According to the new 98-article-long "Labor Contract Law", employees of at least 10 years standing are entitled to contracts that protect them from being dismissed without cause. The new law also requires employers to contribute to employees' social security accounts and sets wage standards for employees on probation and working overtime.
China's new labor contract law targets, primarily domestic companies that do not have labor contracts and that generally fail to comply with China's old laws. Foreign companies have had a stronger track record of signing contracts with employees and bringing to China their global work rules and environmental, health and safety practices.
According to statistics from the All-China Federation of Trade Unions in 2008, 40 percent of private-sector employees lack labor contracts and there are many cases of wage default and forced labor. The new law is to strengthen China's overall economy and regulation.
The law prompts companies to improve their management, capital-labor relations and productivity. A sound market economy system in return would benefit businesses -- both domestic and foreign companies.
Compared to the old contract law issued in 1994, the new law is supposed to provide greater job security.
Ever since the law was approved by China's top legislature in June 2007, it had aroused heated discussion and concern among domestic and foreign companies.
China appealed to foreign investors with its cheap labor, its preferential investment policies and its immense market. Employers feared the new law would have meant bigger severance payments and higher operational costs.
In the short term, it has been predicted that foreign companies investing in supermarket chains, restaurants, building industries and other low-end manufacturing, which abuse cheap labors and avoid paying social security would suffer some losses. But in the long run, the new labor contract law would not negatively impact China's competitiveness and appeal as a destination for foreign investment.
Small and medium enterprises in particular have already particularly felt the effects of the law. For example, some Korean companies have already decided to move their business from China to Vietnam or other developing countries where labor is much cheaper. About 98 percent of Korean enterprises in China are independent small and medium firms.
Other companies reacted to the law by proactively firing employees who would have come under the new guidelines. In October, US-based retail giant Wal-Mart fired about 100 employees at a sourcing center in China. The company said the the layoff was part of its global restructuring. LG and Olympus have respectively announced plans to lay off employees. Carrefour China has asked over 40,000 of its Chinese employees to re-sign a two-year labor contract before December 28, 2007 regardless of an employees' service length or the expiration of their current labor contract.