China’s labour laws give adequate termination protection for employees. In China, an employer may terminate an employee’s employment contract by mutual termination or unilateral termination. Employers have no right to terminate an employment contract for no reason. To unilaterally terminate an employee’s employment contract, an employer must have one of the causes under the Labour Contract Law of China and the conditions and procedures required by such law for such cause must be followed; otherwise, the employee has the right to request the employer to either (1) pay damages for unlawful termination or (2) reinstate their employment contract and pay the backpay.
Mutual termination
Considering possible social impact of mass termination, pressure from the authorities, and the cost for responding to the labour arbitration and litigation to be initiated by employees, mutual termination is highly suggested to employers.
Many employers try mutual termination first with all or the majority of employees and then resort to unilateral termination with the minority who reject mutual termination. Mutual termination is subject to the lowest legal risk and the least restrictions. It applies also to the employees who are pregnant, on maternity leave, at nursing period, or on sick leave, and it doesn’t require a notice period. The challenge of it lies in the formulation of a proper severance pay, which aligns with the expectation of the majority about the severance.
Unilateral termination
It’s necessary for employers to have a plan B, just in case the negotiation with employees for mutual termination failed. Before the negotiation, employers need to decide whether to proceed with unilateral termination if the negotiation failed and to prepare the cause for the unilateral termination.
Among the causes for unilateral termination under the Labour Contract Law of China, the only ones concerning changes in the employers’ business or organisational structure is the termination due to a ‘material change in the objective circumstances’ in Article 40 Item (3) and the termination as the result of ‘economic layoff’ in Article 41.
i. Unilateral termination due to ‘material change in the objective circumstances’
A unilateral termination by an employer due to a ‘material change in the objective circumstances’ is required to satisfy the following conditions:
- the employment contract can’t be performed specifically due to a ‘material change in the objective circumstances’; and
- the employer and the employee negotiate about amending the employment contract but fail to reach agreement.
What constitutes a ‘material change in the objective circumstances’? The Labour Contract Law of China is silent on this. The Notes on Certain Provisions of the Labour Law, released by the now-reorganised Minister of Labour, defines ‘objective circumstances’ as force majeure or the occurrence of other scenarios that render the performance of the employment contract impossible in whole or in part, such as relocation, merger into another entity, or transfer of corporate assets. Economic layoff is excluded from this definition. The above provisions do not provide an exhaustive listing of all the circumstances. Various criteria for determining such circumstances exist in judicial practice. In many regions, employers’ organisational restructuring or change of business is not recognised by courts as a ‘material change in the objective circumstances’.
Amendment of employment contract may involve the amendment of position, place of work, pattern of work, and salary, etc. It’s worth noting that the negotiation on the termination of employment contract is not deemed by courts as the required negotiation on the amendment of employment contract.
ii. Unilateral termination due to economic layoff
A unilateral termination due to economic layoff is required to satisfy the following conditions:
- The number of the employees to be laid off reaches 20 or accounts for at least 10% of the total employees;
- one of the circumstances listed in Article 41 of the Labour Contract Law of China occurs, including severe difficulties in business operation, or the objective economic circumstances relied on which the employment contract was concluded changed so significantly that the continued performance of the employment contract becomes impossible, etc;
- the employer has explained the layoff plan to its labour union or all the employees 30 days in advance; and
- the employer has then filed the layoff plan with the labour authorities.
The most challenging part of economic layoff is the filing with the labour authorities. From our experience, although the Labour Contract Law of China requires the employer to only file its layoff plan with the labour authorities (which means the labour authorities is not granted the power to approve it or not), in practice, the labour authorities do review whether the employer’s layoff satisfies all the conditions required by the law and follows all the required procedures. If the labour authorities determine that the employer fails to meet or follow any of the required conditions or procedures, it will not issue the employer any document to prove that the employer has filed its layoff plan. Without such document, the employer is not able to complete the required procedures for economic layoff.
In addition, as one of the required procedures, the employer should explain to its labour union or all the employees in advance about the layoff. That means the employer should disclose the overall layoff plan either to the labour union or all the employees before the launch of the layoff. If the employees get to know the layoff plan early, the stability of their work may be affected.
iii. Other restrictions
The above mentioned unilateral termination due to either ‘material change in the objective circumstances’ or economic layoff doesn’t apply to the employees on sick leave for illness or non-work-related injury and the prescribed period of medical treatment has not expired, those in pregnancy, maternity leave or nursing period, those who have worked for the employer for 15 consecutive years and will reach the statutory retirement age in less than five years, and the chairman and the vice-chairman of the labour union, etc.