In China, employee layoffs and terminations should always be handled with extra care since PRC employment contract law (ECL) sets forth limited conditions under which employment termination may be carried out lawfully. From 2013 to 2018, more than 4.6 million labor arbitration cases were filed in China.1 The high number of employment disputes can be attributed in part to the relative ease and low cost of litigating employment disputes in China. Accordingly, Chinese companies and multinational companies with employees in China are advised to pay close attention to and comply with the related legal requirements when conducting layoffs or termination of employees, especially at a time like now, when the government has specifically prohibited companies from terminating employees during the mandatory closure of business in response to COVID-19 outbreak.
Layoffs and termination of employees in China during COVID-19
Under the PRC law, a company may end its employment relationship with an employee by terminating the employee’s employment contract in accordance with the ECL, which stipulates certain conditions based on which a company may terminate an employment contract. For example, a company may terminate an employment contract if the employee commits gross misconduct, in which case the company should proactively conduct an investigation to determine if the employee’s misconduct is a terminable offense under company policies and pursuant to the ECL.2 Also, if the employer has delegated work that can be completed by the employee notwithstanding the flexible arrangement for the employee to work remotely as a disease control measure, the employer may terminate the employment relationship in accordance with company policies if the employee refuses to perform work. Furthermore, if the employee is found to have committed a criminal offense in connection with their refusal to be quarantined or to receive treatment for COVID-19, or for intentionally spreading COVID-19 to endanger the public, or otherwise refusing to cooperate with the government’s disease control measures, the employer may terminate the employment contract in accordance with the ECL.3 For the purpose of this client alert, we focus on (1) termination of an individual employment contract due to a major change in the objective economic conditions that makes it impossible for the parties to perform the employment contract, and (2) mass layoff due to difficulties in operations, dissolution or bankruptcy, or a major change in the objective economic conditions related to COVID-19.
Termination of individual employment contracts
An employer may terminate the employment contract if there is a major change in the objective economic conditions – relied upon at the time of the execution of the employment contract – rendering it impossible for the parties to perform the employment contract.4
The employer may terminate an employment contract by giving the employee 30 days’ prior written notice or one month’s wages in lieu of notice. However, companies must satisfy all procedural requirements before terminating an employment contract under this rule. First, after the major change in objective circumstances occurs, the company must negotiate with the employee. Only after negotiations fail and the parties cannot reach a new agreement may the company terminate the contract. The company shall maintain all relevant documents, including but not limited to notice for negotiation and meeting minutes, to prove that the procedural requirements have been fulfilled.
Termination of employment contracts due to mass layoffs
Under certain circumstances, such as the severe difficulties caused by COVID-19, a company may decide to end its employment relationship with multiple employees. If it is necessary for a company to lay off 20 or more employees or 10 percent of the company’s workforce, and if the number of affected employees is less than 20, this is regarded as a “mass layoff.”5
ECL stipulates that a company may initiate a mass layoff if (1) the company is under restructuring pursuant to PRC bankruptcy law; (2) the company encounters serious difficulties in business operations; (3) the company, after switching its production, introducing significant technological innovation, adjusting its business model, and revising the employment contracts, still needs to reduce its workforce; and (4) there are other major changes in the objective economic conditions relied upon at the time of the execution of the employment contract that render it impossible for the parties to perform the employment contract.6
Due to the outbreak of COVID-19 and the severe hardship to companies that has ensued, more and more companies are being dissolved, and many have declared bankruptcy. While both of these conditions would enable a company to invoke the provisions in the ECL to terminate employment contracts,7 some companies that have not been at risk of insolvency might still need to reduce their workforce to stay afloat. As such, these companies should evaluate whether the COVID-19 outbreak constitutes “a major change in the objective economic conditions” as defined by the ECL or otherwise causes difficulties in its operations” that would make it necessary to eliminate certain positions that have become redundant when the company is forced to reduce its scope of operations. Companies that plan to terminate employment contracts based on a major change of objective economic conditions must be mindful that there should be a causal relationship between the major change and the nonperformance of the employment contract.
To analyze whether a company may terminate an employment contract lawfully, it is imperative to understand what constitutes “a major change in objective circumstance.” The law concerning interpretation of provisions of employment law states that “objective circumstances” refers to force majeure or other circumstances that cause all or part of the employment contract to become invalid.8 The determination turns on the specific facts of each case, and the employer has the burden of proof to demonstrate the necessity of implementing a mass layoff after it has tried taking other actions to stave off the impact that the outbreak has had on its operations. Companies are required to first negotiate with employees regarding adjustments to their salaries or compensation, rotating work shifts and leave, and reducing work hours in order to stabilize and preserve the affected positions with the goal of avoiding layoffs to the extent possible or reducing the scope of layoffs.9
To terminate an employment contract through elimination of redundancy, the company must provide 30 days’ written notice to the labor union or to all of its employees.10 After it has solicited the opinions from the labor union or the employees, and after it has submitted the layoff plan to the employment administrative agencies, the company may lay off its employees in accordance with the submitted plan. If the company initiates the mass layoff due to restructuring in accordance with the PRC bankruptcy law or company dissolution, the company shall also provide economic compensation to its employees.11
Protected classes of employees
Certain employees cannot be terminated pursuant to the ECL even when major changes in the objective circumstances exist. China’s state government expressly prohibits companies from terminating employees who are absent from work while they are under medical treatment, medical observation, or subject to quarantine in connection with COVID-19.12 Companies are also prohibited from terminating certain classes of employees under the ECL, including but not limited to employees who have lost or partially lost their capacity to work due to work-related injuries; female employees during pregnancy, confinement, or nursing period; and employees who have been working for the company continuously for no less than 15 years and who will retire in less than five years.13 Companies may negotiate with these employees to reduce their compensation or benefits in order for the company to survive the economic hardship caused by COVID-19.
In addition, companies shall also keep in mind that certain groups of employees are considered “priority personnel” whose positions should be retained to the extent possible. Priority employees include those who have entered into a fixed-term employment contract with the company for a relatively long term, employees who entered into open-ended employment contracts with the company, and employees who need to support the elderly or minors in their family as the family’s sole income earner. If an employer that has reduced its workforce due to restructuring pursuant to the PRC bankruptcy law later intends to hire new employees within six months, it shall notify the dismissed employees at the time of the layoff, and these employees shall have priority in being rehired under the same conditions.
Strategic considerations
The economic hardship caused by COVID-19 poses significant challenges for all companies in China. However, terminating employment relationships is generally not recommended at this point in view of the government’s prohibition on employment termination during the mandatory closure and also the government’s recent call for resumption of business. Companies encountering difficulties should first consider negotiating with their employees to reach a mutual agreement with respect to reduced salaries, paid leave, or other kinds of compensations and benefits. Companies should also permit employees to work flexibly to the extent possible.
In general, the Chinese government has mandated that companies refrain from laying off or terminating employees under the current situation. The central government has issued a notice regarding employment relationships during the prevention and control of COVID-19, in which the government expressly states that companies should make every effort to “avoid layoff or minimize the scope of layoff.”14 The Chinese government has also released various policies to reduce the operational burden of the companies and provide incentives for companies that have taken measures to avoid layoffs.15 For example, the government has allowed companies and individuals to postpone payments of social insurance registration and contributions until three months after COVID-19 is resolved.16 Therefore, companies should consider taking advantage of these government incentives that aim to provide relief to businesses in managing the current challenges.
After a company has negotiated with its employees, postponed payments to the government, and reduced relevant costs and expenses, if it is still necessary to lay off employees, the company should properly plan the layoff or termination process in compliance with all legal requirements. The company should also document the process and retain all relevant records thereof, including but not limited to employment contracts, notices to employees, meeting minutes, financial records or other documentations to prove operational difficulties, and other relevant documents. As significant business disruptions may be triggered by a mass layoff, companies are advised to consult experienced legal counsel to help them manage sensitive employee relations and negotiations, mitigate potential legal risks, and ensure compliance with all legal requirements.
- China Statistical Yearbook 2019, National Bureau of Statistics of China, available at stats.gov.cn.
- Employment Contract Law of the People’s Republic of China (July 1, 2013), art. 39.
- Id. at art. 39(6).
- Id. at art. 40.
- Id. at art. 41.
- Id.
- Id. at art. 44.
- Interpretation of Provisions of Employment Law (Jan. 1, 1995), art. 26.
- Notice of the General Office of the Ministry of Human Resources and Social Security on Properly Handling Employment Relationship during the Prevention and Control of Outbreaks of the New Coronavirus Infection (Jan. 24, 2020), available at mohrss.gov.cn.
- Employment Contract Law of the People’s Republic of China, art. 41.
- Id. at arts. 46, 47.
- See supra note 9.
- See supra note 2, at art. 42.
- See supra note 9.
- See, e.g., supra note 9; see also Notice of the Ministry of Human Resources and Social Security, Ministry of Finance, Tax Bureau on Reducing Enterprises’ Social Security Payments, (Feb. 20, 2020), available at mohrss.gov.cn.
- Ministry of Human Resources and Social Security of the People’s Republic of China, Management of the Social Insurance Work During the Prevention and Control of COVID-19 (Jan. 30, 2020), available at mohrss.gov.cn.
Client Alert 2020-111
