Issue: May 2018

CHINA - The Implications of the New Regulations of the Shanghai Municipality on Employees’ Congress on Enterprise Democratic Management

By: Jingbo (Jason) Lu

Employees’ congress is a system of coordinating labor relations with Chinese characteristics. China is different from the West, which guarantees “three rights of employees”: the right to strike, freedom of association, and negotiation. The system in China coordinates the conflicts of interest between enterprises and its employees, or among employees, through fair consultations and its linkage with the employees’ congresses. As one of the two major systems of coordinating labor relations in the world, the system of collective bargaining and employees’ congress coincided with China becoming the world’s second-largest economy, alongside China’s reform and opening-up policies. The facts have proved its effectiveness in tackling problems during economic restructuring which is also approved by international organizations including the International Labor Organization (ILO) and other countries.

Enactment and amendment of the Regulations of the Shanghai Municipality on Employees’ Congress (the “Regulations”)

On October 23, 2010, Shanghai Municipal People’s Congress passed the Regulations which later became effective on May 1, 2011. Before that, 23 provinces and municipalities had enacted relevant local regulations. However, Shanghai has shown late-mover advantages by legislating the right to rectify labor unions, the binding force of the Employee’s Congress, the rules on alteration, etc., and optimizing the format and arrangement of the provisions. Multiple systems in the Regulations have even been adopted by the Central Commission of the CPC for Discipline Inspection, Organization Department of the Central Committee of the CPC, State-owned Asset Supervision & Administration Commission of the State Council, Ministry of Supervision, All-China Federation of Trade Union and All-China Federation of Industry & Commerce through the issuance of the Provisions on the Democratic Management of Enterprises. During the inspection of law enforcement by the Shanghai Municipal People's Congress in 2016, a number of new situations and problems were identified which called for new adjustments to accommodate the change of circumstances. For example, the principal responsibilities of all parties as stipulated in the Regulations were not fully implemented; the standards of adjusting the democratic management in non-state-owned enterprises were missed; rigid supervision was not found on enterprises which refused or delayed establishing the system; and the regulations of responsibilities of the town government promoting the establishment of the regional or industrial employees’ congress were too general, etc. Subsequently, the Municipal Federation of Trade Unions initiated the revision jointly with the Municipal People's Congress, followed by a number of forums and seminars. After repeated exchange of opinions between relevant authorities and experts, and extensive consultation with all interested parties, the Municipal People’s Congress passed the amended draft in the third and final reading on 23rd November 2017.

Key issues on the amendment:

(1)   To reinforce the party's leadership and the government’s responsibilities

The newly added Article 3 stipulates that "to promote the establishment of the system of employees‘ congress, we shall uphold the leadership of the Chinese Communist Party and facilitate the harmonious development of labor relations." First of all, it explicitly stresses the adherence to the Party's leadership and realizes the Party’s function as the core of leadership and politics. The new Regulations also reinforce the responsibilities of the government and authorities by adding Article 7 that stipulates the People's Government of Shanghai Municipality should establish a sound working mechanism and accelerate the implementation of the employees’ congress system in the region through joint meetings or other means.

(2)   To clarify the responsibilities of enterprises in implementation

In practice, there is a mistaken view that trade unions have a responsibility to establish employees’ congress. Even in some institutions where the employees’ congresses were in place, they did not fully perform their duties and have been run poorly because of a lack of norms in the working procedures and operation method. In light of this, the new Regulations stipulate “[e]nterprises and institution shall, with their trade unions, formulate specific measures for the implementation of the employees’ congress and incorporate them into their management system.” It clarifies the subject of responsibility for building the system to ensure that the provisions of laws and regulations are specifically implemented.

(3)  To optimize the functions and powers of the employees’ congress

(a) Refining the definition of “material issues in operation”

Optimizing the functions and powers of the employees’ congress is the highlight and focus of the revision. Article 18(3) of the Company Law stipulates that, “when the company is deciding on material issues in restructuring and operations and formulating important labor rules, the company should hear the opinions of its trade union and employees through the employees’ congress or other means.” The amendment has reinforced and optimized this particular provision in the Company Law by refining the scope of “major problems in restructuring and operations” into “material issues such as restructuring, merger, separation, relocation, suspension of production, dissolution and bankruptcy, etc.”

(b) Extending the rights of employees to be informed and heard on significant adjustments in operations in all enterprises

The new Regulations have extended the same treatment to all kinds of ownership. Article 10(1) of the amendment states that each of the above-mentioned “material issues” or adjustment of significant matters should be examined by the employees’ congress or other means so that the opinions and suggestions of employees could be heard. This amendment breaks through the limitation that only state-owned enterprises and institutions were governed by the Regulations in the past. As a result, it fully guarantees the rights of employees of all enterprises and institutions to be informed and heard on material issues such as reform and adjustments regardless of the ownership.

(c) Expanding the power of employees’ congress to scrutinize collective contracts arising from disputes on the change of employment relationship

The new Regulations stress that the employees’ congress should examine “the labor rules and significant matters that related to the employees’ immediate interests and any programs on the change of employment relationships such as relocation of employees and economic compensation.” The Regulations also stipulate that the draft of collective contract formed by collective bargaining arising from labor disputes on the change of employment relationships should be examined and approved by the employees’ congress. As a result, the employees’ congresses of non-publicly owned enterprises have the right to review and give opinions on alterations of employment relationship. According to the Regulations of the Shanghai Municipality on Collective Contract and the new Regulations, any drafts of collective contract arising from labor disputes should be examined and approved by the employees’ congress. Accordingly, enterprises are obliged to solve labor disputes through their employees’ congresses, securing the rights of the majority and the minority.

(d) Expanding the power of trade union to intervene with enterprises’ failure of compliance with the rules of procedure

The amendment provides that "where the matters that ought to be submitted to the employees’ congress for approval have not been submitted in accordance with the mandatory procedures, the trade union of the enterprise or the institution shall have the right to request rectification in writing for which the enterprise or institution must respond in writing and rectify the mistakes.”

(4)   To enlarge the duties of the trade union to scrutinize the enforcement of the law

The new Regulations refine the conditions of the issuance of the opinions of trade unions on supervision and rectification of compliance with labor laws (“Opinions”) and the recommendations of trade unions on supervision of compliance with labor laws (“Recommendations”), particularly for the time limit. Where the enterprise or the institution has violated the provisions of the Regulations, the municipal and regional trade unions can issue the Opinions to the enterprise or institution and request it to rectify the mistakes within 90 days. If the enterprise or institution fails to do so within the prescribed time limit, the municipal and regional trade unions may submit the Recommendations to the relevant administrative authority. The authority should investigate and handle the matters in accordance with the law and supervise the rectification within 30 days. If the prescribed time period has lapsed without rectification, the municipal trade union would document the relevant records into the municipal public service platform of credit information. The administrative department of human resource and social security may then take administrative actions, in accordance with the law, against those who violate the laws and regulations of employment protection.

Key points on enterprise democratic management in China:

(1) Optimizing the establishment of the employees’ congress system.

In both the national and local levels, enterprises and institutions are subject to liability for the employees’ congress. Therefore, in Shanghai, the responsible officer of an enterprise is required to report to the National People’s Congress on the implementation of the democratic management during the inspection of law enforcement. So, enterprises should establish the system of employees’ congress as part of compliance operations in China.

(2) Building transparency in the company.

Experience has proven that conflicts stem from misunderstanding based on poor communication, which are rather difficult to mediate. Nevertheless, the employees’ congress can serve as a platform for early communication. Effective communication can help gain the initiative and prevent loss of control and rumors. Therefore, enterprises in China should disclose the necessary information to all employees in a timely manner and listen to opinions and attach importance to the system of employees’ congress for effectively reducing the risk of collective disputes.

(3) Steering the demands during disputes.

During collective disputes, the employees’ claims of interests can be divided into reasonable demands and irrational ones. The new Regulations encourage the enterprises to settle reasonable demands by full communication and turn the unreasonable demands into the rational ones. Practice has proven that the system of employees’ congress can make ways for the minorities to speak up and maintain a balance between majority rule and minority rights.

It is important to note that the Regulations are local laws in Shanghai and only binding at local level, but they can still serve as a reference at the national level. Despite the high business costs and a number of reforms such as increasing the standards of environmental protection, the municipal government acted boldly and embarked on a big adjustment to the system of employees’ congress, reflecting its emphasis on the system. Therefore, enterprises in China should actively cooperate with the trade unions all over the country to conduct relevant research as early as possible so that the employees can truly engage in the management, resulting in a double win situation for employers and employees.

Jingbo (Jason) Lu

River Delta Law Firm