How to deal with labour crises

Foreign companies have faced an increasing number of strikes and other forms of labour unrest in China in recent years. The causes are complex, but foremost are changes in the attitudes of individuals and labour organisations. Individuals, particularly young Chinese workers, are becoming more assertive of their labour rights. Also, labour rights groups now provide these individuals with relatively sophisticated behind-the-scenes support and guidance during their labour activism. And finally, legally-recognised labour unions, which in the past have rightly been viewed as indifferent – if not outright opposed – to workers' collective demands and actions, have in some cases signalled a desire to begin legitimately serving as real employee representatives in advocating for employee rights.

Increasing labour unrest

Among the companies hardest hit by strikes and labour unrest, many are in manufacturing, retail and service industries that rely on large amounts of migrant labour. With China's rapid economic growth, costs of labour, land and logistics have been steadily increasing. These increasing costs have put constant pressure on the ability of these labour intensive industries to maintain profitability. Worse still, these industries are also among the hardest hit by the global economic downturn as well as China's own efforts at economic structural adjustment. As a result, many companies have enacted cost-cutting measures to stay afloat, including instituting pay freezes, eliminating bonuses and benefits, reducing their workforces, relocating to places with lower labour and land costs and selling or completely shutting down businesses. But such measures are increasingly being met by resistance from employees.

In some cases, workers on strike have over-asserted their rights. Many of their demands have either exceeded what is required under the law or have had no legal basis at all. For example, in a share acquisition of a company in which ownership changes hands, employees have no legal right to claim severance pay because their employment is not legally affected by the change in ownership. However, employees in such situations have often either not understood or simply ignored the law and demanded the employer “buy out” their prior years of service and pay them severance.

Another example frequently occurs when companies decide to close stores, business divisions or factories. Under the law, mass layoffs can be conducted in these circumstances if the labour union or employees are consulted and the competent labour bureau is notified. The law requires neither the consent of the labour union or employees nor the approval of the labour bureau to conduct the mass layoff. Despite the mass layoff procedure being legal, employers are often prevented from conducting the layoffs because of militant opposition from employees. Employees have seized control of the workplace until their demands for a large severance package are met. Moreover, many local labour authorities have sided with employees out of concern for maintaining social stability as well as for the financial burden of paying unemployment to laid-off employees. Some local labour bureaus have even set higher local requirements for mass layoffs than required by national law in order to make mass layoffs less likely or even impossible in their jurisdictions.

There is therefore a risk for employers whenever there is a merger, acquisition, relocation, business shutdown or workforce reduction. The employer faces a risk that the employees may demand severance rights not granted in law or demand a severance package much larger than required by law (i.e., one month's salary for each year of service). If their demands are not satisfied, labour unrest could follow. While these demands that exceed the law may be viewed as legitimate expressions for a reasonable if not legally guaranteed compensation for past services and loyalty to the company, in some cases the employees are simply seizing an opportunity to demand a large lump sum payment and leave the company.

Whatever the true justification, employers must still deal with the fact that a strike in one company has the potential to lead to more strikes in other companies, as striking employees learn from other striking employees. Rumours travel quickly about employees who have won rich severance packages through work stoppages. Even if it turns out these rumours are unfounded, they spur striking employees to fight for the same if not a larger severance package.

The nature of strikes in China

Even if a company has a labour union, the employees generally initiate most strikes on their own without union involvement because the employees view official labour unions as too management friendly and unsupportive of employee interests. Smart phones, mass texting and various social media platforms make it easy for employees to independently organise a strike or demonstration without labour union support. In many cases, strike leaders have been seen using these technologies to organise and direct the strike.

However, although employees can easily organise strikes, they often have a more difficult time in effectively negotiating with management because strike leaders are usually reluctant to be elected as representatives to negotiate with the management due to fear of subsequent management reprisals. Furthermore, even if the striking employees manage to elect representatives, the employees generally have little trust in these representatives and often suspect them of accepting bribes from management. These suspicions often derail progress and lead to the collapse of negotiations.

In some cases, certain labour rights groups have reportedly been involved in strikes. These NGOs have experience from past strikes and some labour law knowledge. As such, they can provide valuable support and guidance to employees during a strike and negotiations with management. However, since these NGOs have no legal standing in a strike, they can only work behind-the-scenes and may not take an active role in the strike or negotiations. Moreover, since the role of NGOs in civil society is often politically sensitive and legally uncertain, many strike leaders worry significantly about becoming known to the government as having a close working relationship with NGOs. All of these factors work to limit the NGO's influence during a strike.

China has only one legally recognised labour union, the All-China Federation of Trade Unions (ACFTU). It has an awkward role to play within the Chinese labour regime. On the one hand, as a workers' organisation, it is tasked with protecting worker interests. On the other hand, it is also tasked by the trade union law with maintaining harmonious labour relations and assisting the government in preserving social stability. These conflicting duties mean that the ACFTU cannot be as aggressive on the behalf of workers when dealing with management as its union counterparts in the West. In addition, during most strikes and other forms of labour unrest, the ACFTU's ability to protect worker interests is undermined since the ACFTU – under the law and in practice – usually must assume the role of mediator between the employees and management. As mediator, the ACFTU must remain impartial and therefore cannot unequivocally fulfil its duty to protect worker interests. Rather, it must also ensure the employer's interests are also protected. This conflicted role is why employees view the ACFTU as unhelpful during collective actions by the workers.

However, ACFTU-affiliated company unions have an advantage in that their members and their union activities are protected by law, whereas employee groups unsanctioned by the ACFTU are not protected. As such, even independent employee movements sometimes pressure the sanctioned company labour union to provide representation during a labour dispute. Not only does this pressure come from the employees, but the Chinese Communist Party (CCP) also pressures the sanctioned company labour unions to assist in advocating for the workers' interests to reduce social instability. Also, company union leaders who face the same fate as employees (e.g., termination in a mass layoff) will generally provide a more vigorous representation of the employee interests. All of these reasons may explain why the sanctioned company labour unions in the recent PepsiCo mass-layoff and Wal-Mart store closure were acting like real unions in advocating fiercely and determinedly for employee interests.

Employee activities can be very disruptive during labour unrest. In many instances, protesting workers have physically restrained or even taken hostage the senior managers, occupied plants, blocked entrances and exits to facilities to prevent shipments in or out, obstructed management efforts to recruit replacement workers, and coerced reluctant employees into participating in strikes. The employees sometimes deliberately target the busiest production times to launch strikes so that pressure on management is heightened.

Handling a crisis

The law is silent on work stoppage by strike. While this silence in the law means that strikes have no legal protection, it also means that involvement in a strike is not a statutory ground upon which an employee can be terminated. As a result, management cannot expressly base the termination of an employee on participation or leadership in a strike.

Instead, the employer must base the termination on behaviour that can be defined as a serious violation of company rules according to the employee handbook, such as unjustified absence from work, disobeying management's normal work instructions and disruption of production. The employee handbook must be adopted through an employee consultation procedure for its rules to be enforceable. In order to effect the termination, the company must have evidence of the employee's misconduct, such as video or audio recordings. The company should use its video surveillance system to monitor the strike. An ancillary benefit of the video surveillance is that it might deter the employees from taking particularly disruptive actions.

Management should be prudent when deciding whether to fire strike leaders because it could be viewed as a crackdown and escalate the labour unrest beyond its ability to control. In Guangdong, an interesting regulatory development may limit management's ability to fire employees during a strike. The Guangdong provincial government has recently issued a draft set of regulations in effect granting employees the right to strike if employers refused to engage in collective bargaining, and prohibiting employers from terminating any employee once the strike begins up until the collective bargaining process commences. Employers in China should monitor developments in this area to see whether the Guangdong regulations are adopted and whether other provincial and local governments eventually adopt similar regulations. This would put further pressure on companies to engage in good-faith collective bargaining with employees when the company union or other employee representatives make such demands.

In many cases, strikes are caused by employer noncompliance with the law, for instance underpaying social insurance contributions, ignoring legitimate employee grievances or failing to provide a safe workplace. The first step for employers to limit the risk of labour unrest is to ensure compliance with Chinese employment laws. In order to learn about and address any lapses in compliance or other legitimate employee grievances in a timely fashion, employers should establish effective communication channels between management and employees so that issues can be identified and addressed before they escalate and cause unrest.

Another step employers should take in order to mitigate the impact of a potential strike is to prepare an emergency plan to guide its response to labour unrest. It is vital to have such a plan in place before engaging in any action that poses a high risk for causing labour unrest like mergers and acquisitions that could result in plant closures or mass layoffs. The plan should identify and establish a project team (which includes business, HR and PR managers as well labour lawyers) and a decision maker to handle the labour unrest. It should also include a communication plan outlining the handling of communication with employees in a labour unrest environment and should also identify who will be responsible for public and government relations in order to gain their support.

Private security firms should be contacted to provide security services for senior managers and to protect the company's important assets if necessary, since the police are reluctant to intervene in labour disputes unless the situation gets out of hand. Companies should not wait until a serious incident has occurred to take steps to protect their management personnel. The company's internal security and video surveillance system should also be used to monitor the labour unrest and collect evidence in case any employees later try to bring a claim against the company for disciplinary actions taken against striking workers.

Management should also be aware of the identity of potential strike leaders so that communication channels can be established as quickly as possible. Managers who have relatively good relationships with the employees should be given additional training on how to serve as liaisons to the employees during the immediate outbreak of a strike to quickly gather employee grievances and help establish official communication channels between striking employees and the project team.

If a strike occurs, the emergency plan should be initiated immediately and the project team should be sent to the location of the strike. It should be decided immediately whether management can continue to work on-site or should be moved off-site (the latter option is generally preferable).

Labour, commerce and other relevant government agencies should be contacted as soon as possible for support. Support from senior government officials is more important if obtainable. Police should be notified of the labour unrest so that they can be prepared to intervene if necessary.

Labour lawyers must analyse whether the demands of the employees are legal and reasonable, advise on settlement offers, review or prepare notices or announcements to the employees and assess whether grounds for termination exist for specific employees.

If needed, replacement workers should be brought in to meet manpower shortages, but the risk of conflict between the replacement workers and the striking workers should be assessed before doing so. Management should also consider assigning some production tasks to affiliated companies or outsourcing parts of production to external companies as a temporary emergency measure to meet market demands.


Jonathan Isaacs and Bofu An, Baker & McKenzie, Hong Kong


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