China: Panacea for employment termination?: A brief analysis of the phrase - A Significant Change Has Occurred in the Objective Circumstance

Last Updated: 31 August 2015
Article by Xu Xiaodan and Pei Xiu

A company's HR department is sometimes faced with such situation that the business unit ("BU") needs to be internally adjusted and thus the HR needs to help dismissing certain employees in a particular BU. However, it always causes troubles if the employment contract of the concerned employee is yet to expire, or this employee has never committed any gross misconduct or is found incompetent for his/her work. In such a circumstance, if this employee does not consent on mutual termination, what ground can the HR personnel use to terminate the employment contract?

Some HR personnel would take subsection 3 of Article 40 of Employment Contract Law referring "a significant change has occurred in the objective circumstance" as a panacea to terminate employment contracts. However, can this termination ground make a really good use within the framework of the existing legislation?

Subsection 3 of Article 40 of Employment Contract Law stipulates that if a significant change has occurred to the objective circumstance on which the employment contract was based, which renders the employment contract unable to be performed, and after mutual consultation, the employer and the employee cannot reach any agreement on the amendment of employment contract, the employer can unilaterally terminate the employment contract by giving written notice 30 days in advance to the employee or paying additional one month salary in lieu of notice.

In practice, when applying this article to dismiss employees, the employer should focus on the following two issues, in addition to the category of employees with special conditions (for example the pregnant employees) which are protected from being dismissed: firstly whether the company's situation can constitute a significant change in the objective circumstance, and secondly whether the company has consulted with the employee to amend the employment contract.

To begin with the first issue, we can refer to the Interpretation of Several Provisions of the PRC Labor Law (the "Interpretation") promulgated by the Ministry of Labor in 1994. Subsection 4 of Article 26 of the Interpretation prescribes that, a significant change in the objective circumstance refers to force majeure or other situations which render the employment contract unable to be performed fully or partially such as a relocation of company, a merger, or an assets transfer. Nevertheless, are there any other situations that can be regarded as a significant change in the objective circumstance?

For instance, some companies may remove one BU as a whole so that the job positions within this BU no longer exist. Then can we describe such a situation as "a significant change in the objective circumstance"? Generally speaking, a BU may be removed because the business is depressed in the market and thus the company needs to cut the loss. Some other companies, besides, outsource certain BU to a third party as a whole without retaining any employees, in order to optimize the management structure and cut the cost.

As it appears, the removal of BU is subject to the company's decision, instead of an objective circumstance. Nevertheless, such removal normally is significantly influenced by the outside impact. To this extent, some arbitrators and judges may regard such a situation as "a significant change in the objective circumstance" and deem the company's unilateral termination as lawful.

Then what if the company is having a structural adjustment and dismisses some particular employees according to a piece of board decision or shareholder decision? Whether this situation can be treated as "a significant change in the objective circumstance" is disputable. Some hold the view that having a structural adjustment is a company's operational autonomy, thus labor law should not interfere or deem the termination under such circumstance as wrongful. On the contrary, some others envision that if the termination under such circumstance is allowed by labor law, the company will be entitled to dismiss employees at its will. If that happens, the labor law will lose its function to protect employees. Given the current unclear legislation about this issue, the company needs to thoroughly evaluate the legal risk of wrongful termination and the business needs regarding employment and operation, and make a careful decision on unilaterally terminating the employment contract based on subsection 3 of Article 40 of Employment Contract Law.

Secondly, Employment Contract Law also has procedural requirements on this termination ground. Specifically, employers must consult with the employees to amend the employment contract. Only under the circumstance that no agreement is reached, can the employer be entitled to exercise the unilateral termination right.

Recent judicial cases show that some local courts (for example in Beijing) conduct a strict review on whether the employer has fulfilled the obligation to consult with employees. Once the employer is found not having fulfilled such consultation obligation, the dismissal will be considered as wrongful and the employer will be ruled to undertake the liability of wrongful termination, i.e. double statutory severance or reinstatement of employment. Given this situation, the employer needs to pay extra attention to the procedural requirement.

In practice, the pre-condition of amending employment contract for the discussed termination ground has triggered controversy: normally the amendment is about the change of job position; but what if the employee is offered an outside job position (i.e. the amendment involves the change of employer)? Is it compliant to adjust the employee's salary (usually salary decrease) as well? Does the offer of amendment have to be reasonable (for instance, can the company offer a position of security guard to a manager?)

Since there are no fixed answers to the above questions, it is advised that the employers should fulfill the obligation of amending contracts as conservatively as possible. To be specific, we would suggest offering the employees another job position on a reasonable basis, and trying to keep the employee's salary and benefit unchanged. On the same time, the employers are advised to preserve evidence about the consultation, for example, the notice of consultation and amendment, communication letter to the employees, job description of the new position, and written record of the employee's refusal to the new position.

Given all above, it is not easy to dismiss employees unilaterally under the ground that a significant change has occurred to the objective circumstance. Such termination involves complex requirements both in substance and procedure. Thus, the employers need to carefully make decisions on termination and produce a thorough action plan in order to mitigate the legal risks of wrongful termination.

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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