China Employment and Labor Update (Part 1)


I attended the China Employment and Labor Managementworkshop this past week in Shanghai, China.  The workshop was targeted mostly to labor law attorneys and HR engaged in the day-to-day management of the

HANGZHOU, CHINA - MARCH 09:   Jobseekers atten...

workforce in China.  As the co-chair of the workshop said, “Managing the workforce and legal environment in China is more of an art form than science.”  I walked away thinking that there is so much ambiguity and grey in the its employment laws.  Nothing is certain.  Thus, tread slowly and carefully.

Below are some common themes stemming from the workshop.

Why China?

Panelists discussed the strategic reason why companies set up sales offices, manufacturing facilities, or supply chain hubs in China.  It used to be that the competition for labor has been with other multi-national companies.  However, increasingly China state-owned enterprises and other Chinese private companies have grown sufficiently large to envision expanding globally.  These Chinese companies are now competing for the same pool of talent.  They are also competing in the same products and services gaining market share against the foreign enterprises which has in the past dominated this space.

  • China for China
    • Competition is heating up.  Those companies whose customers are in China may need to rethink how they will compete in the China market.
    • Just like in other matured markets, companies need to innovate and provide more value-adds for their services and products.
  • China for a Global Market
    • There are companies who have set up manufacturing facilities in the past to take advantage of the low labor costs.  Their products are aimed at a global market, not the Chinese domestic consumption market.  The cost advantages are shrinking.These companies may need to evaluate if there are other more cost competitive labor markets in the region.

Rising Labor Cost

Up to now, companies have set up shop in China to take advantage of the relatively low labor costs in China.  However, those cost advantages are increasingly squeezed.

Drivers of increased labor costs include:

  • Increasing minimum wage
  • Overtime compliance
  • Termination settlement
  • Collective bargaining
  • Union dues

Social Insurance

The Chinese government have been attempting to update their labor codes and also, to fill in the dwindling social insurance coffers.  One attempt to do this is to charge a social insurance payment against foreign employees working in China.  As mentioned earlier, large Chinese state-owned and private companies are hiring foreigners to gain international management skills into their organizations.  It will be interesting to see how this all plays out in the long run.  Certainly, adding a social insurance premium adds to a rising labor costs.

  • Once panelist mentioned that in a survey, most foreign companies have elected to pay both the employee and employer contributions required to the government.  Companies fear that not doing so may disadvantage them in attracting critical foreign management talent into their organization.
Employee Misconduct
One of the most contentious issues surrounds dealing with employee misconduct.  Labor contracts, employee handbooks and work rules governs personnel issues at the workplace.  Even when employees violate clearly stated policies the court system favors the employee and requires the employer to go above and beyond to assist problematic employees with corrective training.  Dismissal is never clear cut in China.  Some best practices include:
  • Ask employees to sign and acknowledge that they have received the document (i.e., employee handbook, performance improvement letters).  Receiving the document is different in agreeing to the content of a warning letter.  At least, if you have to take the case to court, showing evidence that the employer have provided due process is far better than making a case that the employee in question has agreed to any misconduct
  • Many international companies have gone online with labor documents.  However, the Chinese system still relies on hard-copy documents.
  • Follow and adhere to work rules you have at the company.  Do not skip or selectively apply those rules.  Although you may not win, showing equal treatment and due process can still help your case.
  • If all else fails, look for opportunities for to buy-out the employee.  You may not win based on philosophical grounds but, at least make sure the unproductive worker does not re-enter the workplace.
In the next segment (updated – Part 2 is located here), I will cover topics related to 1) overtime practices, 2) non-compete agreements and finally, 3) collective bargaining.
Note:  When facing labor issues in China, always obtain counsel from a trusted source who is intimately familiar with the Chinese employment laws.


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