According to China Labor Watch, a New York-based not-for-profit that defends workers’ rights in China, labor law violations in Chinese factories are rampant. Its recent study of eight China-based toy factories sheds light on the types and prevalence of these abuses.

For example the organization cited widespread compulsory overtime with employees working up to 14 hours a day for illegally low wages. All the investigated companies neglected to abide by employment contract provisions and most don’t provide basic medical or work injury insurance.

“The case of multinational toy companies shows that corporate codes of conduct and checklist auditing are not enough by themselves to strengthen workers’ rights if corporations are unwilling to pay the real price it costs to produce a product according to the standards in their codes,” the CLW wrote in its report.

This highlights why one of China’s top priorities for the past two years has been drafting the Labor Contract Law. This sweeping law seeks to shift the balance of power away from the employer and into the hands of the employees. As part of this power shift, the new law allows employees to sue and seek damages from their employers. Most experts believe U.S. companies will be the prime targets of suits because of their deep pockets and the strained relationship that exists between the Chinese government and multinationals.

“My concern is that the companies that will likely get penalized will be the low hanging fruit, which are the big multinationals that are following the rules but aren’t crossing the Ts and dotting the Is,” says Bob Kwauk, managing partner at Blakes, Cassels & Graydon in Beijing. “It’s sexy to go after the big multinationals in the big city.”

Private Action
The Labor Contract Law covers a lot of ground. Among its many provisions, it seeks to empower the Chinese workforce by allowing unions and worker-represented groups to review and comment on changes to company policy, such as provisions in the corporate handbook.

“This part of the law is basically saying you have to talk to employees and listen to them,” says Don Dowling, counsel at White & Case. “It’s like in the U.S. with the duty to establish work rules and bargain with employees in good faith.”

Other aspects of the new law deal with new restrictions on non-compete and collective bargaining agreements.

In the past such changes would have garnered little attention from big multinationals. That’s because China has a history of poor law enforcement due in part to an insufficient number of regulatory agents. However, experts believe the new law will have some teeth.

“This new law gives the individual worker and the worker’s union the right to go to court to independently enforce their rights,” says Steven Dickinson, partner at Harris & Moure. “Chinese workers are increasingly aware of their rights, and they’re likely to take full advantage of this law to vigorously enforce them.”

This is a change from the past when employees weren’t allowed to file claims against companies. Instead they had to file a grievance with the government or state-run labor unions, which would then decide whether a claim should be brought against the offending company. Most employees were reluctant to file a grievance out of fear of retaliation. And many weren’t even aware they had the right to file grievances.

Contract Crackdown
Now with employees acting as enforcement agents, every company will be open to increased action. And no other area of the new law is likely to cause more litigation than the changes to regulations governing China’s labor contracts.

In the past many employers hired workers without entering into a contract with them. This was a violation of the law, though it wasn’t strictly enforced. The new law rectifies this by mandating that an employer contract with an employee within one month after the employee’s start date. If the employer fails to do so, the employee can claim double salary for months worked without a contract for up to 12 months’ salary.

In addition the new law seeks to close certain loopholes that have allowed companies to create makeshift at-will working environments.

“What a lot of companies do is give employees contracts that expire after six months, making it easier to terminate an employee and control the workforce,” says Andreas Lauffs, head of the China employment law group for Baker & McKenzie.

Under current Chinese labor law, there are two main types of contracts that employers can offer workers–fixed-term and open-ended. The fixed-term contracts allow employers to contract workers for a set amount of time. When the contract ends, the employer has no obligation to renew the contract. Oftentimes employers engage employees in consecutive fixed-term contracts rather than offering them open-ended contracts, which provide for indefinite employment.

The new law allows employers to assign only two consecutive fixed-term contracts. After that the employer must offer the employee an open-ended contract, which the employer can only terminate under certain circumstances such as incompetence, serious violations of internal rules, gross negligence and fraud. Employers that violate this statute will have to pay the employee double salary for each month during which he or she had the right to an open-ended contract. Otherwise the employee can sue.

An employer can terminate an employee without cause but must pay the employee double severance. Severance equals one month’s pay per year of service.

“The new law will make it virtually impossible to legally terminate an employee,” says Dickinson.

Policy Review
Most multinationals probably think this threat of sanctions won’t affect them. After all they each spend tens of thousands of dollars a year on global compliance programs. But no amount of money or sophistication can ensure that managers on the ground won’t run afoul of the new law.

“Sometimes local management will violate the law to save money,” Kwauk says. “U.S. companies doing business in China need to conduct an audit of their Chinese entities so they can identify these situations and become more proactive in resolving them.”

If companies don’t act now to ensure compliance, they’ll likely suffer in the future. Experts expect employees will take full advantage of their right to sue. And plaintiffs’ attorneys in China are standing by.

“There are a number of Chinese attorneys actively seeking to assist individual Chinese workers and groups of workers in enforcing their rights under the law,” Dickinson says. “And when it comes to employment disputes, Chinese courts tend to heavily favor the workers.”