China: Redundancy In China: Regulations And Our Practices

Last Updated: 3 August 2015
Article by Anderson Zhang

Redundancy has not been defined in any law or regulation in China so far. Article 41 of The Employment Contract Law of the People's Republic of China provides the following sole and exhaustive four situations where employers can reduce their workforce due to "redundancy." According to Article 41, an employer may reduce its workforce as a result of "redundancy" only if it:

  • Is in the process of reorganization in accordance with the bankruptcy law;
  • Encounters serious problems in terms of production and operation;
  • Switches to other lines of production, introduces a material innovation of technique or adjusts its operation, and after amendment to the employment contracts, still needs to reduce its workforce; or
  • Has any other major change to its objective economic circumstance that the employment contracts rely on when concluded, causing the continuing performance of the employment contracts to be unfeasible.

However, the procedure required by law focuses on the involvement of employees. A reduction of workforce amounting to 20 employees, or less than 20 but accounting for more than 10 percent of the total workforce, triggers the procedure. The employer shall explain the situation to all of its employees or the labor union 30 days in advance, solicit their opinions and file the application of redundancy with local employment authorities. As one of the most important clauses in The Employment Contract Law of the People's Republic of China, Article 41 is stated in only 340 Chinese words.

Redundancy is done by an employer for the purpose of improving efficiency and, theoretically, less efficient or less skilled employees might be reduced. However, the following employees should be retained in priority:

  • The employee who has a long and fixed-term employment contract with the employer;
  • The employee who has an open-ended employment contract with the employer; and
  • The employee who is the sole workforce in his/her family and has an elder or minor depending on his/her support.

Meanwhile, the law also protects the following employees from redundancy and they shall be excluded from the list of exit:

  • The employee engaged in operations exposed to an occupational disease hazard who has not taken an occupational health check before leaving, or the employee suspected of an occupational disease who is in the period of diagnosis or medical observation;
  • The employee who loses or partially loses the ability to work due to occupational disease or work-related injury;
  • The employee who is under the protection of the period of medical treatment for illness or injury not related to work;
  • The female employee during the period of pregnancy, confinement or nursing;
  • The employee who has worked for the employer for 15 consecutive years and is less than five years away from the retirement age; and
  • The employee who is in any other circumstances so specified by laws and administrative regulations.

The compensation standard of redundancy is quite explicit, i.e. the years of service for the employer multiplied with the monthly salary before redundancy. If the employee's monthly salary is higher than three times local employees' average monthly salary, then three times average monthly salary will apply.

We are frequently asked whether a company shall also apply redundancy in case of liquidation. In fact, the employment issue regarding liquidation is more transparent than redundancy. The employer is entitled to end the employment contract and no statutory procedure is required, while the compensation standard is the same as the one applied to redundancy.

In the past two years, several well-known multinational companies, including IBM, Microsoft and Sony, experienced difficulties in implementing a reduction in force. Employers contemplating such a reduction in force should pay close attention to the following four issues at least:

1. The employment authority does not file your application on record. Without filing, redundancy could not be initiated.

We must be aware that filing in China works as approval does in the western world. The employment authority decides at its sole and independent discretion on whether to file it or not—while the criteria is not clear—although you may be able to prove that the company's situation satisfies the requirements as listed above. The employment authority in some cities has even refused to file any applications in the past several years.

2. The employees usually are not satisfied with the statutory compensation.

Even though the formula of economic compensation for redundancy or liquidation is set forth by law, most employees would demand more compensation without any legal grounds and contend the principles of fairness, rationality or transparency.

3. Labor unrest.

As noted above, most employees are not satisfied with the statutory compensation. They normally protest against the plan of redundancy and the standard of compensation, even besiege the management personnel, plug main roads or show banners in front of a camera and upload it to the internet.

4. The role of the labor union in the redundancy.

In most cases (if not all), the labor union always avoids facing the protest and only nods approval of the plan of redundancy. It is commonly believed that the labor union is under the control of the employer instead of employees themselves.

In order to handle the massive reduction of workforce properly, experienced employment lawyers are crucial to the project of redundancy, from the design of the plan, the standard of compensation, the form of the meeting with employees, to the talk sheet for negotiating with employees. Not only is knowledge of employment law required, but psychology, government relationships, industry practice in the local market, the precedents of the company, the understanding of individual employees and other issues also affect the success of a reduction in force based on redundancy.

In the first quarter of 2015, our team completed three separate projects involving reductions in force based on redundancy and all three of the projects were closed within one day after the face-to-face negotiation began: In January, a life-tech company reduced 57 employees; in February, 118 employees were dismissed by an employer specializing in global marketing and branding; and in March, 74 employees left a company due to the sale of the business. All these three projects of redundancy were completed through mutual negotiation and no lawsuit has been launched so far.

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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