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“Human Resources: Dispute Resolution in the Chinese Workplace”

Submitted April 23, 2006

By Cindy Dyar and Erica Miller

Prepared for the International Economic Development Program,

Ford School of Public Policy, University of Michigan

Executive Summary

This paper is intended to offer an impartial mechanism for resolving employer-employee disputes in the Chinese workplace. The authors explore the current policy problem as it exists in China today, then examine the work of the International Labour Organization’s Cambodian Arbitration Council. The Arbitration Council model, the authors find, is one that merits experimentation in China’s manufacturing sector.

“The Human Resources Problem: Dispute Resolution in the Chinese Workplace”

Introduction

With China’s rapid economic reforms has come increasing pressure on the workplace environment. Business-owners, both of state-owned enterprises and of joint ventures, are expected to be profitable, productive, and competitive. Meanwhile, the symbiotic relationship between employers and employees has been dynamically strained, with pressure on wages, speed of production, workplace conditions, and hours worked.

Currently, the most readily available sources for information and opinion on workplace relations in China seem to come from advocacy groups. From the Western world, labor unions and human rights groups have expressed outrage at China’s labor rights, while Chinese officials point to the China’s strong labor laws and cooperative unions.[1] Conspicuously silent in the conversation have been Chinese civil society groups, some of whom have begun to speak out against these working conditions.

As the manufacturing sector in China continues to flourish, so the spotlight on workplace conditions in its factories continue to shine. As a policy brief based on research and meetings with policymakers and advocates, the goal of this paper is to begin to look at establishing mutually agreeable grievance and arbitration procedures that ensure worker safety while enabling employers to be profitable, specifically in the growing garment industry.

The Policy Problem: Human Resources in China: Current avenues for labor disputes

In Chinese labor law, the primary crux of the issue of workplace safety is that there are many rules and much official machinery for monitoring health and safety in China, but these laws are almost never implemented. [2]

At present, the process for resolution of labor disputes is a simple process that is far more satisfactory for the employers than for the employees. China’s system for this is, like its wage determination system, individually established. This is more problematic for private, decentralized companies (such as the coal industry[3]) than for larger, state-wide corporations. As we focus on textiles here, we will examine the effect and feasibility of policy changes in the garment industry, an industry in which China produces the most of any country in the world.

Recently, if there has indeed been an evident, persistent problem in any of these factory sites that is also reported, the authorities have shut it down. If it is a minor problem, the serious repercussions of which have not yet been apparent, authorities will deny wrongdoing (Han, 2002).[4]

The workers themselves are not involved in this reporting, enforcement or operational process. Rather, the central authorities serve as the voices of the workers. Indeed, in China, central authorities have expressed the need for local employers to do more monitoring.

On a visit to a manufacturing plant, a model for recent manufacturing in China, the issue of labor dispute is a moot one. When workers find themselves or their co-workers, in immediate danger, they have the power to stop the line and call a supervisor, yet there is no systematic method for filing a grievance if a machine part is consistently underperforming to the point of hazard (Hyundai Plant Tour, February 28, 2006).

So the power structure, visually, is given with all of its players:

Currently missing from this formulation are civil society, intergovernmental organizations, and competitive labor unions.[5] Essentially, these organizations do not operate in China with the force that they may have in other large countries, such as India and the United States.

We believe that it is important to examine a policy recommendation that would incorporate incremental and feasible changes in grievance and arbitration proceedings. Since the ILO does have a presence in China, we wish to explore the possibilities of experimenting with a policy that has been proven to be effective elsewhere, and that comes from a less controversial entity than civil society and labor unions.

Section One: Dispute Resolution Models: Learning from Cambodia’s Experience

Garment factories in Cambodia were at the center of the sweatshop scandals of the 1990s. Foreign companies found it easy to take advantage of Cambodia’s seemingly endless supply of cheap labor: these companies contracted with subcontractors who owned factories in the country and the foreign companies had little – if any – interaction with the workforce. Present-day China is similar to Cambodia in its excessive supply of labor and international buffer zone between ownership and management. Since almost 80% of Cambodia’s population lives on less than $2 per day, it was extremely easy to fill factories with employees and pay them an average wage of 500 riels (about $.12) for eight to ten hours of work. No comprehensive Labor Law existed in the country until 1997, so labor disputes were resolved in the regular court system. However, since full court decisions are not published, judges often ruled in favor of the party that paid the highest bribe.

After horrendous conditions in these factories were discovered and received attention from media across the world, foreign companies such as Nike and Gap were the focus of intense pressure from NGOs and student groups in the United States. Since these foreign companies did not directly interact with the Cambodian employees and had no future plans to directly oversee the work, the idea of a dispute resolution model that allowed for employees to bring grievances against their direct employers was created.

The Cambodian government was receptive to the creation of the AC for two primary reasons: (1) Cambodia was susceptible to international pressure since it receives millions of dollars in international aid each year, and (2) the foreign companies could simply cease to contract with Cambodian subcontractors if the government was not receptive to such a model that would ease international pressure on the companies.

Section Two: Cambodia’s Arbitration Council

To manage such claims of labor conditions, the government permitted the International Labor Organization (ILO) to establish and fund the Arbitration Council (AC). Cambodia’s 1997 Labor Law provides for the creation of the (AC), which was actually established in 2003.[6]

The AC has a tripartite structure: union officials nominate arbitrators in the first arm, employer associations nominate arbitrators in the second arm, and the Ministry of Social Affairs, Labour, Vocational Training, and Youth Rehabilitation (MoSALVY) nominates arbitrators in the third arm. An equal number of arbitrators must serve on each arm, with a minimum of 15 total arbitrators to serve at one time. An Arbitration Panel comprised of three arbitrators – one from each arm – presides over each dispute. Both the employer and employee parties to a dispute nominate an arbitrator for the Panel, and in turn, each of those arbitrators nominates a third arbitrator from the neutral arm.

The AC resolves collective disputes, primarily in the garment industry. The AC does not maintain jurisdiction over individual labor disputes, and a collective dispute is defined as: "Any dispute that arises between one or more employers and a certain number of their staff over working conditions, the exercise of the recognized rights of professional organizations, the recognition of professional organizations within the enterprise, and issues regarding relations between employers and workers, and this dispute could jeopardize the effective operation of the enterprise or social peacefulness."[7]

A proceeding before the AC is considered a “last stop”; if the parties to a collective dispute are unable to reach agreement, a labor inspector from MoSALVY will first attempt conciliation. If the parties are again unable to reach agreement in the presence of a labor inspector, he or she refers the dispute to the AC. Before issuing a decision, the Arbitration Panel will attempt mediation; if the parties cannot agree, the Panel will conduct a hearing and issue a decision. The Panel must issue an Arbitral Award within 15 days of the hearing, unless both parties agree to an extension.

The AC arbitrates two types of collective disputes: (1) rights disputes and (2) interests disputes.[8] A rights dispute relates to the existing legal rights of the parties, as provided under the labor law, prior jurisprudence, or a collective agreement. An interests dispute relates to a future benefit and is not currently considered an entitlement under the law.

The AC does not have power to create binding awards unless agreed upon by the parties. If both parties to a dispute agree upon binding arbitration, neither party will have the power to oppose the award, which will become enforceable immediately. If either or both parties do not agree to binding arbitration, the arbitration becomes non-binding and either party maintains the right to oppose the award. If either or both parties file an opposition, the award will become unenforceable; if neither party files an opposition within eight calendar days, the award will become enforceable.

Strikes and lockouts are both illegal once a dispute is in arbitration; these are legal measures if (1) one party rejects the Arbitral Award, or (2) if the Arbitration Panel fails to comply with the time limits on issuing an Award. After an award is issued in a non-binding arbitration and either or both parties object within eight calendar days, both parties have the right to conduct a strike or lockout.

Section Three: Success of the Cambodian Arbitration Council[9]

The Arbitration Council compiles statistics on its case intake and hearing rates every sixth months. The latest statistics available analyze the period from July 1 to December 2004. During this period, the AC received 65 cases, more than triple the amount received during the same six month period in 2003. Most notably, there was a 19 percent decline from the first six month period in 2004 in the number of cases with strikes involved. Although a considerable body of jurisprudence in Cambodia exists in the area of industrial relations, new points of jurisprudence for this six month period include the jurisdiction of the Arbitration Council, the existence and interpretation of labor contracts, and union discrimination.

|Number of cases received |65 |

|Number of cases settled without an award |23 |

|Number of cases in which an award was issued |42 |

|Number of cases where objection was filed against award |28 |

|Number of cases where strikes were involved |21 |

|Average number of workers involved in a dispute where an award was issued |365 |

|Average number of workers involved in a dispute where an award was not |241 |

|issued | |

Figure 1 represents statistics from cases registered with the Secretariat of the Arbitration Council during the period from July 1 – December 31 2004.

Figure 2 below demonstrates the true success of the AC: more than one-third of cases were settling with an agreement during the actual arbitration process (either mediation before arbitration, or agreements between the parties before the award was issued); and almost one-quarter of cases were entirely or substantially resolved by the issuance of an award.

[pic]

Figure 2 represents the outcome of cases registered with the Secretariat of the Arbitration Council each month during the period from July 1 – December 31 2004 only.

Section Four: The implementation of a dispute resolution mechanism would provide employees with a voice

China monopolizes much of the international garment industry – 16 percent of the world's market in 2004 and projected to capture up to 50 percent within the next decade. (Comtex, 2005, p. 1). Although labor conditions in China’s factories – especially the newer garment industry – are not up to national or international standards, employees have no procedure available to grieve individual or group workplace disputes. Further, China might never agree to independent unionization of industries or workers, out of fear that unions would strike to demand higher wages and better labor conditions.

A procedural dispute resolution mechanism would provide a means for employees to address workplace issues without quitting their positions or continue to work in unsafe environments with few benefits. Such a mechanism would also quell uprisings from employees demanding to be heard, and would permit China to stave off complete independent unionization in the near future.

Section Five: A neutral arbitral body would attract more international businesses

Although currently, manufacturing and garment corporations are relocating to China because of its lax labor standards and virtual non-implementation of existing regulations, this trend cannot continue indefinitely. A recent New York Times article acknowledges that although a surge in China’s clothing exports has taken business from other nations, the American and European domestic lobbies for the textile and apparel industries “are powerful enough that they have prodded their governments into considering temporary limits on Chinese products.” (Becker, 2005, p. 1).

Some American corporations are also pressured by their stakeholders to practice corporate social responsibility and maintain fair labor standards through their contracts and subcontractors. In the 1990s, some corporations attempted to escape responsibility by denying their role in the employment practices of their overseas factories. However, wide press coverage and domestic demonstrations against conditions in overseas sweatshops resulted in corporations cracking down on contractors and subcontractors that did not practice fair labor standards. Constant public pressure has ensured that at least American-based corporations maintain some awareness of the labor conditions in their overseas factories.[10]

China’s unfair labor practices are beginning to be publicized and cannot escape international awareness. Creation of a neutral arbitral body would demonstrate the nation’s good faith effort in attempting to at least minimally regulate the conditions of its factories. Corporations are attracted to China because of its cheap and exhaustive supply of labor, and a dispute mechanism would allow corporations to avoid claims of indirect human rights abuses.

Alternate Possibilities

While we focus in depth on a very specific policy recommendation, we must pause here briefly to consider methods—some policy options, some not—for effecting greater transparency in the grievance and arbitration procedures in China.

International Pressure

A staggering 45% of foreign direct investment (FDI) in China goes to the manufacturing sector, with a very highly respected American presence (Craig Allen, February 27, 2006). Should the United States Government extend its democratizing foreign policy to China, an unlikely event, leveraging this presence with a demand that China take steps towards transparency and evenhandedness in its labor disputes. The leverage of an FDI withdrawal in favor of balanced arbitration procedures might serve as an effective bargaining chip.

Shop Steward Program

China might implement a policy whereby for each existing factory, one worker is authorized to address management representatives regarding workplace issues and disputes on behalf of the workers. This is mutually beneficial: as workers would benefit from a spokesperson, the company would be able to have complaints funneled through one person, perhaps avoiding the bad publicity and expense that comes from ad hoc protests. A critical component to this would be implementation.

Dialogue Grants

The Ford Foundation-China allocates funding for Rights and Law (Ford Foundation meeting, February 28, 2006). A forum between employees and employers could be annually or biannually funded, with employees and employers from all provinces attending a rotating site. The intention would be to have a public national dialogue on workplace communications with a presiding consulate of even numbers of employees and employers. Decisions from the previous year would be tracked and evaluated; benchmarks from the Chinese Constitution would be set and met.

While these recommendations and more are on the wish list of many advocacy groups, we must consider them as secondary possibilities in favor of a more feasible, comprehensive and concrete recommendation.

The recommendation we have explored here is the introduction of another actor in this process: international governmental oversight under the aegis of the ILO.

Conclusion: China should adopt a dispute resolution model similar to the Cambodian Arbitration Council

The AC was created in Cambodia after the garment industry became the number one industry in the country. The lax labor laws and the corruption of the court system allowed garment employers to operate sweatshops with deplorable conditions. After the end of the Multi Fiber Agreement (MFA)[11] in December 2004, global competition opened and garment factories have begun to flee to China and other countries with lower labor standards and less enforcement of existing laws. Labor standards within China are among the lowest in the world, but there is an expansive supply of labor and garment factories that continue to open and operate.

With government-controlled, corrupt courts and no avenues for the resolution of individual or collective labor disputes, sweatshops are allowed to continue. Further, there are no processes that involve the voice of workers, which is detrimental to Western Countries that have to justify importing from a country with low workplace standards.

There is not much information available on the garment industry in China beyond its actual structure, which is similar to that of Cambodia’s. Foreign companies contract with Chinese subcontractors to produce the garments; these subcontractors employ workers according to their own terms, and are responsible for hiring, firing, payment, setting work weeks and production schedules. While no garment factories in Cambodia are state-owned, it is possible that a certain percentage in China are owned by the state. While these state-owned corporations might not be willing to permit a dispute resolution model such as the ILO, foreign companies are recipients of increasing pressure to better workers’ labor rights. Further, there is a much higher supply of cheap labor – especially in Southeast Asia – than there is demand; if China refuses to cooperate with such a model, increasing international pressure would give foreign companies good reason to pull out of China and move to more willing countries. The ILO model works because the garments created in China are exported for international consumption; if China wishes to keep such factories, it must succumb – at least slightly – to international pressure.

Other options are worth considering, as they are discussed above, but the advantages of the Cambodian model are past success in another country, incremental rather than drastic change, and less political controversy in implementation.

Increasing workplace standards and providing a mechanism for ensuring compliance through the Arbitration Council has paid off for Cambodia.[12] Although certain features could be modified (i.e., establish a council for each province, establish a council for each industry, create only binding arbitration, etc.), Cambodia’s Arbitration Council is a proven success and does not require that China create a model from the ground up. Implementing a dispute resolution model based upon the ILO’s successful AC in Cambodia will benefit the Chinese in three primary ways: employees will have a means to grieve unfair labor practices; employers can maintain orderly workplaces by preventing uprisings with arbitration; and China can attract more factories because of its commitment to fair labor practices.

Afterword: The Other End of the Supply Chain

The Chinese factory has become a synonym in the Western World for asymmetry of power. Our trip to Beijing in late February/early March 2006 gave us a sense of the living standards of workers, but the factory conditions and policies in most of China are closely guarded. It is to be hoped that, as pressure from the United States and Chinese civil society mounts, Chinese workers will gain marginal protection from their government and employers. We believe that the Arbitration Council offers a fair and demonstrated technique for employer-employee relations and deserves an experimental run, but moreover, we hope to see a paradigm shift in the way that the management-worker relationship in China is viewed by the quintessential consumer and retailer.

It is perhaps the case that managers would like to resolve disputes, raise their workers’ wages, and allow workplace problems to be grieved, but we also realize that this is largely contingent on the demands of consumers and retailing companies, and not necessarily in the control of the supplier. As this symbiotic relationship becomes more apparent to the consumer, perhaps change can be effected from the other end of the supply chain.

Works Consulted

Arbitration Council website:

Allen, Craig. February 27, 2006. Interview with students from the Gerald R. Ford School of Public Policy.

Becker, Elizabeth. May 12, 2005. Low Cost and Sweatshop-Free. The New York Times. Section C, 1.

Cambodian Labour Law, 1997

Comtex News Network, Inc. 2005. Safeguards On Chinese Exports Give Southeast Asia A Breather. Comtex News Network. May 19.

Han, DongFeng. November 7, 2002. Congressional Testimony

Hyundai Manufacturing Plant Tour. February 28, 2006. Beijing, China.

Kazmin, Amy. December 4, 2004. Garment buyers prefer Cambodia. The Financial Times (London, England). Section Asia-Pacific, 9.

Labor Rights and Labor Standards in China. Congressional Hearing, Roundtable Before the Congressional-Executive Commission on China. 107th Congress, Second Session. March 18, 2002.

Workplace Safety Issues in the People’s Republic of China. Congressional Hearing, Roundtable Before the Congressional-Executive Commission on China. Hong Kong Sar, China. 107th Congress, Second Session. November 7, 2002.

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[1] Current Chinese labor law code is available at

[2] Current Chinese labor law code is available at

[3] The Chinese coal industry is widely known for its health hazards and lack of worker protections.

[4] Currently, all of China’s legal trade unionists are members of the ACFTU which serves as a placement and networking agency. The ACFTU does not bargain collectively or work in contract enforcement. Although it would be beneficial to workers to have the right to associate and bargain collectively, we realize that this is not a feasible or mutually agreeable solution at this point in China’s economic reform. We hope to revisit this in a few years.

[5] The International Labour Organization (ILO) provided the primary funding for the AC through the end of 2005. To protect against corruption, the ILO was heavily involved with the setup and maintenance of the AC for the first three years. Mentoring and support was supplied by Western attorneys from the Community Legal Education Centre (CLEC), which was funded primarily by the ILO. At the beginning of 2006, CLEC turned its support operations over to the Arbitration Council Foundation (ACF), which by law is required to be comprised of Khmer staff in efforts to increase long-term sustainability and independence.

[6] Article 302, Cambodian Labour Law (1997)

[7] The Arbitration Panel decides rights disputes according to the Labor Law, but decides interests disputes according to “the principles of equity or fairness.”

[8] Statistics in this section were compiled by one of the authors during her 2005 internship with the Community Legal Education Centre in Phnom Penh. The statistics are not publicly available, but can be corroborated if necessary.

[9] For instance, Gap officials in Cambodia made it clear that they would continue buying garments from Cambodia only as long as it continued to follow the special labor program. “’'The presence of the I.L.O.,'' said Kris Marubio, a spokeswoman for Gap, ''was an important factor in our decision to remain in Cambodia.’” (Becker, 2005, p. 1).

[10] Implemented in 1995, the MFA enabled high-cost garment-producing countries such as the United States and countries within the EU to create limits on imports from low-cost manufacturing countries (such as China). These countries began to purchase garments from countries not subject to import quotas (such as Cambodia). Since the end of the MFA, global competition has increased and labor standards in the garment industry have dropped.

[11] “Cambodia's biggest western garment buyers have indicated they intend to maintain, or increase, their purchases from the country next year, apparently vindicating Phnom Penh's strategy of positioning its textile industry as a "safe source" of supply for image sensitive multinationals. A World Bank survey of 15 big US and European buyers, which all source from countries across Asia, rated the la-bour standards and practices of Cambodia's garment industry higher than those in Vietnam, China, Thailand or Bangla-desh. Of the buyers surveyed - which jointly account for 45 per cent of Cambodia's Dollars 1.6bn (Euros 1.2bn, Pounds 830m) in annual garment exports, nine plan to increase their annual purchases from Cambodia, while another six will keep existing volumes once the global textile quota system expires on December 31. The results suggest that Cambodian garment manufacturers' willingness to open their factories to independent, out-side inspections may pay off in the scramble to compete for orders against China, the world's lowest cost producer.” (Kazmin, 2004, pg. 9)

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Employers: Identify problem, report it if they perceive detriment. Suffer corporately, if at all.

Central Authorities: Hear news of problem, urge local enforcement, shut down if perceive detriment, defend if not.

SAFETY

Workers:

Identify problem, rarely report it. Usually suffer individually.

Employers:

Identify problem, report it if they perceive detriment. Suffer corporately, if at all.

Central Authorities: Receive news problem, urge local enforcement, shut down if they perceive state detriment, keep open and defend if not.

Workers:

Identify problem, rarely report it as a systematic issue. Usually suffer individually.

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