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RR RUEHCN RUEHGH RUEHVC
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ZNR UUUUU ZZH
R 170914Z APR 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5983
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEHC/USDOL WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 000475 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ELAB ECON EINV CH
SUBJECT: Draft Labor Contract Law: Companies are Concerned but 
Cautious 
 
¶1. (U) SUMMARY: Most foreign companies with offices in South China 
have negative impressions of China's draft labor contract law, but 
few companies believe the law will significantly impact their growth 
plans in China, according to a survey jointly released on April 11 
by Hewitt and Baker & McKenzie.  Most companies are uncertain of the 
implications of the law, with one quarter having done nothing at all 
to prepare.  Companies that lack employee representation plan to 
establish either formal or informal representative bodies.  European 
companies are less concerned with the law than U.S. companies 
because of similarities with European labor laws.  END SUMMARY 
 
Background of the Survey 
------------------------ 
 
¶2. (U) A total of 436 companies with offices in South China 
participated in the survey on February 7-14, 2007.  Three-quarters 
of respondents were wholly foreign-owned companies and half were in 
manufacturing, with a wide range in terms of company size.  Hewitt 
and Baker & McKenzie conducted the survey and discussed the results 
at an April 11 conference in Guangzhou.  Hewitt's Christian 
Doeringer said company response to the survey was unprecedented, 
with 250 companies completing the survey within the first day.  The 
National People's Congress will reportedly finalize the draft labor 
contract law in summer 2007, with implementation in late 2007. 
 
Impact of the Law, Actions Taken 
-------------------------------- 
 
¶3. (U) Slightly over one-half of companies said the new law will 
have a negative impact on their business, with the rest neutral. 
Almost no companies believe the law will positively affect their 
business.  Nevertheless, very few companies have revised their 
growth plans in China - suggesting that they expect growth to 
continue despite the new law.  European companies are generally less 
concerned than U.S. companies with the new law, according to 
Hewitt's Doeringer, because of provisions on layoffs, duration of 
contracts, and unions that reflect European labor law. 
 
¶4. (U) Companies are highly uncertain of the implications of the new 
law, according to the survey.  Most companies have not yet decided 
how to adapt company operations to comply with the law, which 
contains no grandfathering provisions.  Most HR sections have 
briefed senior management about the law and one-third have sought 
the help of outside consultants.  However, more than a quarter of 
companies have done nothing at all.  This is particularly true for 
smaller companies. 
 
Employee Representation and Unions 
---------------------------------- 
 
¶5. (U) Approximately half of the respondents currently have no 
employee representation in their companies.  Manufacturing companies 
are more likely than service providers and small companies to have 
either formal or informal employee organizations.  Those companies 
that lack employee representation are split 50-50 on whether to 
establish formal unions or informal representative bodies to comply 
with the draft law.  Only a small number of companies have plans in 
place to address the potential new requirement to negotiate a 
collective agreement with their workforce - and most do not 
understand the implications of this provision. 
 
¶6. (U) Under the new law, employers must consult with employee 
representatives before making changes to employment policies. 
Doeringer said this will give employee organizations, many of which 
are currently little more than social groups, more input on 
compensation issues.  How much input is unclear, as the draft law 
uses the term "consultation" (the first draft used the term 
"approval").  Baker & McKenzie's Jonathan Isaacs said the drafters 
left this provision vague in order to reduce criticism from 
business.  On a separate but relevant issue, several companies noted 
at the conference that they have recently been pressured to set up 
unions by the All-China Federation of Trade Unions, which is in the 
middle of a campaign to organize more unions in foreign-invested 
enterprises. 
 
Employment Contracts and Temporary Workers 
------------------------------------------ 
 
¶7. (U) The draft law will encourage the use of open-term contracts 
or longer fixed-term contracts by limiting the number of fixed-term 
contracts per employee to two.  Most companies surveyed use 
fixed-term contracts that range from one to three years.  Service 
companies and small companies are more likely than manufacturing 
companies to use open-term contracts.  U.S. companies are more 
likely than European companies to use open-term (permanent) 
 
GUANGZHOU 00000475  002 OF 002 
 
 
contracts.  To comply with the new law, almost half of companies 
plan to adjust their mix of fixed-term, open-term, and temporary 
employees.  One-third of companies have no plans to make changes. 
 
¶8. (U) Three-quarters of respondents use temporary (seconded) 
employees.  Despite provisions in the draft law that require more 
expenditures on training and benefits to temporary employees, few 
companies plan to reduce the number of temporary workers or stop 
using them altogether.  However, a majority of companies plan to 
negotiate new agreements with labor agencies to comply with the law. 
 The draft law also reduces the maximum hours of part-time employees 
from 30 to 24.  Only one-third of companies plan to hire part-time 
workers in the future (the survey did not say how many companies 
currently hire part-time workers). 
 
Firing Workers 
-------------- 
 
¶9. (U) Two-thirds of companies said the law's provisions on mass 
layoffs will not affect their operations in the foreseeable future. 
The new law requires that, in cases of mass layoffs, companies must 
first fire employees whose social circumstances are least affected 
by the job loss (people without dependents).  Doeringer said similar 
provisions exist in Germany - thus European companies are less 
concerned about this provision than U.S. companies.  In addition, 
because more open-ended contracts will be used under the law, 
companies will need to provide stronger evidence of unsatisfactory 
performance before firing workers.  Though the draft law requires 
more extensive record-keeping in general, Doeringer said 
documentation related to job performance will be particularly 
burdensome. 
 
GOLDBERG