Unionization and Collective Bargaining: New Tools for Social Harmony

As the PRC government renews its unionization campaign, companies must prepare to respond to greater labor pressures.by K. Lesli Ligorner and Todd Shengqiang LiaoAll is no longer quiet on the unionization front. After putting its unionization drive on hold in 2008 because of the financial crisis, the All-China Federation of Trade Unions (ACFTU), China’s only government-recognized union, has reenergized its efforts to unionize foreign-invested enterprises (FIEs). Starting in May 2010, ACFTU began issuing a series of notices that requested its local branches to increase pressure on private domestic companies and FIEs to establish unions and sign collective contracts with their employees. The notices indicate that the PRC government is resuming its unionization campaign and highlight the focus on implementing collective bargaining agreements. FIEs would do well to consider the legal and practical implications of the new notices on their operations and prepare to respond to greater unionization and collective bargaining pressures.

A look back

The current unionization campaign builds on a foundation that solidified in 2006 when ACFTU set up branches in all Wal-Mart Stores, Inc.’s outlets in China. After failing to make considerable progress in unionizing several other multinational corporations (MNCs), ACFTU in June 2008 launched an aggressive campaign that focused on unionizing the Chinese subsidiaries of Fortune 500 companies. Though many MNCs initially resisted the campaign, some companies believed that unionization was inevitable and chose to work with ACFTU officials, including by designating the union chair and committee members. According to ACFTU reports, the unionization rate among Fortune 500 companies in China rose from less than 50 percent to 83 percent in 2008 as a result of the campaign.

PRC government efforts to encourage collective bargaining also expanded during that time. ACFTU, the PRC Ministry of Human Resources and Social Security (MOHRSS), and the China Enterprise Confederation in April 2008 jointly introduced the Rainbow Plan—which originally aimed to establish collective contracts in large companies in eastern China by 2009, in central China by 2010, and in the remainder of China by 2012. (The final plan was not officially issued and implemented until May 2010 [see below]). By September 2008, 108 Wal-Mart outlets in China had entered into collective contracts, and ACFTU reports that by the end of 2009 more than 1.2 million collective contracts were signed involving more than 2 million enterprises and nearly 162 million workers nationwide.

During the global financial crisis, which started later in 2008, ACFTU temporarily halted unionization and collective bargaining efforts and shifted its focus to mitigating the risks of unemployment as enterprises closed their doors and reduced production capacity. Though sporadic unionization activity took place in 2009, ACFTU’s activity did not become more concerted and directed until spring 2010, with the release of a wave of new notices and regulations.

• The Notice on Pushing Forward Collective Bargaining and the Implementation of the Rainbow Plan, jointly published by ACFTU and MOHRSS on May 5, requires trade unions to focus on collective wage negotiations in private and labor-intensive enterprises. The notice further encourages companies and employees to establish collective contracts regarding wage-related topics, such as salary levels and work quotas.
• A revised Rainbow Plan, issued on May 25, aims to increase collective bargaining coverage to more than 60 percent in 2010 and to more than 80 percent by 2011. The plan focuses on collective bargaining for fair wages to ensure that companies increase wages in proportion to their revenue growth. It also targets companies that have not engaged in collective bargaining, have expired labor contracts, or have consistently given low to no salary increases.
• The Urgent Notice on Further Advancing the Establishment and Use of Enterprise Labor Unions, issued by ACFTU on June 4, directs all ACFTU branches to advance the establishment of trade unions in private enterprises, including FIEs and entities with investors from Hong Kong, Macao, and Taiwan. The notice also calls for expanding union representation for migrant workers.

On July 3, ACFTU requested that its local branches offer to engage in collective bargaining with all enterprises that have not established a collective bargaining mechanism, have refused to establish such a mechanism, or have expired collective bargaining contracts. According to PRC media, local ACFTU branches have the jurisdiction and authority to issue a “notice of rectification recommendations” to enterprises that reject or fail to respond to the offer in a timely manner. If a company refuses to take action in response to the recommendations, the local ACFTU branch may raise the request with local labor authorities and work with such authorities to investigate and pursue legal liabilities against the company.

Labor unrest emerges—and the government responds

Many observers believe that the renewed unionization and collective contract campaign was in part prompted by recent labor unrest and worker demands for wage increases throughout China. Most notably, roughly 1,900 workers (including many low-paid interns) at Honda Motor Co., Ltd.’s auto parts company in Foshan, Guangdong, went on strike in May to demand a monthly salary increase of ¥800 ($118). The employees bypassed the official trade union to organize the strike and resisted confrontations with ACFTU representatives who requested that the employees return to work. The strike lasted two weeks before Honda agreed to increase monthly wages by roughly ¥500 ($74) through negotiations with employee-elected representatives (as opposed to union representatives). After the Honda incident, other similar strikes largely planned and executed outside the authority of official ACFTU-controlled trade unions occurred throughout China—most of them settled with the employers agreeing to a wage increase.

The recent spread of labor unrest in part reflects the deepening class conflict in China. Since the reform and opening policy began in 1978, China’s rapid economic development has been relying on low-wage, labor-intensive industries. Rather than benefiting from economic growth, however, many workers in these industries are struggling against inflation and possess little tangible wealth. Aware of the potential threats posed by unequal income distribution, the PRC government has been encouraging wage increases. At the same time, the government is concerned that the independent grassroots labor movement could undermine social stability. To address these issues, PRC leaders have formed a top-down strategy to increase workers’ income gradually. An essential aspect of this strategy is unionization and collective bargaining guided by ACFTU-controlled trade unions.

What to expect from the renewed campaign

Greater unionization pressures

As implementation of the Rainbow Plan becomes national policy, the PRC government sees a growing urgency for enterprises to establish trade unions, despite the lack of a clear statutory requirement for this to occur. Unlike the previous unionization campaign that focused on Fortune 500 companies, the current campaign also targets small and medium-sized FIEs. ACFTU branches will likely contact companies without unions to set up union preparation teams through in-person meetings with employees. Based on past experience, ACFTU may also take countermeasures against “non-cooperative” companies, such as bringing negative media attention to the companies, lobbying local authorities to impose sanctions on the companies, withholding government approvals, or initiating regulatory-related audits. Many MNCs that operate without trade unions in China are considering whether to change their “anti-union” strategy based on the risk of delaying what appears to be inevitable. Companies that have agreed to unionize have focused on maximizing the management’s input in the establishment process and minimizing the disruption to business operations.

The PRC government is also using the collection of trade union dues to increase unionization pressures. Under the PRC Trade Union Law, the employer, not employees, must contribute the dues if the company is not unionized. In many second- and third-tier cities, the local tax authorities collect and hold the dues in escrow until the company establishes a trade union. Some districts in first-tier cities such as Beijing and Guangzhou, Guangdong, are also threatening to withhold these funds unless a company agrees to establish a trade union. The pressure to unionize through the collection of union dues by tax authorities is likely to continue and broaden across more locations in China as ACFTU aims to meet its previously mentioned directives.

Once a company forms a trade union, the employer must fund the trade union with 2 percent of its gross payroll. According to ACFTU regulations, the dues must be paid to the upper-level ACFTU branch, which will then refund at least 40 percent of the dues to the company’s trade union; the remainder of the dues is shared among ACFTU and its branches.

More collective bargaining demands

Companies with or without unions will likely see higher demands for collective bargaining focused on wage increases. In determining how to respond to this pressure, many employers are considering the influence of the trade union in the collective bargaining process and the fact that the lack of a trade union will place such authority in the hands of employee-elected representatives and local ACFTU branches. Accordingly, some companies believe that it is more beneficial to guide their own trade unions through the collective bargaining process rather than involve the local ACFTU branch.

In the past, wages negotiated through collective bargaining usually reflected the minimum wages required by local regulations. ACFTU and some local governments plan to replace this practice with regular pay raises that are higher than the annual local minimum wage increases. The amount of the increase would generally depend on local regulations, local ACFTU branch requirements, salaries of other companies in the same industry or region, the previous year’s average local salary, inflation indexes, and the employer’s corresponding profit increase. The implementation of collective bargaining will also likely restrict the employer’s ability to implement company rules. Because collective contract provisions must cover company rules that affect employee interests, rules issued unilaterally by the employer without consulting employees would likely be deemed ineffective and nonbinding.

Building on the Rainbow Plan, provincial and municipal governments are implementing local collective bargaining regulations, which frequently impose stricter standards on employers than the national rules do. Drawing on the experience of successfully influencing the 2008 PRC Labor Contract Law, many local ACFTU branches are actively involved in drafting local collective bargaining regulations (see Regional Snapshot: Shenzhen’s Draft Collective Bargaining Rules). In some provinces such as Guangdong, the local ACFTU branches are drafting the regulations themselves. As of June, 23 provinces and municipalities have issued local collective bargaining regulations, and 13 provinces and cities have issued formal government guidance promoting collective bargaining initiatives. Many other localities are reviewing similar draft legislation.

Be prepared

The PRC government’s goals for unionization and collective contracts are clear and unwavering: All MNCs in China will have trade unions and collective bargaining agreements that apply new minimum standards for their employees. Companies of all industries and sizes should be proactive and formulate a response to this renewed government push. As initial steps, companies should think about employees that might be beneficial on the union preparation committee and about what the union structure would be if the company has multiple branches or entities across China. Companies could also consider drafting collective contract templates to prepare for potential negotiation requests from an employee or new local rules.

The speed at which industry-wide and national and local regulatory developments are taking place requires advance preparation. Companies cannot afford to be caught unprepared by a request to unionize or engage in collective bargaining. Companies should also test the efficacy of their work rules before an employee challenges his or her termination of employment based on work rule violations, which would require a labor arbitration committee to review the rules. The preparation for increasing labor pressures requires vigilance and careful thought as to how to proceed in this ever-changing environment, which is just as new for the PRC government as it is for MNCs and their Chinese employees.

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Regional Snapshot: Shenzhen’s Draft Collective Bargaining Rules

The Shenzhen People’s Congress on August 13 released for comment the Draft Rules on Collective Bargaining in the Shenzhen Special Economic Zone. If implemented, the rules would place greater legal responsibility on employers to respond to collective bargaining offers and to protect employee representatives in the negotiations.

According to the draft rules, a company must conduct collective bargaining regarding wage adjustments with employees at least once a year. If at least 20 percent of employees request collective bargaining on wages, the company’s union must submit a request to the company. If a company does not have a labor union, the local “sub-district trade union” would submit a collective bargaining request to the company on the employees’ behalf. Either the employer or employees may make an offer for collective bargaining, and the other party must respond within 10 business days of receiving the offer. If the employer refuses the offer to negotiate without justification and fails to come to the bargaining table within a specified time limit set by the labor authority, the employer would face a fine ranging from ¥5,000 ($734) to ¥50,000 ($7,340).

The draft rules would provide job protection to bargaining employees by forbidding the company from terminating the labor contracts or reducing the wages of participating representatives during the collective bargaining process. If the employer violates these rules by disturbing or halting the negotiations, and the employee proposes terminating his or her employment contract, the employer must pay statutory severance. If the employer’s violation of the rules leads to a shutdown or work stoppage, the employer would not have the right to terminate the employee’s employment contract.

Another aspect of the draft legislation would provide for a binding resolution if an impasse occurs in the collective bargaining process. If the impasse cannot be resolved by the parties, the parties may apply to the local labor relations coordination committee for mediation. The local labor relations coordination committee must then set up a panel within five days of receiving the application to decide on the issue.

—K. Lesli Ligorner and Todd Shengqiang Liao
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[author] K. Lesli Ligorner ([email protected]) is a partner at Paul, Hastings, Janofsky & Walker LLP and chairs the firm’s employment law practice in China. Todd Shengqiang Liao ([email protected]) is an associate at the firm’s Shanghai office. [/author]