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Under the Chinese mainland's new labour law, employees can claim payment for their years of service
with a company
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While the current financial crisis is bad enough for Hong Kong-based small and medium-sized enterprises (SMEs), a larger challenge is the Chinese mainland's new labour law and the implications it has for those doing business in the mainland.
"Most companies are concerned about the new labour law, because it brings more labour costs and risk to the employer," said May Bai, Human Resources head for the JLJ Group in Shanghai, a consulting firm that specialises in helping foreign firms set up shop in the mainland.
Arbitration cases are three times higher than they were before the law was implemented, according to Ms Bai, because employees are now more aware of the labour contract law, and they know how to protect themselves. She added that employers are now more willing to spend money on drafting an employee handbook that each employee must read, agree to and sign. If even one clause is violated, the employee can be fired legally.
Outsourcing Risk
Other responses to the new labour law include outsourcing human resource functions, or "talent dispatching." A human resource specialist company hires the employees, then outsources them on contract to a manufacturer.
"This way they can actually outsource the risk," Ms Bai said. "The HR company is the actual employer and takes on the risk. A lot of SMEs are choosing this option."
Employers are also dealing with the law by cutting back on new manufacturing plants. Instead of setting up wholly owned foreign enterprises, they establish "representative offices," which can be changed to a wholly owned enterprise or joint venture at a later date.
Compensation Concerns
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Stanley Lau, Deputy Chairman of the Federation of Hong Kong Industries, is quietly lobbying the Central Government for changes to the new labour law
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Stanley Lau, Deputy Chairman of the Federation of Hong Kong Industries, is quietly lobbying the Central Government to have the law changed.
Last month, Federation members met with officials in Beijing to press their case. "The Central Government understands the current situation," Mr Lau said. "They realise that if there are too many regulations or if laws come out at the same time, that will add more difficulties to most companies. They agree that maybe we have to see whether minor policy adjustments are called for."
Authorities recently announced a plan to allow businesses undergoing financial difficulties to defer their social security contributions. Details on who qualifies for the deferment are expected to be released soon.
SMEs cannot be certain what their liabilities are, according to Mr Lau, because the law is new and many of its provisions relating to employee compensation are not as clear-cut as they might appear.
"Under the new labour contract law, employees have the right to claim compensation for their years of service for a company," he said. "If they claim, you may need to settle the problems at the labour court or labour department. We never know what we have to pay. Even if we only pay half the claim, it's a lot of money."
Mr Lau also said that overtime regulations need adjusting, so that employees and employers can work out their own arrangements rather than being dictated to by the government.
Employees, said Mr Lau, are growing increasingly sophisticated in using the law to file lawsuits against firms they perceive to be violating their rights. The only recourse for SMEs is to hire their own lawyers and fight back.
Change of Address
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| Many Hong Kong-owned factories are finding creative ways to minimise the costs of complying with the new mainland labour law |
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Michael Workman, the Hong Kong-based head of Starmark Global Ltd, said that some SMEs are simply closing their factories, while others have opted to move to lower-cost centres. In that regard, SMEs may be able to take advantage of Guangdong's US$5.8 billion plan, unveiled in November, and designed to assist the province's hard-hit manufacturing sector. The plan includes a US$80 million outlay for SMEs and tax rebates for labour-intensive industries. Much of it will help factories relocate to more remote areas, where costs are lower.
One Hong Kong-based factory owner, who asked not to be named, suggested that employers consider changing the way employees work. "Since it was implemented, we can see the changed attitude," the factory owner said. "The trust is a lot worse."
The factory owner said he spends more time negotiating with employees to avoid hiring lawyers. But he also changed the way some of his workers did their jobs and reinstituted the "piecework" system, in which an employee is paid only for his direct output. "By law, we are not cutting what they get, but if they do more we pay more. After the first month of this policy in one of our departments, we probably lost half the people in the department. Those who were left almost doubled their income. We're implementing this in more and more departments," the owner said.
Change of Business
Andreas Lauffs, head of the employment law group at Baker & McKenzie, said legitimate operators need to "find the right balance. You can't be too religious about all these laws and cannot implement them as strictly as you might if you were in the United States or Europe. But you have to comply somewhat because it doesn't help you if you have to go to court and say, ‘well everyone else is doing it.' You have to have a defensible position."
Mr Lauffs also said owners need to reflect on the kind of business they are in. "If you're in an industry that China doesn't want around in the future, a low-value business, then you probably need to change industries."
Related links
JLJ Group
FHKI
Baker & McKenzie
