Edward Epstein

American companies looking to begin or maintain operations in China should be prepared for an unprecedented shift in Chinese labor laws effective Jan. 1, 2008, according to Edward Epstein, managing partner of the Shanghai office of Atlanta-based law firm Troutman Sanders LLP.

“This is probably the most important change for people doing business in China on a day-to-day basis in the last 20 years,” Mr. Epstein told GlobalAtlanta in a telephone interview from Shanghai.

The 1995 Chinese Labor Law, adopted during a time when state-owned enterprises dominated the Chinese marketplace, has remained unchanged over the past 12 years, Mr. Epstein said.  In June, the PRC National People’s Congress, China’s legislative body, adopted the PRC Labor Contract Law to better match the country’s dynamic economy.

Among the new law’s many ramifications, the most significant changes have to do with the labor contracts and the permanency of employment, Mr. Epstein said. 

United States companies have traditionally operated in an “at-will” employment environment, with workers coming and going as they please and employers making terminations largely without the law requiring them to pay severance.

In China, however, the “iron rice bowl” concept of lifetime employment and job security has been the historical standard.  But as a result of free market reforms and foreign investment, the labor market has become increasingly fluid, and employees are becoming more aware of the need to have their rights clearly delineated, Mr. Epstein said.

Under the 1995 law, employees had to wait 10 consecutive years before getting a guaranteed contract renewal.  Under the new law, employers are expected to renew contracts after one term (one-year deals are the accepted norm) and they are required by law to renew contracts after the second term.  If employers decide to terminate the employee after the second term, they must pay severance to the employee, said Mr. Epstein.

“The new severance requirements for terminating employees who have been employed for two contract terms will increase the financial burden on employers to terminate employees,” he wrote in an email. 

Employers will also be more accountable to labor unions, which have grown in power over the last two decades.  According to the new law, employers will be required to clear their rule policies with labor unions or employee representatives, and employers must notify labor unions before terminating an employee.

“If the labor union believes the termination would be unlawful, it may request the employer not to terminate; the employer must respond to the labor union’s request in writing,” Mr. Epstein said.

The Labor Contract Law, which weighs the golas of many interest groups, was the product of public discourse and governmental transparency that is uncharacteristic of China, he added.

The National People’s Congress circulated three drafts of the legislation among foreign chambers of commerce and the general public, and reactions to the proposed legislation “were not ignored,” Mr. Epstein said.

The fourth draft, which was finally adopted, represents a drastic compromise between the numerous competing interest groups. 

“They were genuinely concerned that if they didn’t address these difficult issues carefully, the law that they came up with could have a seriously detrimental effect on the economy,” Mr. Epstein added.

While he said that how authorities interpret the more ambiguous aspects of the law could give rise to changes in its implementation, Mr. Epstein said he does not expect that it will discourage American companies from going to China. 

To get ready for the new laws, employers thinking about establishing operations in China within the next six months or thereafter should create their company codes of conduct with the new laws in mind and in conjunction with employee or labor union representatives, he said.

Troutman Sanders has nine offices in the United States, as well as offices in Hong Kong, London and Shanghai.