VZCZCXRO9178
PP RUEHCN RUEHGH
DE RUEHBJ #0594/01 0260814
ZNR UUUUU ZZH
P 260814Z JAN 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4161
RUEHC/DEPT OF LABOR WASHDC PRIORITY
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHSH/AMCONSUL SHENYANG 7468
RUEHGH/AMCONSUL SHANGHAI 6843
RUEHCN/AMCONSUL CHENGDU 7800
RUEHGZ/AMCONSUL GUANGZHOU 2231
RUEHIN/AIT TAIPEI 6232
RUEHHK/AMCONSUL HONG KONG 8786
RUEHGV/USMISSION GENEVA 1588

UNCLAS SECTION 01 OF 02 BEIJING 000594 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT PASS USTR FOR KARESH, A. ROSENBERG, CELICO 
LABOR FOR ILAB 
TREAS FOR OASIA/ISA-CUSHMAN 
USDOC FOR 4420/ITA/MAC/MCQUEEN AND DAS KASOFF 
 
E.O. 12958: N/A 
TAGS: ELAB EINV PGOV CH
SUBJECT:  LABOR CONTRACT LAW: SECOND DRAFT 
ACCOMMODATES SOME BUSINESS CONCERNS 
 
REF: A) 07 BEIJING 390 B) 06 BEIJING 24304  C) 06 
BEIJING 9677 
 
¶1.  (SBU)  Summary: The National People's Congress 
(NPC) has invited the American Chamber of Commerce in 
China (Amcham) and the US-China Business Council to 
submit comments on the second draft Labor Contract Law 
(LCL) which the NPC published on December 25.  Amcham 
hosted a breakfast for members on January 25 to 
discuss the draft law, and will submit a new round of 
comments to the NPC on January 26.  In the second 
draft LCL, the NPC accommodated a number of 
recommendations that the US business community made 
after reviewing the first draft LCL in April (ref C). 
In some cases, the NPC imposed new provisions giving 
employees new rights.   Key changes in the draft LCL 
are summarized in paras. 3-7.  The complete text of 
the second draft LCL can be found on the amcham 
website, www.amcham-china.org.cn .  End summary. 
 
Background 
---------- 
 
¶2. (U)  As reported in reftels, China has for a nearly 
a hear been drafting a labor contract law meant to 
improve labor enforcement and address common practices 
that violate workers rights.  International business 
associations in China have responded to NPC 
invitations to provide public comment on the draft law 
(ref B).  This message is intended to highlight the 
changes between the first and second drafts that are 
of most interest to the international business 
community.  As the LCL moves closer to final form, 
Embassy will report in more detail on how the law is 
likely to change China's overall labor climate. 
 
Key changes in the Labor Contract Law, second draft 
--------------------------------------------- ------ 
 
Consultation with unions/worker organizations on 
company regulations and lay-offs: 
 
¶2.  (U)  The second draft LCL removed a requirement 
for labor union/worker organization approval of all 
changes to company rules and regulations that several 
US businesses found unworkable and troubling in the 
first draft and eliminated a requirement that 
unions/worker organizations approve lay-offs involving 
over 50 employees.  Instead, the draft requires 
employers to consult with labor unions on changes to 
company rules and on all lay-offs of 20 or more 
employees (or 10 percent of the workforce, whichever 
is less). 
 
¶3.  (U)  New limitations on use of fixed-term 
contracts and probationary periods: 
 
The second draft LCL encourages in several ways the 
use of non-fixed term (indefinite) and makes it more 
difficult for employers to terminate employees by 
waiting for their fixed-term contracts to lapse. 
While the second draft eliminated a prohibition on 
termination of employees prior to the expiry of a 
contract, it requires employers, when extending an 
employee's fixed-term contract, to offer a new non- 
fixed term contract if the employee requests it.  The 
draft also limits the duration of probationary periods 
according to a formula based on the total contract 
duration.  In the case of termination at the end of a 
contract period, the draft requires employers to pay 
severance pay of one month per year served. 
 
¶4. (U)  New regulations on the use of contract 
workers: 
 
The LCL attempts to discourage the use of contract 
 
BEIJING 00000594  002 OF 002 
 
 
labor as a means of evading employer obligations, and 
imposes new obligations on labor dispatch agencies 
(LDAs) which provide contract labor.  The second draft 
LCL eliminated a one-year limitation on the use of 
contract labor that appeared in the first draft, as 
well as a requirement that LDAs deposit bonds for each 
contracted laborer.  However, the new draft narrows 
the scope of positions for which contract labor can be 
used.  Employers will have to report the use of 
contracted labor to the Ministry of Labor and Social 
Security (MOLSS) and duration of use must be limited 
to actual need.  The second draft also adds a 
provision that entitled contracted labor to the same 
pay as regular employees, and specifies the duties of 
enterprises to the contracted labor they employ, 
including a requirement that the employer create a 
wage increase mechanism for long-term contracted 
workers.  The draft makes employing enterprises and 
LDAs jointly liable for providing work injury 
insurance.  As for LDAs, the new draft defines them as 
an employer, requires them to sign contracts of at 
least two years' duration with workers they contract 
out, requires them to pay wages monthly, and requires 
them to provide workers with at least the minimum 
wage, even when there is no work to which to assign 
them. 
 
Penalties for failure to sign a labor contract: 
 
¶5.  (U)  The second draft LCL removed a provision in 
the first draft that would have presumed the existence 
of a non-fixed term contract if the employer did not 
sign a written contract with an employee.  Instead, 
the second draft requires execution of a contract 
within one month of hiring, and allows MOLSS to fine 
employers who fail to do so. 
 
Non-compete clauses: 
 
¶6.  (U) The second draft LCL softens restrictions the 
first draft would have placed on the use of non- 
compete clauses in labor contracts.  The requirement 
to pay aminimum of one year's salary to former 
employees subject to non-compete clauses, and the cap 
on the damages for violations of non-compete clauses 
have both been eliminated.  The second draft limits 
non-compete clauses to high-level management 
personnel, high-level technical personnel, and other 
personnel with knowledge of the employer?s commercial 
secrets. 
 
SIPDIS 
 
SEDNEY