China: How to determine the legal grounds for a layoff: What you need to know - Article 1 in a series on layoffs

Last Updated: 25 July 2015
Article by Linda Yanling Liang and Wang Zhaogang

Those who watch Hollywood films and American television shows will be familiar with the following scene: A hapless employee is informed of his termination by his boss and must immediately pack up his things and leave the office. The employee is then seen leaving, carrying a Bankers Box, possibly engendering sympathy from the audience. Chinese films do not typically show such scenes because in China, employers are not allowed to fire someone at-will in this manner.

Unlike At-Will Employment as found in the US context, Chinese law stipulates select grounds under which employers are allowed to dismiss their employees. Regardless of the number of employees terminated, whether it is one layoff or a mass layoff, the employer shall either reach a consensus on mutual termination with the employee(s) through consultation, or unilaterally terminate the employees under certain circumstances in accordance with relevant clauses in the law. In a mass layoff, employers may use both mutual consultation and unilateral termination. For instance, the employer may consider unilateral termination if the previous attempt to reach a mutual termination has failed.

When the employers have no choice but to initiate a layoff process, it is essential that they have a legitimate and appropriate ground for the unilateral termination based on the facts in the case. In addition to helping the employees understand the challenging situation faced by the company, thereby increasing the chance of obtaining a negotiated mutual termination, an appropriate ground for the layoff will also help the employer unilaterally terminate employees legally when a mutual agreement on termination cannot be reached.

In practice, grounds for a mass layoff frequently considered by employers include: (1) a major change in objective circumstances under which the employment contract was originally signed; (2) economic layoff; (3) a branch office-employer is dissolved/closed by its head office, or a company decides in advance to deregister (Company Closure). The legal requirements for each ground and our analysis of the situations in which they are suitable to be applied are explored in-depth below.

  1. The Legal Requirements to Invoke Major Changes in Objective Circumstance as the Ground for a Layoff

To invoke major change of objective circumstances as a ground to lay off employees, the following conditions must be met:

  • The situation of the company must substantially constitute a major change of the objective circumstances as stated by law (such as the transfer of the company's assets, the relocation of the company, etc.), and the employment contract cannot be continued due to such a change;
  • Procedural requirements: to invoke this statutory ground, the employer first must not have reached a mutual agreement with employees regarding modifying their employment contracts; second, it must notify the labor union of the reasons thereof in advance; and third the employer shall give the employee a written notice 30 days in advance of the termination or pay a 1-month salary in lieu of notice;
  • Protected classes: female employees in their prenatal, perinatal or lactation period, or employees with work-related injuries sustained during the term of service cannot be terminated.

When invoking this ground for a layoff, the law does not require the employer to report to the relevant labor administrative authorities. Therefore, this ground is convenient for employers because they can adhere to their desired schedule for the layoff. An employer may consider invoking major change in the objective circumstance as the ground for a layoff when it meets the above conditions.

  1. The Legal Requirements to Invoke Economic Layoff as the Ground for a Layoff

To invoke economic layoff, the following statutory conditions must be met:

  • Applicable situations are restricted: economic layoff can be applied only in cases of serious operational difficulty of the company. For instance, if the employer is restructured in accordance with the provisions of the Enterprise Bankruptcy Law, or if there are serious difficulties in production or operations to such an extent that the employer is categorized as a Troubled Enterprise as determined by the local government;
  • Procedural requirements are numerous: the employer shall explain the situation to the labor union or all employees 30 days in advance and submit the layoff plan to the local labor administrative department;
  • Protected classes: female employees in their prenatal, perinatal or lactation period, or employees with work-related injuries sustained during the term of service cannot be terminated;
  • When making an economic layoff, certain employees shall be given priority to be retained, such as employees who have concluded labor contracts with no fixed end date and sole-breadwinner employees supporting elderly or underage family members;
  • The laid-off employees must be rehired in priority: when an employer makes an economic layoff but then undertakes new recruitment within six months, the laid-off employees shall be informed of the new recruitment and be rehired in priority under the same conditions.

The employer may consider invoking economic layoff only if its situation meets the legal requirements for economic layoff, cannot meet the legal requirements for other types of layoff and the number of employees to be laid-off is relatively large.

  1. The Legal Requirements When Invoking Company Closure as the Ground for a Layoff

Invoking Company Closure as the ground for a layoff is convenient because of the following reasons:

  • Company Closure is one of the statutory causes of labor contract termination: The PRC Labor Contract Law stipulates that a labor contract shall be terminated if the branch office-employer is closed/ dissolved or if the company decides in advance to deregister itself;
  • Fewer legal restrictions: The employer's closure leads to its disqualification as a party of the employment contract. As a consequence, employees' labor contracts cannot be continued and are terminated, including those of female employees in their prenatal, perinatal or lactation period, and employees who have suffered work-related injuries, since no specific provision under PRC law forbids such termination.
  • Lower cost of layoff: The national legislation and regulations enacted before 2008 did not require the employer to pay any economic compensation to employees when it terminated its employees due to its dissolution or deregistration. Therefore, in layoffs due to the Company Closure, unless otherwise required by local regulations, the employer has no legal obligation to pay severance deriving from years of service before 1st January in 2008 to employees.

Based on the analysis above, an employer may choose Company Closure as its preferred ground for laying off staff if all relevant legal requirements are met. When invoking this ground, the company may need to consider coordinating the timing of the deregistration process with the employees' settlement.

"Once an arrow is shot, it cannot be retrieved." This proverb accurately captures the delicacy required in determining the legal ground for laying off employees. Once the ground for the layoff has been confirmed and announced to the employees, it becomes difficult for the employer to adjust or change it. Therefore, it is crucial to select an appropriate ground for the layoff after a comprehensive consideration of the conditions of the project before the layoff is actually undertaken. The ground chosen for the layoff, to a large extent, determines whether the project will progress smoothly and whether the result will be satisfying.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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