Liaoning high court looks into labor issues in bankruptcy

While Zhou Qiang’s statements on  judicial independence, mistaken “Western” thinking, and separation of powers continue to be discussed inside and outside of China, others in the Chinese legal community face more prosaic and difficult issues of how to protect workers when companies go into bankruptcy.  This is a particular issue in the northeastern provinces, particularly in Liaoning.

According to statistics released in the past month (January, 2017), there were 345 other bankruptcy cases accepted by the Liaoning courts, aside from the bankruptcy of Dongbei Special Steel, which has received the lions share of attention outside of China. While strikes are regularly reported in the English language media , what is not known that in many of these bankruptcy cases, employees have gone to court.

A research report by the Liaoning Higher People’s Court (Liaoning High Court) recently released in the People’s Court Daily (the Supreme People’s Court’s )SPC) newspaper, giving the report the SPC’s semi-official imprimatur) drilled down on 79 labor cases related to enterprise bankruptcy that arose in 2015-16. The Liaoning High Court did not specify the overall number of bankruptcy-related labor cases the provincial courts accepted.  A quick search reveals several hundred, the exact number depending on how the search is framed.

The research report provides a glimpse into the concerns of the judiciary, involvement of counsel in these disputes (a more general report on representing workers was recently published, available here), inadequacies of related legislation, and chaotic record keeping of these companies.

Research report reveals several major issues

The report identified the top issue to be the re-employment of workers, citing two large scale bankruptcies, the Hongmei Group (MSG manufacturer) and Badaohao Coal Mine. (A 2014 social media posting criticized the Hongmei Group’s violation of labor law).

A second issue was that bankruptcy caused group labor litigation, particularly by senior staff, who were more highly paid, and older, but faced difficulties being reemployed (and likely had the funds to hire a lawyer).  The report noted that this group had overly high expectations from litigation and if their individual claims were not supported by the court, they would resort to group litigation or petitioning.The research report mentioned, with a positive spin, that labor lawyers were involved  to resolve disputes.

The litigants raised more varied claims rather than simply wages, including: damages; determination of a labor relationship; social insurance; work-related injury; wages and status; etc., as shown by the chart below.

screen-shot-2017-02-02-at-8-50-40-amUnlike ordinary labor cases, most cases were decided by court judgment, not mediated. In 66% of the cases, the plaintiff’s claim was upheld in whole or part, with a dismissal of the plaintiff’s claims in 28% of cases.

The report also illustrates the importance of social stability related procedures.  Although a Chinese law firm partner criticized as quite vague and incompatible with the existing labor law system  the requirement in a 2016 State Council policy document that a worker resettlement plan (for certain industries)  be approved by the workers’ congress or all workers, this is not new and is taken seriously by local judges.  The requirement is contained in Liaoning provincial level legislation (and other legislation) and compliance was noted by the research team. (The team noted that after the resettlement plan was approved (for Hong Mei Group and Badaohao Coal) was approved by the workers congress, it was reported to the local labor and union authorities authorities.

Compliance with labor law related formalities, by both  companies and employees created problems for judges hearing these claims, such as in work-related injury cases, where companies failed to pay legally required wages to employees and employees failed to submit needed documentation.  Some of the companies continued to pay employees under old “planned-economy” systems rather than comply with current labor law, requiring employees to work overtime without overtime pay, a particular issue in the Badahao Coal Mine bankruptcy.

Inadequacies of legislation highlighted by the team included: how to characterize labor claims in bankruptcy, and whether they should be treated as labor disputes or claims against the bankruptcy estate; whether labor disputes needed to be submitted first to labor arbitration; how the courts can better obtain files from labor arbitration authorities and can ensure labor disputes are addressed and not avoided; and how to ensure that bankrupt enterprises pay social insurance payments for their employees.

Comments

The research team (at least on the version publicly available) did not further explore the reasons for the failure of these bankrupt companies (likely many SOEs) to comply with basic labor law requirements, why local labor arbitration authorities avoided hearing cases, or why the Liaoning High Court needed to issue the recommendation that  “labor administrative departments should also strengthen the daily management and supervision of the enterprises before their bankruptcy.”

This report contains a disturbing signal about the disposal of assets of bankrupt companies.  This is significant because the government is promoting the use of bankruptcy. The report recommended that the liquidation group effectively dispose of tangible and intangible assets of the bankrupt companies such as coal mines and well-known trademarks, and implement better supervision and management, to ensure that the realization of bankruptcy assets to maximize the protection of the employees.

Liaoning bankruptcies may be an illustration of what an bankruptcy lawyer recently commented in Caixin:  “falsifying financial reports and asset transfers has often occurred in SOE bankruptcy cases to escape obligations. Meanwhile, local governments’ intervention has also often disrupted the fairness of such cases.”

It appears that employees of the bankrupt companies are the ones who suffer the most when these cases are not handled fairly.As the research team recognized, employees are the weaker party. The team recommended that local government provide a coordination mechanism and funding to secure the workers’ claims against the company, so that the company can withdraw from the market but overall societal interests are balanced.  Whether local Liaoning governments do so remains to be seen.

Data from the Supreme People’s Court on 2015 Labor/Employment Disputes

Screen Shot 2016-03-27 at 10.26.57 AMAnother indication of the soft economy is the growing number of labor disputes. The Supreme People’s Court (SPC) has released selected national statistics (chart from linked source), indicating a significant increase in labor disputes.  Unfortunately, the SPC did not release a provincial breakdown and the searches necessary to set out such data are relatively time-consuming.

The statistics are divided into labor disputes (劳动) and labor service (劳务) disputes.  Labor disputes are disputes which arise because the employee is or should have been employed under the Labor Contract Law.

Labor service disputes

Labor service disputes, which totalled 162,920, an increase of 38.69%.  relate to an “independent contractor,” but more often a quasi-employment relationship, governed by the Contract Law and General Principles of Civil Law, under which the laborer has minimal protections.  Although an attempt had been made to set forth better legal infrastructure (and protections) for this category of workers, “for a variety of reasons,” more comprehensive legislation has not yet been promulgated. Local courts have identified the following categories of litigants to labor service disputes:

  • Migrant construction workers,  often hired (without a written contract) by construction contractors or sub-contractors who lack the proper qualifications to be in business, often occurring when the worker has been injured or has not been paid.
  • Older workers, who are beyond retirement age.  According to a Guangdong court, many small companies hire these workers to reduce their labor costs.

These cases often involve large groups of workers, but little documentation. Courts note that  “mass incidents” arise if the cases are not handled properly.

Labor contract disputes

New labor contract disputes accepted by the Chinese courts totalled 483,311 labor dispute cases, up 25.02 percent.For certain categories of labor disputes, the dispute must be first heard by labor arbitration. In an indication of the view of the SPC, its official newspaper, the People’s Court News, has published an article by a judge in a Nanjing court, suggesting that if the employer is in bankruptcy, the employee can sue in court, without resorting to labor arbitration.

Some provincial courts have reported an increase in large scale labor disputes. The  Xinjiang High Court, for example, reported retrials of at least 10 labor disputes involving 600 or more persons.

Some lawyers and judges in China have done a further “big data” analysis of labor cases.  One of the more relevant and detailed was done by the Guangdong Moreking Law Firm), which in 2015 published a series of charts along with their analysis (but relating to 2014, based on a search of the SPC’s case database).  A selection of those charts are set out below (©remains with them).

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Location of labor disputes in Guangdong, 2014

In 2014, the Guangdong courts accepted 13,168 cases, 80% of which arose in the Pearl River Delta cities of Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan and Zhuhai (10178).

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Comparing Zhongshan (red) and Zhuhai (blue), most cases were in the manufacturing sector, followed by service, transportation, construction, and other inddustries.

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In Zhuhai (on left) and Zhongshan (on right), the majority of disputes arose in privately owned companies, followed by foreign invested companies.  The authors noted that foreign invested companies tended to have more compliant labor management, with those company represented by lawyers in most cases.image-6

Comparing Zhuhai (blue) and Zhongshan (red), in each location three quarters of litigants were men.  Similarly, the Panyu district court (part of Guangzhou), noted the same phenomenon.

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Most cases related to termination, followed by payment, with failure to sign a labor contract, social insurance and other reasons far behind.

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On disputes over payment, the greatest reason is wage arrears (35%), followed by overtime pay (22%).  The Guangdong High Court issued guidance in 2015 enabling lower courts to impose a criminal sentence for wage arrears if certain minimum thresholds are met.

Comment

A more comprehensive survey is needed by province, as well as an analysis of the underlying reasons.  From the statistics above, and from earlier comments by senior leaders of the SPC, it is clear that labor abuses of migrant construction workers by unscrupulous contractors are widespread, and it is difficult for the legal system to deal with them.  The private sector has a far greater incidence of labor disputes, and women are more willing to tolerate ill-treatment at work.  Finance Minister Lou Jiwei criticized the Labor Contract Law during this year’s National People’s Congress session, but the numbers reveal significant issues with labor relations in China.