In an attempt to clear up the confusion about the recently promulgated Labor Law, the State Council just issued the ominously sounding ‘535th Order of the State Council for the issuance of Regulations For the Implementation Of the Labor Contract Law’.

The new regulation cover issues like fixed term contracts, contract terminations, and the legal liability of the various parties involved.

China’s new laws generally require the issuance of a set of regulations within a year or two of promulgation. This is because the original laws are often the first or second to cover a given legal jurisdiction. As a consequence they are short and to the point, and leave a lot to the imagination. Coaches and four horses come to mind.

Once the new law has been issued, the government gauges the response of the various players in the market, and clarifies any issue with a set of implementation regulations.

Legal Confusion

The most contentious element of the original Labor Law was the confusion around what would really happen to someone who had been with a company for more than 10 years.

The suggestion was that these individuals would be entitled to lifetime employment, and this was very frightening for employers, especially to those foreign firms that had committed to a China joint-venture early on. They might actually have a cohort of 10-year veterans that they had inherited from the local joint-venture partner.

There is a low probability that these foreign companies would continue their commitment to a market that had shifted far left. Hence the clarification.

China’s attractiveness as a destination for Foreign Direct Investment is predicated on an end to the Iron Rice Bowl, and the confusion surrounding this issue had made it seem as if other countries should be re-considered as a destination for investment.

I haven’t seen the actual regulations yet but reports indicate that the no fixed term contract cannot be seen as equivalent to a lifetime contract. Employers are simply not going to be burdened with employees who have a you-can’t-fire-me guarantee.

This is a relief, and it may help stem the flow of low-value-added factories leaving for Vietnam and Mexico.

Note:  For your information, this is the full version of the original china-draft-labor-law-third-edition as translated by international law firm Baker & McKensie. If you want to know more, in much greater legal detail, please take a look at China Law.