these aims are met, some issues in the draft law will need further consideration and subsequent clarification…

The European Chamber therefore encourages the Chinese government to focus its efforts on improving the implementation of existing regulations and, if necessary adopting new implementing regulations, before passing additional laws. (Emphasis in the original)

As the last sentence reflects, the European Chamber’s actual position, rhetoric aside, is that the reforms should not be enacted.

Corporations and business associations have justified their opposition on one or more of the following grounds: (1) the reforms are not needed, because the current law is fine, (2) the reforms are too onerous and infringe on the rights of employers, and (3) the reforms will backfire and hurt workers. Some have argued that they are not opposing the law, but are only arguing for modifications to make it more “effective” and “balanced.” Those interested in reviewing the arguments of the business associations in full can review an AmCham submission to the Chinese government (the English translation begins on page 20), a critique of the law by the US-China Business Council, and a statement by the European Chamber, issued in response to public criticism of its opposition to the reforms (the European Chamber’s original submission to the Chinese government is not available).

In evaluating the opponents’ arguments, it is important to bear in mind the Chinese context. China has a notoriously poor record on labor rights. The country’s laws fall far short of international standards and the reality on the ground is grim for tens of millions of workers. Because of the ban on independent unions, and the severe limitations on free speech that prevent the development of worker rights groups and civil society in general, it is extremely difficult for workers to defend themselves against workplace abuses; in most cases, they simply have nowhere to turn. As a result, the balance of power between employers and employees in China is radically skewed in favor of the former. According to a recent report by Human Rights Watch:

“China’s national laws prohibit workers from organizing independent unions, and do not explicitly protect the right to strike. Only one organization, the All China Federation of Trade Unions (ACFTU), can legally represent workers, and its local offices are controlled by local authorities and Communist Party committees. Many workers also lack minimal health and safety protections and adequate wages. Many are compelled to work long hours. Some contract workers may not even be paid by factories for the work they have done.”

If the labor rights situation in China were generally good, if workers had viable means to defend their rights, if employers were subject to effective workplace regulation, if there were real unions – then it would be understandable if domestic and foreign business interests took a skeptical view of new regulations designed to provide greater protections to workers. Under current circumstances, however, it is very hard to understand how corporations can oppose modest improvements in worker rights protections in China.

Moreover, the modifications proposed by the various business associations are not minor and do not consist of less onerous, alternative methods for achieving the desired labor rights goals. For the most part, the modifications they have advocated consist of scrapping the key elements of the reform proposal. For example, the proposed law would restrict the use of “probationary” status, which has been used by many employers as a means to deny workers the rights and benefits that accrue, under the law, to permanent employees. The business associations want these restrictions eliminated from the proposed law. The proposed reforms would address the chronic hostility of Chinese courts to workers’ claims by requiring employers to provide concrete evidence in support of their position in arbitrations and court cases, and by directing the courts to credit the workers’ claims when such evidence does not materialize. The business associations want this provision eliminated. The proposed law would make bargaining mandatory over work rules and health and safety procedures, in workplaces where workers have representation. The business associations have assailed this requirement, arguing that sole decision-making authority in these areas must in all cases rest with the employer. In the words of AmCham: “In the process of labor, the employer is active and the employee is passive…” Am Cham argues that “the decision of formulating rules” should not be “endowed to the laborers,” lest “chaos” ensue. This is not a technical objection, but a rejection of the concept of collective bargaining, a right protected by every university code of conduct.

There may well be elements of the reform proposal that would benefit from modest revisions. Their may be superior legislative language for achieving the purpose of the reforms. However, the foreign business associations have not proposed modest revisions, or alternative language; they have proposed eliminating the key elements of the reform.

The Impact of the Groups Opposing the Reforms

Unfortunately, their efforts have had an impact. In the second draft of the law, some important provisions have been significantly weakened, both with respect to employment contracts and the right to bargain. The attached chart prepared by the WRC explains the significance of these changes.

The Potential for Licensees to Play a Positive Role

It is generally acknowledged in the discussion of university codes of conduct that Chinese law and practice conflict with university codes in the area of freedom of association, that working conditions in China are poor, and that code enforcement is difficult because of the ban on unions and restrictions on civil society. While all parties would like to see positive change in China, the problem is that the Chinese regime has been very resistant to change in the labor rights arena, because of both its political hostility to freedom of association and its long-standing policy of attracting foreign investment by minimizing the cost of labor. University licensees that lament the lack of associational rights in China, that are concerned about the conflict between Chinese law and university codes, and that wish the situation would improve, have not had significant opportunities to contribute to positive change.

The proposed reforms represent an opportunity for licensees to help bring Chinese law more into compliance with university codes. By expressing support for the proposed reforms, licensees can send a positive message to the Chinese government that there are at least some foreign investors who will welcome labor rights reform in China. The government has solicited input from both domestic and foreign corporations, so there is no question that it is appropriate for licensees to weigh in. The opposition of most foreign corporations and their business associations in China makes it all the more important for companies that support the reforms to speak out.

We are at an important juncture. The Chinese regime has decided to consider significant and unprecedented labor law reforms that will mean at least a modest improvement in the labor rights environment and will bring significant benefits to many workers. The government is highly sensitive to the opinions of foreign corporations, which it sees as vital to the country’s economic future – this is why it has sought their input. The government is testing the waters and if it concludes that foreign corporations will not accept the reforms, they are likely to be watered down significantly or simply scrapped. Indeed, the weakening of some important provisions in the second draft of the law demonstrates the substantial influence of foreign companies. The outcome also has broader implications, because the government’s experience with the present reforms will undoubtedly affect its willingness to consider deeper change.

The WRC has written to licensees that source from China, urging them to communicate their support for the proposed reforms to the Chinese government and to ask their suppliers in China to do the same. We have specifically urged licensees to express support for the original, stronger draft of the proposed law. We wanted you to be aware of our communications with licensees; a copy of our letter is attached. Because of their membership in business associations in China and their prominence as global corporations, Nike’s and adidas’ actions are of particular significance; however, other licensees can and should make themselves heard.

We will keep you posted on the response of licensees to our request and will update you on developments in China as the discussion of the reforms proceeds.

Scott Nova
Worker Rights Consortium
5 Thomas Circle NW
Washington DC 20005
ph 202 387 4884
fax 202 387 3292
[email protected]