Monday, April 16, 2007

What Foreign Companies Need to Know About Chinese Labor Law

Fast Food Giants in Chinese Hot Water

Kentucky Fried Chicken and McDonalds both grabbed news headlines in China in the last few weeks. This time, they were not noted for their famed fried chicken or burgers; they were in trouble with the Chinese authorities for alleged violations of local minimum wages regulation in the Southern province of Guangdong.

Forbes has an excellent article, reporting the allegations of violations:
A newspaper in the city of Guangzhou had charged that McDonald’s and two chains owned by Yum! , KFC and Pizza Hut, were paying their workers, mainly students, wages as much as 40% below the local minimum for part-timers of 7.5 yuan (97 cents) an hour.

According to provincial labor authorities in charge of investigating the alleged violations, the foreign companies did not violate local minimum wage regulations. But, the companies were cleared only because that the minimum wage protection does not extend to college students, who make up a large portion of the two companies stores in Guangdong province.

Negative Impact

Any PR specialist would probably conclude that the events unfolded in China constitute a PR disaster for the two fast food giants in the local market. And the local market, unfortunately for the companies, is one of the world’s fastest and most important markets for them. Even though they have been cleared for the minimum wage issue, they have not for alleged working hour violations. As the corporate executives in America wait for the other shoe to drop, the damage might have already been done to the companies involved. To the Chinese consumers, the companies look just like what Karl Marx described in his treatise on the cruelties of capitalists, greedy, blood thirsty creatures that suck every ounce of value out of their workers…

To mitigate the negative impact of the bad press, both McDonalds’s and Yum! agreed to more unions in China. The New York Times reported on April 10, 2007 that McDonald’s, following the footsteps of Wal-Mart, gave into governmental pressure and agreed the formation of unions in its 750 outlets in China.

In light of the recent events, foreign companies are likely to remain under scrutiny of both local government authorities and consumers. China Business Blog states that:

The All China Federation of Trade Unions (ACFTU) is planning to get 80 percent of foreign companies to sign up by the end of 2008, and anyone running an MNC in China might want to plan for the day when they knock on the door - and to make sure, well in advance, that the Union rep (or the undercover reporter that precedes him) will not find any low-hanging fruit in which to stew the company at China’s most efficient court – the Court of Public Opinion.

Lessons for McDonald’s, Yum! and Everyone Going to China

1. Know the Chinese Labor Law

Like many other laws and regulations, the Chinese regulations over labor issues are very complicated. The most fundamental piece of legislation is the Labor Law of the People’s Republic of China (“Labor Law”). Chapter Five of the Labor Law sets the standards for wages, and it states as follows:

Art. 48 China hereby institutes a minimum wage protection system. Minimum wage standard is to be determined by the government authorities in provinces, autonomous regions, and municipalities. And such governments shall register minimum wage standard with the State Council.
Employers shall not pay wages lower than local minimum wage standard.

Art.49 When ascertaining and adjusting minimum wage standard, local governments consider comprehensively the following factors:
(1) Employee’s situation and minimum living standard;
(2) Average wage level;
(3) Production rate;
(4) Employment situation;
(5) Economic development differences between regions.

In addition to the Labor Law, the Ministry of Labor Social Security issued the Regulation on Minimum Wage (“Wage Regulation”) in January 2004, which came into effect on March 1, 2004. Wage Regulation states:
Art. Five Minimum wages standard shall apply in two forms, monthly minimum wage and hourly minimum wage. Monthly minimum wage standard applies to full time employees; hourly minimum wage standard applies to part time employees.
Art. Six When ascertaining and adjusting minimum wage standard, local governments consider local minimum living expenses, city and township consumer price index, worker social security deduction and housing deduction, worker average wages, economic development level, and employment situation.

2. Due Diligence

As shown above in the Labor Law and Wage Regulation, local government (on the provincial and similar level) is left with the discretion to set the minimum wage standard. Therefore, minimum wages can differ significantly from province to province. Variations of minimum wage standards could be a source for trouble for foreign companies. Needless to say, both McDonalds’ and Yum had their first rate in-house counsel, large international law firm counsel, as well as local Chinese counsel examine labor regulations in different regions of China. However, somehow, somewhere details still failed them.

In addition to seeking legal counsel, foreign companies need to take additional due diligence measure to avoid brushes with the Chinese authorities, and more importantly bad PR in the Chinese press.

a. Communication with Local Department of Labor and Social Security
Wages Regulation stipulates in Article Four that people’s government above the county level bears the administrative responsibility of enforcing the minimum wage compliance. Therefore, it should serve a foreign company to have a local agent to seek clarification from relevant enforcing government bodies regarding minimum wage standard in specific regions.

b. Union organizations are given a rule in the enforcement of the minimum wage standards in China too. Specifically, union bodies have the legal right to report violation and request enforcement actions from relevant administrative government labor agencies. So, communication and corporation with such union organizations in labor matters such as minimum wages, working hours would also benefit foreign companies.

3. Doing More Than the Minimum

As a direct result of the alleged violations of McDonalds’ and Yum, foreign companies are likely to remain under the microscope for a long time. Providing local employees more than what is the minimum could be a proactive action against possible allegations of wrong doing. Compliance with the law is one matter; provisions beyond minimum local governmental requirement is quite another in that it proactively dispels suspicions of violation simply because working for a foreign company means higher wages (This is actually the overall general impression among professionals in China.). Meanwhile, higher wages and better pay packages will tend to attract top notch Chinese talents.

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