One reason multinationals love China is its malleable workforce. That looks set to change with the impending passage of a new labor contract law that will make it harder to hire and fire, ultimately boosting the cost of doing business in the country. Under the law, "the hiring cost for employers will rise, the flow of labor will be further restricted, and the employment relationship will be more unstable," says Ma Jianjun, chairman of the Labor Committee of the Shanghai Bar Assn.
The new law, likely to pass this spring, will usher in a raft of regulations similar to those in pro-labor European countries. Probationary periods for new hires will be shortened to as little as one month, while the use of short-term contracts will be restricted. And when companies are downsizing, they will have to base decisions not on workers' abilities but on factors such as whether they have dependents. "Distressed companies may be forced to lay off more qualified employees and employees in critical positions while retaining less essential personnel," the American Chamber of Commerce warned in a statement submitted to Chinese authorities.
That comment is one of more than 190,000 the government has received on the proposed law—an unprecedented level of public discussion of legislation in China. The debate spurred Beijing to tone down some of the measures. For instance, a second draft, released in December, no longer requires management to get China's official trade union to sign off on important staffing decisions, though labor bosses must still be consulted. "We have enough investment at stake that we can usually get someone to listen to us if we are passionate about an issue," says Scott D. Slipy, director of human resources in China for Microsoft Corp.(MSFT ), which worked with the Chamber of Commerce to make its concerns heard.
Some foreign investors support the law. Those who buy goods from Chinese-owned factories hope it will cut down on worker abuse—and bad press. And they're hoping that turnover rates, which run as high as 100% a year, could come down if workers enjoy stronger protections. "We see it as a huge stabilizing force if there is an up-front contract enforced in factories," says Auret van Heerden, CEO of the Fair Labor Assn., an industry group that represents the likes of Nike (NKE ), Adidas, Liz Claiborne(LIZ ), and Eddie Bauer (EBHI ).
Many companies, meanwhile, are wondering how vigilant Beijing will be. "The current labor law already is stronger than many in the region," says William Anderson, who oversees social affairs in Asia for sportswear maker Adidas Group. "But it all comes down to enforcement."
By Dexter Roberts