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The topic for this Chapter Meeting became China’s New Labor Law and its Impact on the Outsourcing Industry. Speaking was Bob Zhu, Asia Pacific HR Director for Electronic Arts. Bob was previously the Asia-Pac HR Director for Capital One, Danone and Tektronix and he has a wealth of experience adapting HR practices of multinationals to the China environment.
In his speech Mr. Zhu highlighted several areas that will impact all companies operating in China as a result of the new labor law. Noting that the new law was not negotiable he suggested that one’s time is best spent understanding the impact and creating strategies for dealing with the new labor landscape in China.
While the labor law will may make operations more difficult for vendors in China who provide offshore outsourcing services it will likely act as a catalyst to promote outsourcing within China. Multinationals may choose to outsource more positions in their China operations to mitigate the increased risk and overhead the new law places on employers in China.
Mr Zhu pointed to six key impacts that the new labor law that goes into effect January 1, 2008 will have on employers. They are: 1. The practice of making fixed term, (1 or 2 year employment contracts) will be phased out in China in favor of permanent employment contracts. This will limit the current practice of being able to terminate employees by simply not renewing their labor contracts when they expire. Going forward companies will have to prove cause in all cases when terminating staff. 2. Probation, which is commonly used at the start of an employment relationship is effectively eliminated. Previously companies could enjoy a 3 month probation period with new hires if they made the employment contracts for 1 year and 1 day. During probation it was very easy for a company to terminate the employee if they found their performance or attitude was not good. Now probation will be limited effectively to one month, and there will be no more termination without cause. So employers will need to document and prove their case that the employee did not perform during probation, a very difficult hurdle, if they with to terminate. One strategy Mr Zhu pointed to for this was to put a clause in employment contracts stipulating that it is conditional on a successful background check. Then if the employee is found to have misrepresented anything even slightly, it could be grounds for dismissal. However, the change in this new probation term will put much more burden on HR departments to do more due diligence on candidates before hiring them, since it will be significantly harder to terminate them during probation if they are found to not be a match with your company. 3. One favorable change to the labor law is a change to the amount of severance a company must pay in the case of termination. Previously the law required 1 month salary for each year of employment as severance, plus one month notice. Under the new law 1 month notice is still required, but the compensation for time served will be based on the average salary in one’s city, not the employee’s actual salary. So for highly paid IT workers whose salary is far above the city average salary, they will receive less. 4. Companies will need to be much more careful that their employees all have valid labor contracts. In the past, if an employee’s labor contract expired the company could make a new one at its leisure. Under the new law, if a company lets more than 30 days lapse between the expiration of an old labor contract and a new one, significant penalties will be due to the employer. So HR departments will need to be much more organized in their handling of labor contracts with employees. 5. The penalty for wrongful termination is doubled. If an employee is terminated and elects to take the employer to the labor bureau for arbitration and they win, whatever compensation they would have received as a result is doubled. This creates a dangerous situation for companies since employees win 80% of the time in labor court in China. With the new policy of doubling the money the employee can get, it should be expected that employees will start to take far more cases to arbitration since they have nothing to lose and lots to gain. However, Mr Zhu pointed out that companies should not be intimidated by this and that if handled right, a favorable settlement can be achieved by a skillful HR department. What this means though is HR departments will need to be much more professional in the new regime. 6. All companies will have to start a union. Mr Zhu commented that one should not look at this measure from the Western point of view since unions are not as strong in China as in the West. This is preferable to the alternative under the law which would require unanimous approval from the staff for any change of policies or firing decision. So companies should be proactive in planning their union strategy to put in place a friendly organization rather than letting it happen organically or falling into the trap of needing unanimous consent for operational decisions.
The new labor law puts more power into the hands of employees, which may be needed in some industries like manufacturing where perhaps they are exploited today. However, in the outsourcing industry it is already a candidates market and these new measures will further tip the balance in the favor of employees to the detriment of employers. On the other hand these new laws will increase the incentive for companies to use contractors rather than full time permanent employees for their China operations and may reduce the appeal for overseas companies to build Captive centers in China and instead find a suitable outsourcing vendor.
Chairman’s Summary – April 12, 2007
The topic of the meeting was BPO in China and we had two speakers, one from the advisor side and one from the vendor side.
On the advisor side we heard from Vibhash Ranjan from Morgan Chambers. Vibhash gave a high level overview of the outsourcing industry, its critical success factors and reviewed the BPO landscape in China. Importantly, he found that the market in China is very nascent, with just a handful of players able to operate at the international level. One interesting take away though, was a large opportunity seen for servicing the China and Asia operations of multinationals from China. This could be a huge as-yet untapped market.
Following Vibhash’s industry overview we heard from one of China’s BPO success stories, ResourcePro. Matt Bruno, their CEO, discussed the motivations for setting up operations in China and how they service insurance customers in the US. With a more stable talent pool than India, it looks like China will grow in popularity as a BPO destination whether serving the local market, or the US and UK.
One other interesting take away was that of the 30 attendees at the meeting, eight reported being involved in BPO. This is clearly a growing trend in China. One attendee is also servicing the US market with local resources. They are providing graphics design work from China and have been experiencing strong growth. English language skills may be a challenge to doing BPO in China, but if one chooses the right service offering, language need not be an obstacle. | 
