The rumor mill is churning as industry giants including Huawei Technologies Co Ltd, LG Electronics, and Wal-Mart China carry out drastic domestic work cuts just before the enactment of the Employment Contract Law on January 1, 2008.

On October 22, the Wal-Mart Procurement Center ordered its Chinese branches to cut about 100 employees in Shenzhen, Shanghai, Putian, and Dongguan stores. Shenzhen-based Huawei asked over 7,000 employees working for more than eight years to voluntarily resign before next year, offering one-to-three-year contracts with some after the resignations, China Business News reported on November 5.

According to the Employment Contract Law, employees who work for 10 years in a company may sign flexible-term contracts with their employers, and industry insiders believe the new law is the driving force behind this sudden round of firings. However, almost all major companies firing employees at the end of this year denied that the adjustments were related to the Employment Contract Law.

Officials from the Wal-Mart Procurement Center explained the move was just part of the center’s global human resource strategy, while LG Electronics said it was a tactic for the company to secure higher status in the industry. Most employees that LG let go had worked in the company for about five years and were fired after their contracts expired. Meanwhile, Huawei said the human resource restructure aims to enhance the company's competitiveness, according to China Business News.

Although these companies are itching to make clear their motivations, experts and industry insiders see things in a different light. "Labor costs will be increased and it will be difficult for companies to fire employees after the legislation is ratified next year," said an anonymous human resource manager from a multinational company.

The new law, which regulates probation periods, contract terms, and company liabilities, aims to erect stronger legal protection for employees. Companies have been compelled to rebuild talent pools as the new law challenges human resource management, according to Zhang Mingjing, a lawyer from the Shanghai Huarong Law Firm.

It is understandable for companies like Huawei to enhance competitiveness by asking veteran employees to resign and signing short-term contracts with some of them, said Yang Xihong, general manager of Guangzhou Ruiqi Human Resource Co Ltd. "However, it conveys a negative image and magnifies misunderstandings of the new law," he added. Spreadtrum Communications Inc, China's Nasdaq-listed 3G solution provider, slashed its workforce in the same month as Huawei, one of the biggest telecommunication network providers in the country.

Although China Business News revealed Huawei offered compensation packages totaling about 1 billion yuan (US$134.16 million) for those asked to resign before next year, experts believe the move is meant is to avert liabilities required by the new law.

"The Employment Contract Law was set up to enhance companies' innovative abilities in the long run," said Ye Jiaguo, deputy researcher from the Companies’ Social Duties and Public Service Research Center at the Guangdong Social Sciences Institute. "The economy will be trapped in a vicious circle if it relies too much on a cheap labor force. The increase of labor costs will force companies to pay more attention to innovation and employees training."