Reed Smith Client Alerts

The outbreak of COVID-19 in 2020 has shocked the world and given rise to various challenges to companies operating in the People’s Republic of China (China or PRC). Since January 2020, the Chinese government has released a multitude of government directives to provide guidance as well as assistance to companies to help them manage labor and employment issues in connection with COVID-19. Most businesses in China have had to shut down their operations to cooperate with the government’s public health and disease control measures; many of these companies now face significant financial hardship and operational difficulties due to the impact that COVID-19 continues to have on employee mobility and the economy in general. As a result, some employers have started to consider layoffs, terminations of nonperforming employees, elimination of redundant positions, and reduction of pay and benefits in order to decrease their operational costs and expenses.

Autores: Dora Wang Katherine Yang Cindy Shen

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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.