Factory Closures Strain China's Labor Law

Sky Canaves
The Wall Street Journal
January 16, 2009

SHENZHEN, China -- The global economic downturn is testing China's efforts to improve labor laws, pitting the need to give basic legal protections to 700 million workers against the need to keep businesses afloat.

The country's economic emergence boosted incomes, but also led to complaints that workers' rights were being trampled. In response, the central government in January 2008 introduced workplace-protection legislation, known as the Labor Contract Law. The law sought to tighten job security, to make dismissing workers more difficult, and to guarantee severance pay of one month's salary for each year of employment. Last year, China added new job-discrimination laws and made it easier to file complaints against employers.

But as the global financial crisis hits the heart of the world's factory floor, labor activists say officials are turning a blind eye to the new requirements. Local governments deny they are becoming lax, yet complaints against employers languish in huge backlogs as many are simply shuttering their factories.

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Migrant workers who returned home from China's Guangdong Province after losing their jobs look for work at a labor market in Chengdu. One worker advertises that he will take any job.
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Migrant workers who returned home from China's Guangdong Province after losing their jobs look for work at a labor market in Chengdu. One worker advertises that he will take any job.
Migrant workers who returned home from China's Guangdong Province after losing their jobs look for work at a labor market in Chengdu. One worker advertises that he will take any job.
Migrant workers who returned home from China's Guangdong Province after losing their jobs look for work at a labor market in Chengdu. One worker advertises that he will take any job.

"The enforcement of the Labor Contract Law is facing new problems," Hua Jianmin, chairman of the National People's Congress Standing Committee, China's top legislative body, said last month at a meeting on the law.

One problem is that China's manufacturing sector contracted for the fifth consecutive month in December, according to the CLSA China Purchasing Managers Index.

"Pressures from the labor law may encourage factories to close rather than pay what they owe to workers under the law," says Liu Kaiming, executive direct at the Institute of Contemporary Observation, a Shenzhen-based labor group.

Even before the downturn hit, business groups protested that the new law would be costly and burdensome. Now, workers say companies avoid paying claims by liquidating or by just disappearing without properly settling their business.

In the first 10 months of 2008, say authorities, 15,661 enterprises in Guangdong, the manufacturing-heavy southern province, shut their doors. Over half of those -- about 8,500 -- ceased doing business in October.

To aid businesses, Beijing has permitted local authorities to freeze minimum-wage levels and to reduce or suspend employers' social-insurance contributions.

The vice mayor of Dongguan, in Guangdong, says many employers hope the central government will suspend the Labor Contract Law, and his office has sent that request to Beijing. "We can't ourselves halt the implementation of a national law," says Jiang Ling.

Giving business such leeway could ultimately undermine trust in the still-developing rule of law, says Andreas Lauffs, a partner at the law firm of Baker & McKenzie who focuses on Chinese labor issues.

The situation keeps workers in limbo at a time when the plight of those unemployed by mass layoffs or illegal factory closings has drawn wide attention. The Chinese media have reported numerous recent incidents of labor unrest, from taxi strikes to protests by factory workers over unpaid wages.

After their factory closed last month, workers from the Shatangbu Yifa Rubber & Hardware Factory in Shenzhen filed for the back pay and severance promised under a contract required by the new law.

The Hong Kong-based owner disappeared, according to Shenzhen officials. That left many migrant workers stranded without enough money to return to their hometowns hundreds of miles away. About a third of the factory's 300 workers went to the Shenzhen government to request a speedy resolution of their case.

"We are aware of our rights, but we don't have enough time to go to court. We just want to get paid and go home before the holiday," said one worker, referring to the Lunar New Year celebration this month.

The former owner couldn't be located to comment.

Local officials later gave the employees 500 yuan ($73) in back pay from a special fund, but said other claims would have to go through a bankruptcy court.

The state media's heavy promotion of the new law has resulted in a big jump in labor disputes. In the city of Guangzhou, the local arbitration office received more than 60,000 cases from January through November, about as many as it handled over the previous two years combined. The fast-rising caseload has overwhelmed the system.

"Before, we would try to mediate more disputes before going to arbitration, but now that workers have the right to go to arbitration, they choose to do that right away," said Huang Huiping, deputy director of the labor bureau in Dongguan. "Right now, the number of labor arbitrators is not sufficient."

On Jan. 1, central labor authorities introduced new rules to allow arbitrators to give priority to claims filed by more than 10 workers.
—Ellen Zhu in Shanghai contributed to this article.