Labor Disputes in China’s Local Government-Led Enterprise Restructuring: A Litigation Case Study *,**

Enterprises Subject to Government-Led Restructuring

The restructuring of small and medium-sized SOEs and collective enterprises in China has been mostly led by local governments. This is because the enterprise restructuring process largely involves government actions. Furthermore, whether enterprises are profitable or not affects local government tax revenue. Local governments therefore often attach importance to the restructuring of local enterprises. Enterprise restructuring is also of great importance to workers, because it inevitably affects their livelihood, which in turn affects the stability of the local social order. Local small and medium-sized SOEs have close relations with local governments in terms of operation and management. As for actual numbers, before the introduction at the turn of the century of the state policy of “grasp the big and let go of the small” 抓大放小 (meaning that the central government should concentrate on strengthening control of the largest SOEs and relinquish control over smaller SOEs to local governments, which in turn had the authority to restructure, privatize, or close these enterprises), most of the enterprises in China were state-owned or collective entities. In this article, most of these enterprises were restructured after the turn of the century without being dealt with under the state policy of “grasp the big and let go of the small,” which shows that this policy is actually still operative. Generally speaking, it is believed that after the introduction of the “grasp the big and let go of the small” policy, the enterprises that survived consist mainly of large central SOEs, numbering about a hundred and twenty in total. Each has around a hundred subsidiaries on average; hence the total number of large central SOEs is about twelve thousand. In addition, there are about a hundred thousand local SOEs. Altogether, SOEs account for about 40 percent of China’s nonagricultural GDP (Huang, 2015: 254). As can be seen from court cases, after the “grasp the big and let go of the small” policy was adopted, the number of local SOEs has not been static, this because local governments continue to restructure and reform local small and medium-sized SOEs and collective enterprises in response to changing business conditions and state policies.The restructured enterprises involved in this article were mainly small and medium-sized SOEs or collective enterprises, but a few private enterprises were also involved.

The principle of government-led restructuring has been applied in legal practice to several different types of enterprises. Above all, it is about the labor disputes arising from the restructuring of SOEs under various public entities of local governments. For example, in the case of a labor dispute related to the restructuring of a municipal government hotel, where the local government guesthouse had been turned into a hotel serving the public, the plaintiff asked for confirmation of the existence of a “labor relationship” 劳动关系 with the defendant. The hotel had been restructured in 2005 via the transfer of assets managed by a government department. This meant that the dispute was not a general labor dispute and hence was beyond the scope of civil litigation. The court therefore rejected the suit (Case 13). In addition, the hotel itself was a subordinate work unit of the local government. In another example, in a case involving a labor dispute over the restructuring of a state-owned county farm, the plaintiff asked for a determination of whether she had a “labor relationship” with the defendant and whether she, the plaintiff, was an “employee.” In 2011, the court held that the restructured farm followed the general idea of “transforming farms into towns, and farmhands into farmers” 农场变乡镇、农工变农民, in line with the “integrated towns and farms” 镇场合一 management system, and therefore the dispute between the plaintiff and the defendant arose from the process of enterprise restructuring under the guidance of the government. The dispute, in other words, did not spring from the process of independent enterprise restructuring (i.e., where restructuring is not government-led but is conducted by the enterprise itself), and so it was not within the scope of civil disputes that the court would accept for adjudication (Case 11).

In addition, the scope of application of government-led restructuring, as noted earlier, also encompasses some local private enterprises. For example, in a labor dispute involving a private transport company, the enterprise transferred part of its route and terminated its labor relationship with the plaintiff. The plaintiff asked the court to confirm that there was a labor relationship between the plaintiff and the defendant (the enterprise) and to award him compensation. The court, however, held that in the takeover, the arrangements for the employment of drivers and for passengers were government-led and therefore were not legal relations between equal civil subjects. On that basis the court rejected the suit (Case 3).

In practice, the types of enterprises involved in government-led restructuring have been gradually expanding, and their specific forms have also become more complicated. Local governments pay attention to business conditions and overall policy on enterprises, and as these change, governments may modify the capital structure of enterprises or change their organizational form, operations, and mode of management, which may either strengthen the management of local SOEs or lead to privatization. In short, the fate of local SOEs is determined by the local governments’ reading of specific policies and economic conditions.

In the face of this reality, the courts’ factual criterion for determining whether a case involves government-led restructuring has gradually expanded. In legal practice, the meaning of “government-led” has been extended to “government-related department-led.” Here “led” refers not only to the government or its departments giving the seal of approval to restructuring plans, but also to the government or its departments as the subject of signed agreements. The courts consider most such cases as instances of government-led enterprise restructuring, and thus reject them. This is an outgrowth of the courts’ adoption of a very broad understanding of this category of enterprise restructuring. If a case involves restructuring approved by the government or its departments (usually the most critical element), or if the subject of a restructuring agreement involves the government or related government departments, it may be recognized as a type of government-led enterprise restructuring. This naturally has expanded the scope of application of the principle of government-led restructuring. For example, plaintiff Long Weiyi and the defendant, a Municipal State-Owned Assets Supervision and Administration Commission (SASAC), had signed an employee settlement agreement, which ended Long’s status as an employee of an SOE. However, because the agreement did not mention how the labor relationship between Long and the defendant’s company was to be handled, Long asked the defendant to go through the procedures of dissolving a labor contract and to pay compensation. The court held that the defendant (the municipal SASAC) had signed an employee settlement agreement with Long, which changed Long’s status as an employee of an SOE. Therefore, the court concluded that Long’s claim was the result of a dispute caused by a government-led restructuring and reform of a state-owned and collective enterprise, and therefore the court rejected his suit (Case 9). In sum, as can be seen from the legal cases, the majority of the labor disputes have been recognized by the court as involving government-led enterprise restructuring, which has as much to do with the expanded meaning of government-led restructuring in legal practice.

“Government-Led” as a Key Consideration in Labor Disputes

My research shows that “government-led” has gradually become a key consideration in labor disputes concerning enterprise restructuring. If the courts determine that a suit by an employee for monetary compensation and social insurance is the result of government-led restructuring, then the courts will reject the suit on the basis that such restructuring does not fall within the purview of the courts. With the gradual expansion of the scope of the application of “government guidance,” the actual effect on the judgments of the courts is a result of a combination of local government power and formalistic contract logic, further promoting and deepening the transformation of labor relations. In legal practice, the contract logic of “equal civil subjects” has gradually evolved into a reason for the courts to exclude the legal claims of enterprise employees. The key is the legal principle of “government leadership,” with the courts limited to accepting labor dispute cases involving independent enterprise restructuring, which actually undercuts the logic of labor relationships. As Philip Huang (2017b: 257) has pointed out,

The older Reform period Labor Law of 1994 had been organized mainly around the concept of protecting industrial workers from abusive treatment by their employers-managers: reasonable work hours and rest days and holidays, overtime pay, decent and safe conditions of work, protection against arbitrary dismissal, health and retirement benefits, requirements against use of child labor, and of female labor for heavy work, and so on.

However, according to contract logic, the only labor disputes the courts will accept for adjudication are those in which the parties are equal subjects. Although the reality of labor dispute cases can be complex, the scope of acceptance is narrow, making it is easy to ignore in practice the weak position of workers.

The Application of the “Government-Led” Principle and the Expansion of the Scope of Dispatch-Work Relationships

The logic behind dispatch-work relationships is essentially consistent with the logic of government-led enterprise restructuring: the old-style “labor relations” have been replaced by a new form wherein the enterprise is “only the user of the work, not the employer of the person” 只用工, 不用人. That is, in dispatch work, the enterprise hires workers through an intermediary dispatch agency. A worker’s contract is thus with the dispatch agency and not the enterprise. Since the enterprise does not actually enter into a contract with the worker directly, it thereby evades the responsibilities of an employer as spelled out in China’s labor laws. The actual result for workers is the same as the application of the “government-led” principle in that they are usually not effectively protected by labor laws in legal practice.

Dispatch work involves a very complicated legal relationship. Philip Huang has pointed out a “black hole in labor law theory and practice, related to its construction of a severing of contracting from management and of the laborer’s ‘person’ from the laborer’s ‘work’” (Huang, 2017b: 247). Based on lawsuits, Huang analyzed how enterprises use dispatch work and dispatch agencies to transform themselves from a “contracting and managing entity” into simply a “managing entity” (with the dispatch agency being the contracting entity), or, in other words, from being an “employer of the person” into simply a “user of the work.” These enterprises have thereby successfully exempted themselves from legal obligations toward their workers. Thus we see that the courts reject suits from dispatch workers seeking protection on the basis of the labor law (Huang, 2017b). Huang focused on dispatch-work cases prior to 2016, whereas the present article draws on basic-level court handling of enterprise restructuring labor dispute cases in 2018. In the cases in the former category, the courts had mainly rejected workers’ suits on the basis of laws related to the dispatch-work relationships. At present it is more likely that a case will involve government-led enterprise restructuring, and regardless of whether the worker has a dispatch-work relationship or a labor relationship with the enterprise, the courts will rely on the “government-led” legal principle to reject workers’ lawsuits. The outcome, in other words, remains the same.

In a case from September 2017, for example, the plaintiff Liu Jun claimed that he was an employee of the defendant’s SOE. On January 3, 2017, Liu learned from a document of the municipal SASAC that at the end of 2003, when he was transferred to the Shaanxi Lueyang Iron and Steel Co., the transfer was part of a collective transfer of employees to the Lueyang Iron and Steel Co. during its first restructuring. By the end of 2003, the status of workers as SOE employees had not been changed: they were still in a labor relationship with Lueyang. In late September 2016, Lueyang was restructured again, and this time was transformed into a “user of the work” 用工单位 (rather than an “employer of the person” 用人单位, as in its earlier incarnation). This transformation meant that the defendant had cut labor and employment ties with its workers. In Liu’s view, the work unit and the defendant had shirked their responsibilities and failed to arrange a new job for him. He thus brought suit against Lueyang. The court ruled that this dispute arose from enterprise restructuring, that the defendant, Lueyang Iron and Steel Works, was an SOE, and that the 2003 restructuring was not an independent restructuring. The dispute, the court held, did not arise because of a problem with carrying out a contract. Thus, the dispute was not a labor dispute case. The court ruled that the case should not be filed for trial as a civil case and the plaintiff should not be subject to suit (Case 7). Here it can be clearly seen that the key basis for the judgment turned on whether the restructuring of Lueyang was “government-led.”

In another case, enterprise restructuring also involved dispatch work. The plaintiff, Huang Fujiu, was recruited in 1997 to work in the Lüdu Dongfanghong Grain Depot in Sichuan loading and unloading grain. Soon he was offered a long-term position because of his excellent work. However, for two decades his employer denied him the benefits and protections to which the law entitled him. It did not apply for social insurance for him and it did not give him time off on holidays. He asked the court to confirm that he and the Lüdu Dongfanghong Branch Co. were in a labor relationship, and he asked the company to apply for social insurance for him. The court held that the restructuring of the Dongfanghong Grain Depot had been government-led and therefore, according to law, Huang’s case was not within the purview of the court. On September 28, 2007, under the leadership of the Hulin municipal government, the Dongfanghong Grain Depot had been handed over to the Xinliang Grain and Oil Group Co. The court determined that this was a government-led restructuring and not an independent enterprise restructuring and therefore Huang’s suit should not be accepted by the court. Moreover, the court held that Huang had already been dispatched by a third party and that he had no labor relationship with the defendant. After the establishment of Lüdu, the loading and unloading business of this company was entrusted to a dispatch agency, and thereafter Huang’s wages were paid by the agency. All these facts do not confirm that there was a labor relationship between Huang Fujiu and the Lüdu Dongfanghong Branch. Huang’s request that the court rule that he had a labor relationship with Lüdu was rejected (Case 6). What these cases all have in common is that in legal practice the law has created a situation where the enterprise is “only the user of the work, not the employer of the person.” Hence they do not have to bear the obligations involved in a labor relationship.

The Expanding Use of “Government-Led” and the Shrinking Acceptance of Labor Dispute Cases

As the use of the principle of “government-led” in law has expanded, the courts’ acceptance of cases involving enterprise restructuring and labor disputes has concomitantly shrunk. In this regard, it is instructive to look at the various types of cases that were accepted by the courts. First, some cases involve enterprise restructuring plans that have been approved by the local government and are binding on both parties, or the dispute between the two parties in any particular case is not related to any objection to the restructuring plan. Instead, what is involved is a civil dispute between equal parties. In civil disputes, the courts have taken the position that the coordination plan involving both parties should be preserved and that at the same time the restructuring is binding on both parties. ³ Fixed coordination plans are more often than not considered to be a specific part of the implementation process of restructuring plans and neither party may violate such plans. Putting a restructuring plan into practice helps confirm its effectiveness. Second, there are also cases involving the restructuring of enterprises where the phrase “government-led” is not used and where workers have signed a new labor contract. In these cases, the enterprises must adhere to the old labor relations protection requirements. In short, the courts only accepts civil relationship disputes between equal subjects which are not contrary to or are unrelated to the restructuring plan approved by the local government. Hence the scope of labor dispute settlements is further limited according to formalistic contract logic. In practice, the courts only accept suits that arise from the implementation of the restructuring plans. Thus, as mentioned above, the scope of what the courts will accept is narrow.

The Practical Jurisprudence of Government-Led Enterprise Restructuring and China’s Development Experience

To conclude, government-led enterprise restructuring should be understood in the context of China’s development experience. Here it is important first to emphasize that at the center of Chinese economic practices is the all-important role played by government-led enterprise restructuring in economic development. Before the restructuring of enterprises there were a multitude of factors that influenced economic effectiveness. The internal logic turned on the fact that bureaucratic coordination entails what János Kornai (1992) called “soft budget constraints.” Under the policy of “grasp the big and let go of the small,” many small and medium-sized SOEs were introduced to the market through a variety of processes such as reorganization, alliance building, merging, and others. At the same time, in order to reduce the burden on enterprises, huge numbers of workers were laid off. “Grasp the big and let go of the small” had a remarkable effect on the economy. Based on solid empirical evidence, Philip Huang has demonstrated that the transformation of SOEs into profit-making state-owned companies has played a positive role in the rapid growth of China’s GDP (Huang, 2012: 591). The restructuring of small and medium-sized SOEs has often been linked to the competition for economic growth between local governments. Zhou Li’an believes that this local government competition has played an important role in China’s economic development and, “since the 1980s, the ‘promotion tournament’ model that revolves around GDP growth is key to understanding government incentives and growth” (Zhou, 2007: 38). The small and medium-sized SOEs that have been “released” to participate in market competition have eased the financial burden on local governments, and their contribution to local economic development is unquestionable.

However, this has also brought problems with it. For example, Philip Huang has argued that the main reason local governments, whether intentionally or not, evade labor laws and regulations in the “informal economy” is because the law often only protects employees in the formal economy (Huang, 2012: 592). Workers in the informal economy include 277 million migrant workers and also about 45 million workers in small and medium-sized SOEs who were laid off by the turn of the century, as well as those who are still working and about 60 million “dispatch workers” (Huang, 2017a: 3). Huang has pointed out that these workers in the informal economy—the majority of the employed population—are urgently in need of the protection of labor laws and regulations (Huang Zongzhi, 2013: 56). At the same time, Zhou Li’an has pointed out that the competition among local governments around economic growth presents another problem. For example, “local governments only focus on measurable economic results, while ignoring many long-term effects” (Zhou, 2007: 48). Wang Shaoguang has argued that the relationship between “ethical economy” and “market society” needs to be properly dealt with and “by pursuing the maximum efficiency or overall economic growth rate, everything else is compromised, including fairness, employment, workers’ rights and interests, public health, environment, and so on” (Wang, 2008: 131). Among the issues this raises is formal contract logic, which is inherently logically consistent with the competition between local governments for economic growth because it causes local enterprises to make profit their overriding goal, often at the expense of substantive labor protection. The intertwining of formal contract logic and local government power amplifies the complexity of the problem.

We should at the same time look at the economic competition between local governments and all the obvious problems that accompany it. This article has explored the two types of restructuring—government-led and independent (or self-restructuring)—and shown that government-led restructuring is rife with labor disputes. In labor disputes involving government-led restructuring, the courts follow formalist contract logic and hold that these are not contract disputes between two equal subjects and thus the question of contract performance does not enter the picture. Such suits, then, do not meet the requirements of a civil dispute and are excluded from trial. However, the reality is that most enterprise restructurings are government-led. In fact, enterprise restructuring procedures mostly involve local government actions. Thus, the courts often interpret “government-led” in a very broad sense. In addition, the courts also exclude cases that have extended beyond the statute of limitations for arbitration. This, in practice, can mean that if an enterprise restructuring entails any connection at all with the local government, then the court can reject the case based on contract logic. It is true that this helps local governments to promote enterprise restructuring in order to adapt to market competition or strengthen the overall management of enterprises by local governments. While this may advance local economic development and reduce the financial burden on local governments, it also creates problems of procedural, social, and legal justice.

From this we can also see that the fundamental problem with the “theory of market transition” proposed by Victor Nee is that it is based on the Western notion of a linear market transition, thus ignoring the complexity of the changes that China has undergone. Nee’s main argument is that “in reforming socialist economies, the transition from redistributive to market coordination shifts sources of power and privilege to favor direct producers relative to redistributors” (Nee, 1989: 663). This makes it easy to ignore the complex role of local government and its impact on ordinary people in the process of enterprise restructuring. Chinese labor relations are more complex than those in the West, which is closely related to the basic realities of China’s government–enterprise relations, operation of trade unions, and economic transformation. In analyzing labor relations in the West, Western scholars tend to highlight the significance of labor unions and collective bargaining. For example, Thomas Kochan, the senior American scholar in the field of labor relations, and his coauthors have argued that “labor and management relations in the post–World War II American economy were shaped by the rise, maturation, and eventual weakening of a system that regulated collective bargaining between the nation’s major unions and employers. Even in firms without unions, employment conditions and management actions were influenced heavily by events within the organized sector of the economy. Thus it is important to understand the nature of the union or, as we call it, the ‘New Deal industrial relations system’” (Kochan, Katz, and McKersie, 1994: 21) However, in China, the close relationship between local governments and firms, as well as the transformation of the economic system, are obviously different from the basic situation presupposed by formalist contract logic.

Therefore, if one takes a perspective that is forward-looking and strategic, it is important that labor law should be rooted in Chinese practice and not ignore the logic of substantive labor protection by emphasizing formalistic contract logic above all else. In fact, as scholars have noted, the logic of labor relations protection is an important legacy of the revolutionary legal tradition (Huang Zongzhi, 2013: 57). That legal tradition can also be used as an important resource for the construction of labor law today. At present, an effective strategy to deal with the legal principle of government-led enterprise restructuring should at least clearly take into consideration the fact that most workers are in a disadvantaged position vis-à-vis local enterprises. Legal practice should focus on the protection of workers’ rights, rather than further expanding the scope of the principle of government-led enterprise restructuring. Attention should be paid to identifying the specifics of labor disputes based on the logic of labor protection. In fact, we can sum up our experience from legal practice: for labor dispute cases, the courts, based on the actual situation of the case, should analyze the relationship between the reasonable demands of enterprise employees and the enterprise restructuring plan so as to decide whether to include it within the scope of a court trial. Furthermore, the specific meaning of “relevant” and the standards for factual judgments should be clarified. In addition, the courts should consider whether there are justifiable legal reasons why labor disputes in which the statute of limitations for arbitration has been exceeded should heard. When such legal reasons exist, the courts should try such cases, rather than simply exclude them from the courts’ jurisdiction based on the principle of government-led enterprise restructuring. In short, the trial of labor relations cases should be carried out on the basis of an analysis of the specifics of each case. At present, the scope of application of “government-led” should be limited rather than further expanded. In a word, we should focus on the proper integration of rights protection, substantive moral concerns, and practical considerations based on the specific facts of the case at hand. Only in this way can we truly and effectively protect the legitimate rights and interests of workers and enhance the credibility of judicial authority, thus safeguarding social fairness and justice.