China's New Draft Arbitration Law

With China increasingly setting wages and working conditions for workers the world over, the ripple effects from changes in Chinese labor law are likely to be felt in each of our home countries. So head's up: new Chinese labor legislation is in the works.

The latest draft law concerns labor dispute mediation and arbitration.  Since Chinese workers lack the right to strike, arbitration has been one of the few institutional ways for workers to address grievances with their employers. But the current system is failing, triggering an increasing number of worker protests and social unrest.

The new draft was submitted to the National People’s Congress for its first reading on August 26, 2007.  It comes on the heels of the Labour Contract Law passed last August, which extended an array of basic rights for Chinese workers—including protections for temp workers, just-cause firing provisions, etc.

The arbitration law is designed to address a number of government concerns.  According to the China Daily, PRC figures reveal that “labor dispute cases in China are continuously increasing in recent years. Statistics show that labor dispute arbitration organizations at various levels dealt with 1.72 million labor dispute cases involving 5.32 million employees from 1987 to the end of 2005, with a growth rate of 27.3 percent annually.”

fUnder the current arbitration system, workers are granted access to the court system only if arbitration fails. And many companies have gamed the system by delaying proceedings.  According to a recent article in the Beijing Review:

Against a backdrop of intensifying tension between labor and management, people have begun to question the 20-year-old arbitration solution. The major complaint is that it takes a long period to reach a verdict…The confirmation of employment relations and the appraisal of work injuries usually have to be conducted several times between arbitration and trial, which explains why in some extreme cases the whole process has taken 19 years.  The biggest victims of these slow procedures are usually the employees, who often badly need compensation from their employer for medical treatment of simply to buy food and other necessities.

Many legal experts and senior lawyers have expressed worry that arbitration more often than not will give a verdict favoring the interests of management and sometimes this is a result of bribery. In other cases, the arbitration committee, which is heavily influenced by the government, will refuse requests for arbitration from employees under the government call for creating a favorable environment to attract investment. Such a response has also eliminated any judicial means for workers to safeguard their interests.

While GLS has yet to see a translated version of the draft law (the draft is very much in flux, but as soon as we get a copy, we’ll post it on the blog), it appears that at least a few of the provisions are pro-worker.  These include:

• Ensuring that workers can petition courts for cancellation of unfair arbitration judgments or parties’ failure to comply;
• Extending the deadline for initiating arbitration from 60 days to six months from the day the parties know or should have known of the harm;
• Mandating that if an arbitration court fails to deliver verdict within 45 days workers may file a lawsuit in people’s court;
• Granting workers the right to petition the court to take enforcement measures if employers refuse to comply with mediation agreements on wages, benefits or work injuries (although this right appears to be severely limited by the fact that if the employer answers the charge in writing, the enforcement order abates).

At the same time we are hearing that some Chinese labor scholars are far from pleased with the initial draft and are now pushing for major revisions.

We know for sure there is at least one major flaw in the law...and it’s a big one. The current draft is silent on the majority of Chinese labor arbitration disputes.  According to Professor Chang Kai, a distinguished labor law scholar based at Renmin University and drafter of the Labor Contract Law (GLS staff recently had the pleasure of speaking alongside Professor Chang at a series of events in Brussels):  "The current law is drafted for solving the labor disputes of individual workers rather than those involving a group of workers. But in reality, a lot of labor disputes concern a group of workers."

Recent studies show that group labor disputes have been on the rise and now represent roughly 60% of all workers involved in disputes.  Professor Chang argues that the new law needs to be grounded in China's existing realities by elevating the importance of group labor disputes: "If the law remains focused on solving individual labor disputes, in 10 years we will have many problems that cannot be solved under the current legal system."

At the same time, here at GLS we are always concerned about how US and EU multinational corporations may respond to new laws in China. We’re worried, for example, that to avoid arbitration panels favorable to workers and consumers, corporations may insist that contracts include provisions mandating that arbitrations take place on more business-friendly shores. In fact it appears that some companies operating in China are already using this avoidance tactic for existing dispute resolutions cases. On June 8, 2007, for example, the American Chamber of Commerce in Shanghai sponsored a conference on “China’s Trends” where one influential lawyer representing numerous global firms “promoted using an offshore arbitration clause…”  He argued that his firm had a high rate of success in getting foreign business-to-business arbitration awards enforced in Chinese courts.  Some favorite arbitration off-shoring locations include Hong Kong and Singapore. (Thanks to the China Law Blog for clarifying that AmCham's presentation concerned business-to-business disputes.  We remain concerned that this practice will migrate at some point to employment disputes, especially non-compete provisions.  We'll write more on this potential trend in the future.)

Could this represent a new “advance” in the race to the bottom?  For years global corporations have been moving their operations to whatever country offered the weakest labor and environmental regulations. Now they might simply set up shop in China and if the government passes modestly progressive legislation they'll respond by drafting contract clauses that “ship” the dispute to business-friendly shores.  This has been common practice in the US for decades as credit card and other companies include “choice of law” provisions in the fine print of consumer contracts mandating consumer complaints be heard in states with weaker consumer protections.

Same principle but now on a global scale.  What will they think of next?

N.H.

Comments

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I cannot imagine Chinese law allows a foreign arbitration provision in an agreement with Chinese employees. In fact, I am pretty sure they do not. The foreign arbitration provision to which you refer related to business to business arbitration, not employer-employee.