Are US and EU Corporations Complicit in Evading China’s New Labor Law?

Evidence is mounting that they are. In a recent post we reported that some firms in China are firing workers in the run-up to the implementation of China’s new labor contract law which grants more rights to workers. Now it appears the problems are widespread and that foreign corporations--including Walmart--may be complicit.

In the interim period between the law's passage on June 29th, 2007 and its effective date on January 1, 2008 employers must bring personnel policies into compliance. Among its provisions, the new law requires a written contract for each employee; encourages open ended contracts rather than fixed term agreements; makes dismissals more difficult; automatically grants open-ended contracts to workers with 10 years of service; and requires that many company policies and procedures be negotiated with employee representatives.

Corporations are looking after their own interests: as 2008 nears, law firms and HR consultants are hard at work giving advice and holding seminars on how to best deal with the new law and HR staffs are drafting new contracts and policies. For workers it’s a different story. At a meeting here in the US last week a visiting Chinese scholar called the current situation “a-symmetrical”.  Citing the example of one firm that has laid off workers to avoid provisions of the new law he asked, “Who is looking out for the interests of the employees?”  Who indeed!   Against the power of the employers, workers have been left to their own devices.

A story that is currently receiving a great deal of attention in China involves the Chinese telecommunications company Huawei which has joint ventures, partnerships, or other legal ties with IBM, Siemens, Motorola, Microsoft, Sun Microsystems, and HP among many others.  Recently thousands of Huawei employees have quit their jobs. Well sort of….

Here’s the report in the China Daily, the English language newspaper published in China,

More than 7,000 loyal employees of Huawei, China's largest private telecom gear maker based in the southern city of Shenzhen, have quit in exchange for the chance to work for the company again.

The mass resignation triggered by the company management started last month. Many legal experts believe it was an irresponsible decision to exploit a legal loophole before the Labor Contract Law takes effect on January 1 next year.

Under the new law, employees can sign open-ended labor contracts if they have worked for the same company for 10 or more years in a row.

Huawei employees who have been serving the company for at least eight years, including founder Ren Zhengfei, will soon sign new contracts, lasting one to three years, but may have to leave when they expire.

To encourage them to accept the new arrangement, Huawei worked out a compensation scheme based on length of service, salaries and bonuses. The total cost of the package is expected to reach 1 billion Yuan (US$134 million).

"I can't understand why Huawei has taken such an unwise step," You Yunting, a lawyer with JoinWay Law Firm in Shanghai, said.

"Once this problem is solved, new problems will arise and the costs will mount up."

You added that open-ended contracts did not necessarily mean the employees had jobs for life.

According to the Labor Contract Law, employers can revoke the contract under six circumstances, including seriously violating the company's rules and causing the employer major losses due to serious dereliction of duty or engagement in malpractice for selfish ends.

"I think it's more important to improve internal governance and the existing rules rather than look for legal loopholes," You said.

Lu Tong, a researcher at the China Academy of Social Sciences, said: "I think it's a very bad example. Other companies will follow Huawei's example and mess things up."

Xiao Fangsheng, director of the labor law committee of the lawyer's associations of Guangzhou in Guangdong Province, agreed that Huawei did not have a clear understanding of the contract law.

"It tries to dodge the disadvantages of the open-ended contract but its efforts will turn out to be invalid.

"Even with the new contracts, employees can still enjoy the benefits of open-ended contracts because they never left the company and are still working for the company even if they quit," Xiao said.

An official at the Shenzhen labor authority told China Daily that an official investigation into the case is ongoing.

China.org, the China based on-line news and information service, adds

....Huawei’s self induced tide of resignations has attracted widespread criticism. They have been attacked for “shirking social responsibility”. A HR expert from Guangzhou called Huawei’s action “inappropriate”, saying: “In terms of morality and social responsibility for a business enterprise it’s irresponsible for Huawei to do this. Their action will not only impair the company’s image, but it will also lower employee morale.”

His opinion has been echoed on the internet. “Huawei has set a rather bad example for other enterprises to cope with the incoming Employment Contract Law,” said a netizen. “The company has urged its employees to resign by using both the carrot and the stick. It’s a disguised form of layoffs.”

“As the ‘vulnerable group’, employees have no alternative but to resign ‘voluntarily’,” said another netizen…

Although HR managers from 10 state-owned and foreign enterprises have denied similar actions inside their companies…., some of them revealed that rumors of layoffs were circulating.

Huawei—based in Shenzhen—emerged from state-owned enterprise privatization during the late 1980’s.  According the company’s website:

We work closely with leading multinationals such as TI, Motorola, IBM, Intel, Agere, ADI, Altera, SUN, Microsoft, Oracle and HP to improve the time to market of our products, and to incorporate the latest technologies and best management practices into our company.  We have also set up a joint venture with Siemens which focuses on the research, production, sales and services. Jointly with Motorola, we set up [a] research center in Shanghai, which is engaged in providing global customers with more powerful products and solutions…We also join hands with a large number of prestigious companies such as Intel, Texas Instruments, Freescale Semiconductor, Qualcomm, Infineon, Agere Systems, Microsoft, IBM, Sun Microsystems and HP and set up joint laboratories.”

In October, Huawei announced it had formed a partnership with US based Bain Capital to buy 3Com, a high tech company headquartered in Massachusetts, with which Huawei previously had a joint venture. The deal awaits regulatory approval in the US. The acquisition has caused a bit of a tempest among zealots in the national security fringe because of technology transfers and because Republican candidate Mitt Romney is a founder of Bain and owns considerable shares in a blind trust.

Like most global corporations Huawei ostensibly subscribes to “good citizenship” corporate social responsibility standards and the United Nations Global Compact, which according to Huawei’s website, expects “ [m]ember companies...to observe, promote and execute certain principles in the areas of human rights, labor, and the environment.”

American and European corporations doing business in China generally do not directly own production facilities. Instead, they operate a spider web of alliances, joint ventures, suppliers and middle men.  Risk and blame are shifted: these companies don’t have to assume the risk of paying for their own factories and if the goods they sell are produced under sweatshop conditions, or products are unsafe, they can avoid blame because they don’t actually own the shops that produced the goods. But the truth is that while they may not directly own these suppliers, they control them through their overwhelming buying power.

Last year global companies lobbied aggressively to gut the draft Labor Contract Law. (see GLS’s China reports for detailed background). One of the changes requested by the US-China Business Council was that “the effective date of the law be at least 6 months after promulgation, and that the law not be made retroactive to labor contracts signed before the effective date.”  We were suspicious then that this was a move to allow companies something of an open season before the law took effect.   Our suspicions were warranted.

But there’s more. One knowledgeable blogger writes that, “[t]he four departments of Wal-Mart’s global purchasing center that are in China are reported to all have been laying people off as the [new labor law] prepares to take effect.” We suspect that is the tip of the ice-berg of evasive action by foreign companies. [10/7/07 Update: Official Chinese media outlets are reporting that Walmart plans a round of staff cuts. China.com writes that “Many people suspect that Wal-Mart's redundancy is aimed at the new Employment Contract Law, which will take effect next year.”  Walmart’s plans provoked a strong rebuke from one prominent Chinese labor scholar: “The activities of evading laws will not be allowed and the loss will outweigh the gain for enterprises with irregularities.”  WalMart is claiming that these measures are part of a global restructuring plan. We’re skeptical of these claims.]

There are a many US and EU firms listed on Huawei’s web-site that the company claims are close partners. Each of those companies should be asked to condemn this practice and to say what they are doing to stop it. Wal-Mart and other foreign firms should also be asked if they are engaged in predatory labor practices prior to the new law, and if so, they should be asked to halt them immediately

It is time for all those interested in labor rights for Chinese workers—trade unions, NGO’s, policy makers and concerned citizens—to speak up and not allow companies based in their own countries to hide behind the corporate veils of global production chains. In particular, US and EU unions—especially those seeking to open a dialogue with the official All China Federation of Trade Unions (ACFTU)—should use this occasion to exchange views and information with the Chinese union on the behavior of foreign corporations and their suppliers during the transition period.

We are tracking this process and would like to hear more stories from people about how companies are preparing for implementation of the new law. You can help us by posting a comment below or sending information off line to [email protected]

Comments

[Old Tales Retold]

I'm not sure of Global Labor Strategies has noted it or not--I have to re-read some of these great posts!--but there were some questions at the end of last year about French giant Carrefour also engaging in moves not unlike Huawei's. See CSR China's article:

http://www.chinacsr.com/2007/12/28/1985-carrefours-re-signing-of-labor-contract-causes-dispute/#more-1985

[Sue Under]

That seems to be the case with Dell, too. The NewsVisual article on the deal http://www.newsvisual.com/newsvisual/2007/11/dell-and-equall.html shows the personal connections among the leaders of these two companies. Those connections could have played a role in reaching the deal. But they will also help tell gain a foothold in a new market.

[Fons Tuinstra]

There are a few more stories linking dismissals to the Contract Labor Law:
http://www.chinaherald.net/2007/11/also-wal-mart-sacks-staff.html

Huawei is based in Shenzhen.