The PRC Labor Contract Law, effective since 1 January 2008, requires an enterprise to follow democratic procedures whenever it formulates or amends any rules or makes any important decisions that are directly related to the interests of the employees. It stipulates that the enterprise shall discuss the above rules and decisions with the employees, negotiate with the labor union or the employees' representatives on an equal basis. However, the law did not provide in details about the organization which can represents all employees to execute their legal rights in an enterprise.

On 13 February 2012, the Provisions on Democratic Management in Enterprises (“New Rules”) were issued by the All China Trade Unions Federation jointly, together with other relevant Chinese authorities. The New Rules expressly provide that the Employees’ Representative Congress (“ERC”) is a democratic organization for employees to participate in the management of an enterprise. The New Rules apply to all types of enterprises, including state-owned and privately-owned enterprises. Before these New Rules were issued, the governments of Jiangsu and Zhejiang Province & Shanghai Municipality had already issued similar local regulations.

In the New Rules, an ERC is defined as a permanent organ and the primary method of executing democratic management of employees in an enterprise. The New Rules also provide details on the election procedures of employees’ representatives, organizational structure and the working mechanism of the ERC. The major powers of the ERC include reviewing rules or important decisions made by the enterprises which are directly related to the interests of the employees, making proposal or opinions, approving execution of collective agreements and electing employee director or employee supervisor (if any).

The New Rules also provide a system of disclosing managerial affairs in the enterprise. This system requires the enterprise to disclose certain business matters in the enterprise such as the business and management situation, recruitment and execution of written employment contracts with employees, collective agreements, details on rewards or punishments of employees, unilateral termination of employees or plans and results of mass lay-off, details of payment of social insurance contributions, etc.

Further, the New Rules require a company to set up an employee director or employee supervisor system to support the employee representatives who were elected by the ERC. The PRC Company Law does not require a company to have an employee director but employee supervisor if only it has a supervisory board (in practice most foreign invested companies only have a supervisor rather than a supervisory board to avoid having employee supervisor). Until now, it had been unclear whether the PRC Company Law would make having an employee director and employee supervisor in a company compulsory.

The background for this change is that the PRC government aims to establish a collective bargaining system in enterprises, to enable employees to participate in the management of the enterprise to some extent. Since 2004, the PRC government started its initiatives on establishing trade unions in enterprises. In 2010, the PRC Ministry of Human Resources and Social Securities and the All China Trade Unions Federation jointly announced a so-called “Rainbow Plan”. The plan promotes the establishment of a collective agreement system in enterprises. The goal was to cover more than 60% of enterprises in 2010 and more than 80% of enterprises in 2011. However, legally speaking, the trade union of an enterprise does not automatically represent all employees of the enterprise. The employees shall have their own democratic organization, i.e. ERC. The trade union will then act as the working institute of the ERC and is in charge of its daily operation. Therefore, it was important to define the legal status of the ERC by law and to empower the ERC to obtain more information about the management of the enterprise.

The New Rules do not include any articles containing any punishments or other notable setbacks. Therefore, an enterprise is unlikely to be punished by the authority if it does not set up an ERC. However, there are tendencies that more and more enterprises in China will be urged to set up an ERC (and its corresponding trade union) and to conclude collective agreements with the employees. This seems to be leading to increased employee power in both wage bargaining as well as a more prominent role in the decisions of enterprise management.