China's Draft Labour Contract Law, issued earlier this year, has stirred up a great deal of controversy among domestic and overseas legal experts and local and foreign business people operating in the country.

The debate originated with the launch of the public consultation period on the draft law by the Legal Affairs Committee of the Standing Committee of the National People's Congress on 20 March 2006. Foreign investors and commercial groups have studied the draft law and submitted their comments. Their concerns were reflected in an article published in the magazine, 21st Century Economic Report, on May 11 entitled "Foreign investors strongly oppose the Draft Labour Contract Law and threaten to withdraw investment".

The draft law intends to expressly set out the rights and obligations of employers and employees for the purpose of strengthening protection of employees' rights and interests. It is aimed at rectifying problems such as the low rate of use of labour contracts, the short-term nature of most labour contracts, and the lack of protection of workers.

The new law would also rectify certain shortcomings in the Labour Law of China, promulgated more than 10 years ago.

Labour studies scholars from around China met at Beijing University's School of Law on 3 April to discuss the draft bill and labour standards. A sharp difference of views on the new law was demonstrated by two leading scholars, Dong Baohua, professor of labour law at East China University of Politics and Law, and Chang Kai, director of the Institute of Labour Relations of Renmin University of China. The two professors have continued their debate in the media, where their positions have been dubbed the"debate between the "Jing (Beijing) camp" - represented by Professor Chang - and the "Hai (Shanghai) camp" - represented by Professor Dong".

Dong Camp: Difficulties in synchronizing draft law's high labour standards with human resources management principles

Professor Dong argued that the draft law attempted to set a "high" labour standard to enhance the protection of workers' rights in a macro sense. Dong pointed out that the draft law would strictly limit an employer's power to change their employees' job positions and to terminate employment. The conditions set out in the draft law concerning an employee's resignation were also too broad, Dong added. For instance, the draft law did not allow employers to reassign an employee to another position if he or she was not performing well in the current position or to adjust his or her salary, without the employee's agreement.

At the same time, an employee who is treated favourably by his company and who possesses trade secrets, may resign at his or her discretion. The cost to the individual of such a breach of his employment contract would be quite low or might carry no cost at all according to the draft, Dong said.

He also pointed out that the draft law specifies that labour inspection agencies will be responsible for reviewing whether the law has been observed, rather than the labour dispute arbitration bodies. In this way, a company's human resource management would come under the scrutiny of the labour administrative agencies. Professor Dong said the proposed labour standards were viewed as relatively high and rigid in an international context and he was worried that it would be difficult for internationally practiced human resources management principles (e.g., based on employee performance evaluation methods and systems) to be synchronized with the draft law.

Chang Camp: protection of workers paramount

Professor Chang said the labour market was different from other markets and that it was not only related to economic relations, but it was related to social relations. It was not possible to solve social contradictions simply by depending on self-balancing by the economy, especially given that China's labour market had not yet been regularized, he said. If the government did not intervene in the labour market, it would be equal to the government standing on the side of the privileged, further weakening the position of the underprivileged.

Professor Chang said the draft law, which was a social law, should be based on social interests as the major point of legislation and labour interests were the foundation of social interests. Therefore, the Draft Labour Contract Law should be inclined to uphold labour's interests. He pointed out that employers in China currently enjoyed much more power than workers. Given the current status of the ACFTU, relationship between workers and employers is tipped in favour of the latter and the situation would be further exacerbated if the government did not act to strengthen the law.

As to the question of whether China's labour standards were "high" or"low", Professor Chang said it was not appropriate to judge whether a country's labour standard was "high" or"low" simply by individual standards, such as working hours or overtime payments, but labour standards should be regarded as a system. Other aspects, for example, wages, job security, social security levels, occupational health and safety and job training, should also be included. Taking all these into consideration, China's current labour standards are in fact relatively low, especially as regards wages. Professor Chang also argued that we should not use the principles and the standards of human resources management to evaluate the labour contract law, adding that human resources management was only a management strategy applied by employers and it could not replace the labour law in handling labour relations.

Over-exploitation of workers harms economic development, ACFTU says

Apart from the heated debate in the academic field, the All-China Federation of Trade Unions (ACFTU), the only legally allowed trade union in China, and foreign investors' organizations also held different views on the draft law. On the morning of 10 May, the ACFTU held a press conference on the Draft Labour Contract Law. During the press conference, Guo Jun, deputy director of ACFTU's legal department, said the major problem that currently affected China's economic development was the over-exploitation of workers by employers. This affected the enhancement of the  quality of labour and led to a constant and relatively low level economic development. While the Chinese government was advocating a new strategy focused on developing technology and creativity and the policies to ensure that all of its citizens enjoyed the fruits of social and economic development, it is necessary to ensure workers' rights in order to enhance labour quality. Guo insisted that the only negative impact of the Labour Contract Law would be to help reduce the employers' excessive and inappropriate profits that resulted from over-exploitation of workers' rights.

Foreign business groups threaten to withdraw investments

According to the 11 May report of the 21st Century Economic Report magazine, European Union Chamber of Commerce in China and the American Chamber of Commerce in Shanghai – the two largest foreign investors organizations in China – each submitted recommendations and opinion papers on the Draft Labour Contract Law to the Legal Affairs Committee of the Standing Committee of the National People's Congress on 20 April. The report said that the submission made by the European Union Chamber of Commerce in China included 11 items, while that made by the American Chamber of Commerce in Shanghai was 42 pages long, covering almost all chapters and provisions in the Labour Contract Law.

In the recommendations of the European Union Chamber of Commerce, it read: "The labour laws currently adopted in several European countries have led to the increase in labour costs, resulting in many European countries having to move their production lines to countries outside Europe or to other European countries with less strict labour laws. Therefore, if China chooses to implement the draft law on labour contracts, it will undoubtedly face a similar challenge. "The recommendations made by the American Chamber of Commerce were even more direct: "We believe it [the draft law on labour contracts] might have negative effects on China's investment environment."

During a seminar on the Draft Labour Contract Law held in Shanghai on 23 April, a representative of the Shanghai Association of Human Resources Management in Multinational Companies said: "If this kind of law is going to be implemented, we will withdraw our investments."

The Draft Labour Contract Law will be tabled for seconding reading in the NPC in August after the consultation period ends. If it goes through the second reading, the law is expected to be formally passed and enacted at the end of the year.

7 June 2006