Beyond Codes of Conduct

Addressing Labor Rights Problems in Chinaby Robert J. RosoffThe attraction of doing business in China is undeniable. The country’s low labor costs, in particular, enable companies to manufacture apparel, footwear, toys, and many other products very cheaply. China is also emerging as a large consumer market for many goods. At the same time, terrible labor rights and human rights conditions persist even as China’s economy develops. Foreign companies must address these conditions if they wish to operate in a socially responsible manner.

Some Western companies are already addressing the problem of labor rights violations in their Chinese factories. Their innovative strategies and programs to address labor law violations are best understood in the context of the requirements of Chinese labor law, typical violations, the types of factories operating in China, and the many codes of conduct that companies have crafted to establish minimum standards for suppliers.

PRC labor law

The 1995 PRC Labor Law is comprehensive, covering labor contracts, working hours, wages, worker safety, child labor, and labor disputes, among other subjects. Government regulations provide additional detail and rights. For example, the law currently mandates a maximum workweek of 40 hours. Minimum wages are established locally, and wages cannot be deducted or delayed without reason. If employees must work more than 40 hours, overtime pay at fixed rates is mandatory. Workers are guaranteed at least one day off every week. Working conditions are required to be safe and sanitary.

In practice, however, the rights of Chinese workers are routinely violated. Workers are often required to work far more than 40 hours a week, have few days off, are paid below the minimum wage, and are not paid required overtime. Improper deductions from wages are common. Some Chinese workers must pay a large sum of money as a “deposit” to their employer, and they may have to pay a “recruitment fee” in order to be hired. These payments can prevent workers from leaving jobs where their rights are violated. Physical abuse of workers, and dangerous working conditions, are also common.

Chinese factories

The types of labor rights violations found in a Chinese factory may depend, to a degree, on the nature of factory ownership and the size of the factory. Four broad types of enterprises exist in China today: private, state-owned, foreign-funded, and township-and-village enterprises. Before the mid-1990s there were clear differences between state-owned “socialist” factories, which offered lifetime employment, housing, and medical care, and private sector factories, which provided little job security, low wages, and no fringe benefits. Today, however, competition and a persistent government effort to privatize state-owned firms has led even these employers to offer less job security, fewer welfare benefits, and strict labor conditions.

Generalizations are difficult, but are possible based on evidence of labor rights abuse in PRC factories:

• Labor rights violations are so widespread in China that violations can be presumed to exist in every factory until proven otherwise.
• Factories fully owned and operated by foreign companies that implement good codes of conduct tend to have few violations.
• Large factories with direct investment from, and management by, Western companies also tend to have fewer violations, because Western companies often stress the importance of labor law compliance. Larger factories also tend to have enough orders to keep production lines going, enabling the factories to pay workers on time.
• A Western company with a good code of conduct will have greater success implementing the code in factories over which it controls a significant amount of the factory’s output, because it will have more negotiating leverage over factory owners.
• If a Western company does not control a significant amount of a factory’s output, it can act together with other companies that use the factory to demand acceptable treatment of workers.
• Factories owned by Hong Kong Chinese, Taiwan, and South Korean companies tend to have worse conditions, as do small, privately owned PRC factories.
• Large non-Western (usually Asian) foreign-funded factories tend to have better compliance than smaller factories.

Codes of conduct and inspections

To meet corporate social responsibility (CSR) obligations in countries like China that have serious labor rights and environmental problems, companies are increasingly adopting codes of conduct that set forth labor rights, human rights, and social, ethical, and environmental requirements for suppliers. According to a recent estimate by the World Bank, there are about 1,000 different codes in existence today. They are issued by companies, multi-stakeholder groups such as the China Working Group, nongovernmental organizations, and unions.

Although the language of the codes may differ, the substance is usually similar in codes adopted by apparel, footwear, and other light manufacturing companies, including: prohibitions on the use of forced labor and child labor; detailed provisions concerning wages, benefits, and terms of employment; limitations concerning hours of work; nondiscrimination guarantees; prohibitions of harassment, abuse, and types of disciplinary action; health and safety policies; and environmental standards.

Companies prefer to adopt one code to govern all their international operations, and some codes declare that workers must have the right to freedom of association and collective bargaining, although in practice these rights are denied to Chinese workers. In 1999, three companies and 21 organizations endorsed “Business Principles for Human Rights of Workers in China,” a code drafted by the China Working Group specifically to address the human rights and labor rights violations common in China.

Companies that manufacture in China using subcontractors have found that merely communicating the contents of their codes to subcontractors is insufficient. Inspections, either by the company’s own inspectors or by professional monitoring companies, are necessary to determine the extent of compliance. Inspectors visit factories, determine compliance with the company code, and inform the company of results. After receiving a report of factory noncompliance, companies then approach factory owners to discuss changes in factory operation with the goal of achieving full compliance.

Codes of conduct and inspections are unquestionably useful. Codes establish higher standards than many subcontractors employ, while inspections ensure greater compliance than would otherwise exist. But in China this code-inspection regime has been only partially successful, for several reasons:

• Although China has an adequate labor law, it is poorly enforced.
• Codes imposed on factory owners raise costs, so owners have a financial incentive to ignore code requirements. Factory owners are becoming increasingly adept at circumventing inspections, through practices such as double bookkeeping and coaching of workers. As a result, inspectors are often deceived and “clean” audit reports often do not reflect reality.
• China has a virtually inexhaustible supply of migrant workers, most of whom are ignorant of their rights under Chinese law and are willing to work under any conditions without protest.
• The Chinese government prohibits the existence of independent trade unions, leaving workers without representatives who can discuss violations with management. Workers who have tried to form independent unions or lead labor protests have been imprisoned.
• Western companies’ sourcing practices can contribute to the problem when, for example, large orders are made with short deadlines, the lowest possible prices are demanded, and orders are changed at the last minute. Factory owners are afraid to lose business if they refuse orders, even if they have to violate the law to complete an order.

In addition, companies manufacturing in China that seriously attempt to implement good codes of conduct have found the effort to be expensive and only partly successful. Therefore, some companies are seeking more creative strategies to ensure the protection of their subcontractors’ employees in China.

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Labor Rights Resources

The Labor Law of the People’s Republic of China
www.usmra.com/china/Labour%20Law.htm

Company Codes of Conduct and International Standards: An Analytical Comparison, Part I of II: Apparel, Footwear and Light Manufacturing; Agribusiness; Tourism
www.worldbank.org/privatesector/csr/doc/Company%20Codes%20of%20Conduct.pdf

Business Principles for Human Rights of Workers in China
www.amnestyusa.org/business/chinaprinciples.html

For information on Reebok and other companies’ experiments with labor rights improvements in China, see:

CECC Roundtable: Codes of Conduct: U.S. Corporate Compliance Programs and Working Conditions in Chinese Factories
www.cecc.gov/pages/roundtables/042803/index.php
www.cecc.gov/pages/roundtables/042803/cahn.php
www.cecc.gov/pages/roundtables/042803/niepold.php
www.cecc.gov/pages/roundtables/042803/vanHeerden.php
www.cecc.gov/pages/roundtables/042803/rosenbaum.php
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New strategies

Faced with recurrent labor rights abuse in subcontractor factories despite code-inspection regimes, a few companies have been experimenting with more innovative strategies to address abuses. Such strategies include empowering Chinese workers through democratic factory elections of representatives; educating workers about their rights under Chinese labor law; seeking to protect the rights of labor activists; and working with the Chinese business community.

Democratic elections

In 2001 and 2002, Reebok, Ltd. facilitated the democratic election of union representatives using secret ballots in one Hong Kong-invested factory and one Taiwan-invested factory to which it subcontracts. It was the first open election of its type in China, and it took place with the knowledge of provincial officials of the state-controlled All-China Federation of Trade Unions. Setting up the elections and educating the elected representatives about how to carry out the duties of trade union members has been challenging, but Reebok believes that giving workers an independent voice in the operation of factories will reduce labor rights violations and lead to better working conditions, which, in turn, will strengthen the loyalty of workers and be good for business.

Educating workers about the PRC Labor Law

A number of companies, including Nike Corp., Adidas-Solomon AG, Reebok, and Sears, Roebuck & Co. have produced posters in Chinese that summarize the main provisions of China’s Labor Law and include telephone numbers of PRC officials responsible for law enforcement. The posters also include the phone number of a call center established to provide information and advice to workers who believe their rights are being violated. In 2003, the posters were hung in factories used by these companies, and the call center has been receiving complaints and requests for advice. It is too early to determine whether this attempt at worker education has reduced labor rights violations in the targeted factories, but the more Chinese workers learn they have rights under Chinese law, the more they can be expected to seek to end violations of these rights.

Protecting Chinese labor activists

Labor protests are increasing in China as a result of labor rights abuse, rising unemployment, lack of a social safety net, fraud by some factory owners, and lack of responsiveness by government officials. Often, when workers protest in large numbers, the Chinese government will arrest and imprison the protest leaders and pay off the workers. For many years, John Kamm has proved that Western businesspeople can effectively approach the PRC government and help to free these wrongfully imprisoned labor rights activists. Although most of his interventions have occurred during confidential meetings with PRC officials, Kamm began this work publicly in 1990 as vice president of Occidental Chemical and president of the American Chamber of Commerce in Hong Kong. At a public dinner he called on Beijing’s senior representative in Hong Kong to release Yao Yongzhan, a student who had been detained and tortured shortly after the Tiananmen massacre. About three weeks later, Yao was released. Large companies have taken similar action. Reebok wrote a letter to the Indonesian president urging the release of imprisoned Indonesian labor rights activist, Dita Sari, who was also released. Chinese workers must be permitted to assert their rights under Chinese law. These examples indicate that Western companies can take beneficial actions on behalf of wrongfully imprisoned citizens without harming company business.

Engaging the Chinese business community

Adidas, Nike, and Gap Inc. have agreed to participate in a project to engage Chinese small and medium-sized enterprises (SMEs) not currently manufacturing directly for Western companies. The primary goal will be to convince SMEs to comply with China’s Labor Law and company codes of conduct, so Western companies can order from them directly. These SME trainings are part of a larger project undertaken by the China Working Group to engage the Chinese business community concerning labor rights and CSR. With China’s entry into the World Trade Organization, there is a growing awareness and interest within the Chinese business community concerning CSR. Efforts to build awareness of CSR within Chinese society should help improve labor conditions.

Ways to get started

Foreign companies can take a number of actions to address labor rights problems in China. First, they can own and operate Chinese factories directly. If this is not possible, they can significantly influence a factory’s conditions by sharing the costs of upgrading labor standards, especially if they control a large percentage of the factory’s output either alone or together with other companies. Second, they can, and should, adopt a detailed code of conduct and hire competent and experienced monitors to assess compliance, while ensuring their sourcing practices do not contribute to these problems. Third, since codes and monitoring are only partly effective in China, companies can, and should, seek to empower Chinese workers to act on their own behalf by educating them about their rights, by helping workers elect their own factory representatives, and by seeking to protect the right of workers to protest abuses. Fourth, companies can seek to engage the Chinese business community concerning the importance of CSR. Finally, companies can, and should, educate themselves about their options, through organizations such as the China Working Group and others. It is difficult to meet basic CSR requirements when manufacturing in China, but innovative techniques can help make this possible.

Robert J. Rosoff is director of the China Working Group, an organization composed of companies, nongovernmental organizations, and socially responsible investors working together to address labor rights problems in China.