Delays ahead: Why new labour rules raise stress levels

Democratic management has existed in China's legal system for years. The government considers democratic management as an important characteristic of how enterprises manage. Many existing laws and regulations reflect this concept and relevant requirements. For example, the PRC Constitution (中华人民共和国宪法) provides that state-owned enterprises should implement democratic management in the form of employee representative offices. The PRC Labour Law (中华人民共和国劳动法) provides that employees may participate in democratic management in the form of an employee congress or employee representative congress. Finally, the PRC Company Law (中华人民共和国公司法) provides that a company must implement democratic management in the form of an ERC.

Democratic management initially considered the disclosures of enterprise affairs, to create a mechanism for the employees of state-owned enterprises to raise their concerns and check on the management team. This was largely to improve financial conditions and fight against corruption by the management team. In 1999, a group for the disclosure of enterprise affairs was established to take the lead in promoting disclosures of factory affairs among state-owned companies and collectively owned enterprises. The six promulgators of the Rules are the current members of this group.

Timing

Over the years, the requirements of democratic management have extended to non-state-owned companies, including FIEs, mainly through regional rules. From 2007 to 2010, many provincial jurisdictions like Shanghai, Zhejiang, and Jiangsu promulgated provincial regulations on democratic management or ERC. The central government may have collected enough experience through local regulations and felt that it is time to promote democratic management nationwide, especially for non-state owned enterprises.

The Rules are an important step in the government's continuous labour initiatives against non-state-owned enterprises. In 2004, the Chinese government started the first wave of movements focusing on unionisation of large multinational companies. For example, Wal-Mart, Kodak and Samsung were openly criticised for refusing to set up unions. The wave saw many big-name FIEs unionised. Following unionisation, the government began a second wave focusing on collective bargaining for wages. The All-China Federation of Trade Unions (ACFTU) announced Two Universal and Rainbow plans in 2010. The Two Universal plan considered universal establishment of unions and engagement in collective wage bargaining. Detailed goals included that from 2011 to 2013, 90% of enterprises nationwide should be unionised; 95% of FIEs and privately owned enterprises should be unionised; and 80% of the unionised enterprises should engage in collective bargaining. The goal of the Rainbow Plan is to have collective bargaining agreements signed at each unionised enterprise and the coverage of collective bargaining agreements should reach 80% from 2010 to 2012. Starting from 2007, the third wave emphasised democratic management of enterprises, or more specifically the requirement of establishing an ERC at all non-state-owned enterprises.

The Rules also echo the government's latest macro-economic policies. Since 1979, China's economic reforms have seen outstanding achievements, but have caused serious social problems. One of these problems is that the income gap between rich and poor keeps widening. Economic growth also heavily relies on fixed-asset investment and exportation, not on domestic consumption, which is considered unsustainable. To address these issues, the central and local governments have repeatedly emphasised change in the means of economic growth. A major effort to achieve this was to increase workers' income, especially the income of low-level employees. Many provinces and cities announced the double salary plan in 2010 targeted at doubling employees' average income within five years, or a 15% increase each year. As a result, the minimum wage in China keeps growing (see figure 1).

The government wanted to mobilise and enhance employees' bargaining power with enterprises through labour movements like unionisation, collective bargaining and ERC for higher pay and benefits. In addition, workplace unrest, such as strikes, protests and slowdowns occur frequently throughout China. The global financial crisis and high inflation made the situation even worse. The government may also wish to establish some legal and controllable channels for the employees to raise their issues and concerns, so that employers can have precautions and address these issues, which would avoid workplace unrest.

Three key steps

The Rules compel enterprises to follow three key requirements to achieve democratic management of enterprises. The first requires each enterprise to set up an ERC as the basic form of democratic management. Some FIEs established employee clubs and employee representative groups, which have the similar function to the ERC, but they are not allowed to replace the ERC under the Rules.

An ERC consists of a certain number of employee representatives elected by all the employees by simple majority. The Rules provide that the number of the representatives should be at least 5% of the total workforce, but no less than 30. Some regional rules on ERC, for example Shanghai's, add that if the number of employees is fewer than 100, an employee congress, which consists of all the employees, should be held in place of the ERC.

Each employee is eligible to be elected as a representative, including managers and executives, but the number of mid-level or senior managers and executives acting as representatives may not exceed 20%.

A breakthrough in the Rules is that the ERC must include representatives from labour dispatch workers (temporary staff). In China's current market, use of dispatch workers is excessive. A typical issue for dispatch workers is that they work the same as or even harder than regular employees, but receive less pay and benefits, especially in state-owned companies. Currently, the PRC Employment Contract Law (中华人民共和国劳动合同法) allows dispatch workers to participate in trade unions, but it does not allow them to participate in the ERC. Existing regional regulations on ERC, like in Shanghai and Jiangsu, do not explicitly allow dispatch workers to participate in ERC. Zhejiang's regulations only allow dispatch workers to participate in the ERC as observers. Requiring an enterprise's ERC to include representatives from dispatch workers gives them a platform to raise their concerns and protect their interests.

The Rules provide that employee representatives may take part in ERC or other activities organised by the ERC during working time and employers may not lower their salary and benefits due to those activities.

Most non-state-owned enterprise ERC are advisory in nature. Typically, they consist of hearing reports from management over business development, the status of operations, information regarding occupational safety and compliance with employment laws and regulations. The ERC has two decision-making rights: (1) review and approve any collective bargaining contract; and (2) elect the employee directors and employee supervisors that will sit in the board of directors and board of supervisors, respectively.

The ERC advisory role has been enhanced. It states that if an enterprise fails to consult with its ERC about the work rules or decisions as required by law, the work rules or decision in question will be void. Article 4 of the Employment Contract Law provides that when an employer formulates or revises any employment policy, or makes any decision, which will have a direct bearing on the vital interests of its employees, the employer must submit the employment policy or decision to the ERC or to all the employees (in absence of an ERC) for their discussion, proposals and comments. In existing practice, the legal consequence of non-compliance with Article 4 is very uncertain. Some cities hold that the same view as the Rules – that the work rules or decision in question should be void if the consultation requirements are not followed. Other locations, for example Guangdong, uphold the work rules or decisions not in compliance with Article 4, if the content is not illegal or obviously unreasonable. It is unclear whether locations like Guangdong would change its practice due to the Rules.

Putting employees on the board

The ERC and trade unions are two separate organisations and are not inter-changeable. Enterprises technically must have both of them. Consistent with the existing rules, the new Rules define the trade union as a working organisation of an ERC, which is responsible for the daily operation of the ERC. For example, the trade union is in charge of preparing and convening the ERC, organising the employees to elect employee representatives, soliciting proposals and topics to be discussed.

The second requirement asks enterprises to disclose business affairs to their employees. These include important matters in business operations, work rules involving employees' immediate interest and integrity of management personnel. This disclosure is meant to solicit employee's comments and to subject management to supervision by the employees.

Some enterprise affairs may include sensitive information, like wages, benefits and personal privacy, which the enterprise does not want to share with regular employees. The Rules ask an enterprise to disclose information regarding its disciplinary actions against the employees, unilateral termination of employment contracts, labour disputes and their results. To address that issue, the Rules allow an enterprise to withhold some information if it is inappropriate to be disclosed to the employees due to protection of trade secrets and intellectual property.

The third requirement is the election of employee directors and employee supervisors. A company incorporated under the Company Law, should have a board of directors and a board of supervisors. However, the Law also provides that if a company has only a few shareholders or a comparatively small scale, they may choose to have one managing director in lieu of the board of directors and one or two supervisors instead of a board of supervisors.

The Company Law requires any state-owned company to have one or more employee representative and the employee directors sitting in its board of directors. There is no requirement on the percentage of the employee directors of the board of directors. Non-state-owned companies are not required to have employee directors. Unlike employee directors, the Law provides that, regardless of the nature of ownership, a board of supervisors must have at least one-third of the supervisors elected by the employees through ERC, employee congress (in absence of an ERC) or other forms. However, in practice, a FIE usually only has one shareholder if it is a wholly foreign-owned enterprise or two or three shareholders in joint ventures. Therefore, many FIEs choose to have supervisors instead of the board of supervisors, avoiding electing employee supervisors.

The new Rules are perhaps a signal that the PRC Company Law may be revised to require non-state-owned companies to also include employee director(s) in the board of directors. If a company does not have a BOS, then one supervisor must be an employee supervisor, in order to implement and set up the employee director and supervisor institution.

Enforcement

It is unclear how the Rules will be enforced against FIEs. The six promulgators are all in charge of state-owned companies and their managers. They clearly are not appropriate authorities to enforce the Rules against FIEs. Although the ACFTU and the All-China Federation of Industry & Commerce have promoted democratic management in non-state-owned enterprises for years, they cannot enforce the Rules as non-governmental organisations (although they can be very influential). The Ministry of Commerce or Ministry of Human Resources and Social Security are unlikely to enforce the Rules since neither of them is a promulgator.

Another important factor is that unlike other laws and regulations, the Rules do not contain any punishment clauses, which makes it uncertain as to what the legal consequences will be for non-compliance. The code of the New Rules is Zong Gong Fa [2012] No. 12, which indicates that they are considered ACFTU's internal rules instead of ministerial regulations. That may be the reason why the Rules do not contain any penalty clauses. In reality, FIEs have already been required by many local regulations to set up ERCs and implement democratic management. If an FIE fails to comply with these existing local regulations, it is hard to envisage sudden compliance with the Rules, which has less legal effect than the local regulations.

One step at a time

A wait-and-see approach is perhaps the best option to assess the impact of the Rules. However, employers should have a long-term plan towards unionisation, collective bargaining and ERC issues, because they are and will continue to be an inevitable trend of China's labour movement. This precaution is also necessary as enforcement may be enhanced in the future.

In China, the central and local governments stand behind each labour movement. Labour laws and regulations and their enforcement are destined to be very political. For example, during the 2008 global financial crisis, all the unionisation movements initiated by the ACFTU were called off to support enterprises to overcome the crisis. On one hand, the governments want to promote unionisation, collective bargaining and democratic management to mobilise employees and enhance their power to bargain for higher income and benefits. On the other hand, they (especially local governments) are also aware that intensive enforcement of labour laws and regulations may drive up the labour costs, deter investment and weaken the local area's competitiveness. Also, the employees' activities may go out of control. Both the governments and employers will have to take one step at a time and look carefully before any huge leap.

Gordon Feng and Kay Cai, Paul Hastings, Shanghai