Thailand risk: Labour market risk. Check it out:
(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC53C50Labour market riskC50C50Note: E=most risky; 100=most risky.SUMMARY
Only an estimated 2-5% of the labour force is unionised, and unions have traditionally wielded little power. There are, however, signs of increasingly militant labour movements in the large state enterprises, particularly those scheduled for privatisation. A critical issue for employers is the lack of skilled and specialised workers in the labour force. The Thaksin administration has acknowledged the need to reform secondary and higher-level education and is in the process of introducing 12 years of free schooling for all Thai children. There are doubts, however, about the state's ability to finance the government's ambitious schemes. There are an estimated 3m legal, and illegal, migrant workers in the country, typically from Myanmar, Laos, Cambodia and Bangladesh. Their presence puts downward pressure on average wages as they often work for as little as half the Thai minimum wage.
SCENARIOS
Firms face a shortage of skilled and specialised workers (High Risk)
Levels of primary education and literacy in Thailand are high, but there has been a marked deterioration in the provision of education at a more advanced level. Even when students are fortunate enough to receive tertiary education, there is a very low level of interest in technology- related and business subjects. Thailand's educational system is still oriented toward the needs of a largely rural, agrarian economy. The government has promised reform of the education system, but even if it enacts the required legislation and reforms, improvements in the quality of the workforce will not be felt for many years. Foreign companies are likely to have to import skilled or specialised workers for their Thai operations, which will significantly raise production costs.
Labour militancy increases (Moderate Risk)
An increasingly vocal and militant union movement is beginning to develop, particularly in state-owned organisations that are scheduled for privatisation in the next couple of years. In March 2004 the union movement achieved a major victory when the government was forced to delay plans to privatise the state electricity company, EGAT, largely because of the scale of union opposition. However, the rise in union activity is within the context of a historically weak labour movement; only about 2% of the total Thai workforce is unionised, and within the industrial sector union membership stands at only around 10%. Labour laws are flexible, and few days are lost to strikes. Before investing, foreign companies should carefully research labour conditions and obligations in their chosen sector, especially if they are investing in a privatisation or asset sale.
BACKGROUND
(Updated: September 14th, 2006)
Union Strength
The state enterprise ban has greatly weakened Thailands labour movement; the ban left only the textile industry with a high level of trade-union membership. Growing numbers of layoffs have also eroded support in this industry stronghold, and internal power struggles have stifled the effectiveness of the top labour leadership. Despite several mergers of labour congresses in recent yearsincluding a loose partnership of the four biggest in 1997trade-union leadership is heavily splintered; hence, industrial action tends to be isolated and rarely spreads beyond individual factories. Private-sector unions are limited mostly to single plants or companies.
Trade-union membership, which has become a target for dismissals since 1997, is thus falling. The ILO estimated in mid-2004 that only 25% of the total labour force is unionised; about 10% of the industrial workforce is organised. Unionisation is high in state enterprises, however; more than half of state-enterprise employees belong to a union.
The 1975 Labour Relations Act permits and recognises trade unions and plant employee associations. The governments failure to enact the trade-union law may prove an obstacle to the successful negotiation of the free-trade agreement with the United States (see International agreements). Based on the governments version, the legislation permits one trade union for each state enterprise, with a requirement that 25% of the total workforce become members. Collective bargaining for state employees has been revived but not the right to strike. Private-sector workers, however, are free to strike. Thailand is one of only 18 countries that have not ratified International Labour Organisation (ILO) conventions 87 and 98, instruments forged in 1948 and 1949 that protect workers right to set up labour unions and engage in collective bargaining.
Labour Disputes
A requirement for 50% of private-sector workers to support a strike also means that all-out work stoppages are kept to a minimum. Action is prohibited until the workforce has gone through the wage-bargaining process with management, and unlawful strikes can bring dismissal or undermine any arbitration proceedings. Unionised workers need the support of 20% of workers in their unit to negotiate; non-unionised workers need 15% support to negotiate a demand.
The 1975 labour law makes contracts mandatory for all companies with 20 or more employees. Labour contracts must specify employment conditions, working days, hours, wages, benefits, termination conditions, complaint procedures and provisions for amending contracts. Agreements are annual (subject to extension of up to three years by mutual agreement). Employees must select negotiating representatives. In the event of failure to reach agreement, a government conciliator may be appointed. The Labour Court rules on contractual disputes (mostly complaints on severance, overtime or holiday pay). Court proceedings are informal, with lawyers acting as advisers rather than advocates and judges appointed on a tripartite basis, representing government, employers and employees. The main advantages of the court are low costs and prompt hearings. Appeals may be made on points of law to the Dika (Supreme) Court. A labour panel was set up in 1993 to resolve broader disputes as part of a reorganisation that created separate labour and social-welfare ministries, but it has not held a meeting since 1998 and is believed to be dormant. The panel, with representatives of employers, employees and the government, was designed to diffuse grievances before they affect production.
A separate committee was established in 1997 to arbitrate disputes involving foreign-owned companies, but it lapsed after the change of government in that year. Mainly intended to represent the interests of local employees, the 15-member committee was supposed to resolve labour issues left behind by failed firms and ensure that workers received full legal compensation. It was set up following the return abroad of several foreign owners who did not settle their labour affairs.
Wage Restrictions
Wages and bonuses continue to rise in line with the expanding economy; salaries in the private sector are expected to have increased by 6.1% by end-2005 after posting a rise of 5.9% in 2004, according to surveys by Watson Wyatt, an employment consultancy. Companies on average plan to pay fixed bonuses amounting to 1.5 months worth of salary and 2.5 months in variable bonuses. After the recession took full effect in 199899, wages had declined by an estimated 20% in real terms because of the elimination of bonuses and overtime and an effective wage freeze.
Government salaries, which the private sector often uses as a guide, have risen by a more restrained 5% since 1996, down from 1015% in better times. Unlike their private-sector counterparts, however, civil servants still get their bonus entitlementsthough these were reduced under a new system the Bank of Thailand introduced from the start of the 2000/01 fiscal year in October 2000. The new system incorporates bonuses into the actual salaries to avoid charges of preferential treatment for civil servants. State-enterprise workers also have fared better than private employees, since they usually work under an automatic-remuneration scheme linked to salary scales. InJuly 2005 the government announced a 5% pay raise for civil servants, and those earning less than Bt10,000 per month received Bt1,000 extra per month (up to an aggregated Bt10,000 per month). In September 2004 the government announced a special increase for low-ranking civil servants earning less than Bt10,000 per month. The increase, which affected around 350,000 civil servants, raised the minimum monthly salary of all government workers to Bt7,000. Labour activists have demanded equal treatment for private-sector minimum-wage earners, whose daily wages would need to rise to more than Bt200 to reach that level. In 2006, the government aims to reduce the number of civil servants by up to 50,000 by offering an early-retirement scheme. Civil servants opting for retirement will receive 815 times their final monthly salary. Under a similar scheme offered in 200002, about 70,000 civil servants retired, with severance payments totalling Bt9.6bn.
Monthly salaries in multinational companies are generally higher than those in purely Thai companies, but the recession has also moderated these. Semi-skilled workers can expect to earn about Bt12,000 and skilled employees an average of about Bt16,000. Fringe benefits became scarce following the 199798 financial crisis but are returning now as labour shortages make themselves felt. According to a 2005 survey conducted by Hewitt Associates, a consultancy, covering 110 multinational companies operating in Thailand, 90% of employers had introduced variable pay; individual performance awards (70% of companies surveyed) and business incentives (50%) the most popular forms.
Few fringe benefits are compulsory, although there are legal provisions for paid holidays, sick leave, maternity leave, injury benefits, termination benefits and other basic benefits under the Social Security Act and Labour Protection Act. The former provides for a Social Security Fund covering payments for sickness, disability, death, maternity leave, child support or retirement. Unemployment benefits were introduced on July1st 2004. Laid-off workers are entitled to half their salary for six months, and those who quit their jobs are paid 30% of their last months pay for three months. Previously, coverage was given to units with ten employees or more, but coverage has been extended since April 2002 to units with just one worker.
The Social Security Fund is funded from monthly salary deductions from employees and a corresponding level of contribution from employers, as well as a government contribution. It now covers all firms with ten or more workers. Virtually all industrial-sector employees will be part of the scheme once agricultural and fishery workers receive cover in 2006 or 2007.
Under the present rules, any firm may opt out if it can prove that its employees have better welfare benefits. The contribution rate to the Social Security Fund increased by 1percentage point to 5% of monthly earnings, equally shared between employers and employees, from January31st 2004. The minimum salary covered under the fund is Bt1,650 per month. The highest applicable salary, of Bt15,000 per month, results in a contribution of Bt375. There are about 7.5m contributors to the fund, which had assets of around Bt332bn as at October 2005. The fund is administered by the Social Security Office (SSO) under the Ministry of Labour. In October 2005 the SSO announced it planned to invest up to Bt8bn of the Social Security Fund in foreign bondsa plan ill received by labour groups and others.
Sick leave is payable at 50% of wages for 90 days each time, or a maximum of 180 days a year. To qualify for sick leave, employees must contribute to the fund for at least three months. Maternity leave is granted only after seven months of employment, at 50% of wages for 90 days.
Parliament passed an amended Labour Protection Bill in 1998 that imposed more-stringent rules on the employment of women and children. The minimum employment age was raised to 15 years (from 13), and overtime for children was banned after 10 pm. Restrictions also apply for employees younger than aged 18, who must be granted additional break times and are banned from working overtime. The act bans the employment of women in hazardous or strenuous occupations such as mining and prohibits work by pregnant women after 10 pm or on weekends.
Since 1995 all businesses employing more than 50 workers have had to set up a safety-monitoring committee of employer and worker representatives. Failure to do so can result in a fine of Bt20,000. Major firms normally provide employees with healthcare and accident insurance, which is sometimes extended to workers families. Aworkers compensation fund is compulsory for all firms with ten or more employees. In addition, employers and employees may contribute to provident and superannuation funds. Employer contributions to registered funds are tax deductible.
The labour ministry introduced the first compulsory retirement scheme for companies with ten or more employees in 1997. Employers must contribute 3% of the total salary up to the age of 55. A similar scheme for public employees, the Government Pension Fund (GPF), has not proven successful since it was implemented on a voluntary basis. Only about 4,000 employers nationwide have established GPF schemes since the fund started operating in 1996. Employees must contribute 3% of their wages. Membership is compulsory for new employees but not for existing staff, who may continue using a pension scheme. The finance ministry had originally expected to have a framework to compel employers to have provident funds in place by end-2004, but it said in September 2005 that it would delay the plan to 2007. Under the scheme, every company will be required to set up a mandatory provident fund for employees. Employees will contribute at least 6% of their salaries to the new funds, and employers will match these contributions. Companies that already offer voluntary provident funds to which the contribution is 6% or more will be allowed to register these as mandatory provident funds. Under the existing Provident Fund Act, the establishment of provident funds is voluntary, and employers and employees can contribute 215% of employees salaries to the fund. Authorities, faced with a slowly ageing population, are increasingly worried that most workers pension coverage is insufficient. The ratio of people of working age to elderly declined from 19:1 in 1970 to 11:1 in 2000, and it is forecast to decline further, to 8:1 in 2010 and 6:1 in 2020. Present coverage provides retirees with about 13% of their final salaries, well below the 50% most retirees will need. Efforts to create pension funds have so far yielded coverage for only about 1m employeesless than 3% of the countrys labour force. By comparison, the Social Security Fund (which might also be combined with the pension scheme) has about 7.5m members, and the civil-service pension fund covers 1.1m workers.
Workers contributing to the Social Security Fund for 15 years or more receive, as a form of pension, about 15% of their average salary over the past 60 months on retirement.
An employee who has been working continuously for more than one year is entitled to at least six working days of paid vacation; all staff members get the 13 publicly observed holidays. Financial institutions frequently give personal loans, but this is unusual for other organisations. Annual bonuses, once standard practice in the Thai workplace, began making a comeback in 2000; however, they were still well below the generous pre-1997 levels, when four or five months salary was commonplace. Average bonuses for 2005 will probably be equivalent to 1.5 months salary, according to a survey of local companies.
Hiring and Firing Restrictions
Under the Alien Occupation Law of 1973, foreigners wishing to work legally in Thailand require work permits that can normally be sponsored only by an entity registered to do business in Thailand. It is usually necessary to establish that a Thai national cannot be found to perform a task in order to obtain a work permit for a foreigner. Moreover, certain occupations are reserved for Thai nationals.
New regulations for the employment of foreigners came into effect on November1st 2004. A company with fully paid-up capital of at least Bt2m is permitted to have one foreign employee. For each additional Bt2m in paid-up capital, one more foreign employee is permitted, up to a maximum of ten persons. Companies that already have ten foreign employees (and meet the fully-paid-up capital criteria) must comply with any one of the following criteria to add additional foreign employees: paying at least Bt3m corporate income tax during the previous year; bringing in at least Bt30m through export business; bringing in at least 5,000 foreign tourists in the previous year through the tourism business; or employing at least 100 Thais. The Ministry of Labour may grant exceptions on acase-by-case basis. The paid-up-capital requirement is reduced by half for a foreign employee married to a Thainational.
There are four classes of work permits: temporary permits (renewed every year), which accounted for well over half the total issued in 2005; permits issued through the Board of Investment; permits issued under cabinet resolutions to foreigners; and permanent-resident work permits. Many foreigners arriving in Thailand were issued permanent-resident work permits 30 years ago; since then, however, such permits have not been issued. The number of permanent-resident permits has been falling gradually as residents die or depart, officials say.
Foreigners are allowed to work in Thailand under the Employment of Aliens Act of 1978 and a royal decree of 1979. New minimum monthly wage rates for work permits came into effect at end-August 2003 and vary by nationality. They require citizens of Japan, the United States and Canada to be paid at least Bt60,000 to qualify for a work permit and non-immigrant visa. For Europeans and Australians, the figure is Bt50,000; for South Koreans, Taiwanese, Singaporeans and Hong Kong passport holders, it is Bt45,000; for Malaysians, Indians, Filipinos and Middle Eastern nationals, Bt35,000; and for Africans, Bt25,000. For those working in the newspaper business the figure is Bt20,000, regardless of nationality.
The government said in September 2004 that it plans to ease restrictions on the employment of foreigners for companies from countries that have signed free-trade agreements with Thailand, though no changes in the regulations had been made as of November 2005.
The nationwide registration of foreign migrant workers began in September 2001, with employers having to register their alien workers with the Ministry of Labour. Their employment is allowed only in ten categories of work facing severe labour shortages. The number of registered foreigners was about 580,000 in 2001, but it declined to about 400,000 in 2002 and to less than 300,000 in 2003. An amnesty during July 2004 for illegal migrant workers from Myanmar, Laos and Cambodia resulted in the registration of 1.2m foreigners, 70% of them from Myanmar. Employers of foreign labourers also had to register. After registering, the foreigners were required to pay Bt600 for a medical check-up fee and Bt1,300 for medical insurance. If they intended to work in the country, they also had to pay Bt1,900 for a work permit, which is valid for one year. By registering alien workers, the government hopes both to get a clear idea of the number of foreigners in the country and to track labour demand.
According to government figures, the number of migrants working legally in Thailand had dropped to 700,000 by November 2005, but it believed that another 300,000 were living and working illegally at that time. The Ministry of Labour said it was considering amending the labour laws to encourage these illegal labourers to register as well; it said it would also import 200,000 workers from Laos and Cambodia via government-to-government contracts. The ministry estimates that the Thai economy needs at least 1.2m foreign workers, and demand for lowly skilled labour is likely to soar as the government starts implementing its Bt1.7trn infrastructure programme.
Illegal foreign workers risk being jailed for up to three months and/or fined up to Bt5,000. Those employing illegal labourers risk a jail sentence of up to three years and/or a fine of up to Bt60,000.
The draft Foreign Business Law had fixed the proportion of foreign staff at 20% of all employees and stipulated that specialist expatriate staff could be hired for up to five years, instead of being negotiated on a case-by-case basis. But these changes were never included in the final version of the law.
Special rules apply to individual investors, consultants and journalists. The immigration regulations recognise short visits by businesspersons for legitimate trading purposes, conferences or seminars. Immigration legislation provides for permanent residence status on deposit of a bank guarantee. A similar scheme also applies to skilled entrepreneurs.
Both forms of permanent residency require a direct investor to bring more than Bt10m into a project with total investment (excluding land and working capital) of at least Bt100m or in which foreign ownership exceeds 25%. A portfolio investor must purchase minimum amounts of special Ministry of Finance bonds with foreign exchangeBt8m for the individual investor, Bt6m for a spouse and Bt2m per child. A foreign specialist must be older than age 25 and employed in a qualifying field at an annual salary of at least US$10,000. Separate conditions apply for applicants with a Thai spouse. Those qualifying will be granted residency visas for a probationary term of three years, to be extended if qualifying status is maintained.
Rules for dismissal and severance pay have been in force since 1974 and were updated under the amended Labour Protection Act. According to Section 119 of the act, employers need not pay severance pay if an employee performs his duties dishonestly, or intentionally commits a criminal act against the employer; intentionally causes the employer to suffer losses; performs an act of gross negligence which causes the employer to suffer severe losses; neglects his duties for a period of three consecutive working days without reasonable cause; is imprisonedunder a final judgment, except for offences arising out of negligent acts or for petty offences; or violates the employers work rules, regulations or orders which are legal and fair, and the employer has already given a written warning, except in serious situations for which the employer is not required to give a warning. Thewritten warning is effective for a period of one year from the date of the violation by the employee.
It is normal for employers to issue warning letters to employees for any first offence to build evidence if the eventual dismissal is referred to the Labour Court. Regular employees are otherwise entitled to severance pay on dismissal, depending on the length of employment: 30 days when employment has been at least 90 days but less than one year; 90 days for more than one year but less than three years; 180 days for more than three years but less than six years; 240 days for more than six years but less than ten years; and 300 days for any employment longer than ten years.
Since 1995 firms that replace workers with machines have had to give employees advance notice of 60 days before terminating their employment. Employees who have worked for more than six years are eligible for compensation, in the form of 15 days wages for each year of employment after the first six years. Unless otherwise provided in an employment contract, retirement can give rise to entitlement to severance pay, even though provident-fund or other retirement benefits may also be payable. Severance pay is no longer liable for income tax under changes announced by the Finance Ministry in 1999.
Copyright 2006 Economist Intelligence Unit
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