No longer straining to be heard

In addition to unionisation, the government has increased pressure on private enterprises to allow collective contract negotiations with the issuance of the Notice on the Pushing Forward of Collective Bargaining and the Implementation of the Rainbow Plan (推进工资协商及执行彩虹计划的通知) (Rainbow Plan) on May 5 2010 by the Ministry of Human Resources and Social Security (MOHRSS). The Rainbow Plan requires all enterprises with labour unions to enact a collective contract scheme by 2012 (Employers unfamiliar with collective contracts should note that, while generally individual employment contracts apply, where the individual employment contract fails to provide for certain matters or fails to meet the requirements of the collective contract regarding that matter, the collective contract would govern). The Rainbow Plan places considerable focus on increasing the ability of workers to negotiate for wage increases through collective bargaining.

Context

These measures come after a number of high-profile strikes raised concerns over the wages and working conditions of workers in factories across China. Perhaps the most notable events took place at Foxconn's factory in Longhua where 16 people committed – and reports say 20 more attempted – suicide by jumping from employee dormitories over a period of weeks. Additionally, a strike early this year at Honda's factory in Foshan resulted in wage increases for employees and produced a number of copy-cat strikes throughout the country. The Honda strike received an especially large amount of media coverage. While the government has generally been quick to silence media reports on labour disputes – fearing workers elsewhere will mobilise, which may then affect social stability – the government allowed the media to freely cover this strike for two days.

While some observers conclude that the labour reforms are in response to the recent turmoil, a shrewd government may instead have taken advantage of the situation to garner support for the recent reforms. The strikes have been indicative of growing labour unrest: employees struggling with poor conditions and low pay versus employers struggling in a post-financial crisis era of rising costs and shrinking profit-margins. The above measures should thus be seen as an attempt to restore some of the power lost by labour. However, the government has not suddenly become pro-labour. Rather, such moves are in line with its overall objectives of sustainable economic development and social stability. Indeed income inequality in China is growing, illustrated for example by growing outrage towards a housing market that has placed home ownership out of reach for many middle-class families. And clearly the government is aware of the threats posed by a vastly unequal distribution of income. It should come as no surprise that income distribution has become one of the main focal points of the upcoming 12th Five-Year Plan session, with labour reforms expected to receive particular attention.

Pending regional & national legislation

In addition to the two national measures described above, regional authorities including those of Fujian, Beijing, Shenzhen and Guangdong have measures under consideration designed to raise wages and strengthen the power of labour. The Shenzhen People's Congress, for example, released the Draft Regulation on Employment Relationship and Collective Bargaining in Shenzhen Special Economic Zone (《深圳经济特区劳动关系集体协商条例》（草案）广东省企业民主管理条例) in January 2010. The draft proposes fines of up to Rmb 50,000 on employers that either do not respond to employee requests for negotiations or negotiate in bad faith. Employers are also required to supply information and materials necessary for collective bargaining. Additionally, the regulations would prohibit employers from taking retaliatory action against workers who serve as representatives in negotiations. Shenzhen has been at the forefront of the government's renewed unionisation campaign, and these regulations, if passed, may serve as a model for other provinces.

The business lobby is not giving in without a fight: Guangdong for instance took a similar initiative, but the backlash from business interests has shelved the regulations for the foreseeable future. The draft regulations, known as the Guangdong Enterprise Democratic Management Regulations (广东省企业民主管理条例（草案修改稿）), were originally drafted in 2008 but promulgation was put on hold due to the pressures of the global financial crisis. In January 2010 they were revived, introducing mandatory wage negotiations if 20% of the employees requested them, as well as mandatory mediation with ACFTU officials if negotiations reached an impasse. Additionally, these regulations would give protection to employees that went on strike or conducted a slow-down in response to a management's refusal to negotiate. However, the regulations were shelved again before the September meeting of the Guangdong Provincial People's Congress after the business lobby, led by representatives from Hong Kong employer groups, successfully convinced provincial leaders that the regulations would cause a catastrophe for the Pearl River Delta and a mass-exodus of factories from the region.

The defeat of these regulations in Guangdong, however, is unlikely to stem the larger, nationwide trend of labour reform: national legislation on wage increases is expected as soon as next year. The Wage Increase Regulations (工资条例) currently under draft by the MOHRSS could mandate a doubling of the minimum wage over the next five years. Whether the reforms will actually ameliorate increasing income inequality is speculative; however, from a business perspective, the regulations are yet another sign that labour reform is coming and that greater compliance burdens will be placed on employers.

Impact on business

Businesses of all sizes need to be aware of the changing labour laws and consider how it will impact their own employment systems. But companies with large, low-wage and labour-intensive employment will undoubtedly face the most immediate challenges. Some large companies are considering moving factories in-land to escape the new regulations in the coastal provinces; however, with reform expected to proceed everywhere, this solution will likely prove only temporary. Companies without unions can expect local ACFTU branches to increase pressure to unionise, and companies should carefully consider how to respond.

During the previous unionisation campaign, before the global financial crisis, some companies chose to opt-in to unionisation in an effort to be a part of the unionisation process and influence the union formation process. Companies should carefully consider the consequences of unionisation. Unionisation is often seen as an expense only, but it may result in improved relations with the workforce and reduce individual disputes, and could also lead to stronger support from local authorities or the community. Having an influence on choosing union representatives will help as well. If a company decides to give in to pressures and pursue unionisation, the company should consult with an experienced professional to maximise management involvement with the union and limit disruptions to business operations.

The same kind of in-depth attention is due when considering collective contracts. Stipulating working conditions or work rules in the collective contract will require renegotiations should the company desire to change those rules, and may thus restrict a company's ability to determine its human resource policy. Well thought-out collective contracts that clearly detail desired requirements while providing mechanisms for change later will ensure that the collective contracts do not unnecessarily burden the company and become obstacles to the business later on.

Small- to medium-sized companies should also consider whether unionisation or collective contracts are appropriate for them, as they will also likely face increased pressure from the local trade union authorities. While the previous unionisation campaign focused on large, Fortune 500 companies, this campaign has increased the focus on smaller businesses as these private companies comprise almost 90% of the workforce in China. Pressure from local departments of the ACFTU may increase in the coming years, and so companies should consider their own needs and determine what kind of strategy on unionisation and/or collective contracts they want to pursue for the time being.

The Chinese government has clearly demonstrated its goal of pursuing labour reform through unionisation, collective contracts, and wage increases, and this goal is fully in line with its broader goal of tackling income distribution. The national and regional measures that have recently been circulated are likely to be just the first step, with more regional and nationwide legislation to follow. As China increases the scrutiny on all businesses, but especially foreign-invested companies, businesses of all sizes need to keep themselves aware of the legal developments and ensure they maintain compliance. They should carefully consider unionisation and collective contracts and assess whether either are appropriate for their businesses, considering not only the costs but also the benefits of taking the initiative. While it may not solve income inequality, the trend towards unionisation and collective bargaining is not likely to regress.

Luo Ai and David Hartung, R&P China Lawyers, Shanghai