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What are the rules on making staff redundant in China following the coronavirus?

by Tom Pattinson
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For many companies in China, the only way to survive the coronavirus outbreak might be to make staffing redundancies. Here law firm Jingtang explain the steps you need to take.

As the coronavirus outbreak continues, enterprises in China are experiencing enormous challenges in the management of employee relations. The nationwide implementation of epidemic prevention and control measures has exerted varying degrees of pressure on enterprises, affecting their production, operation and employment arrangements. Some employees cannot return to work, and others are not able to work to capacity. As the epidemic continues, some enterprises may suffer from a partial or complete labour surplus.

In response to these problems, state and local governments have issued a series of policies to encourage enterprises affected by the epidemic to adopt flexible employment arrangements (such as salary adjustment, work shift rearrangement, work hour reduction, and rest day rearrangement), with an aim to avoid or minimise layoffs.

If an enterprise still experiences serious difficulty after adopting flexible employment arrangements, it may have to find a way to deal with the redundancy, to minimize cost of labour. There are mainly two types of plans available: (1) suspend the enterprise’s operation while retaining the employment relationship with employees until operations are resumed, and (2) terminate the employment relationship with some or all employees. In this article, we describe each plan’s conditions, requirements, and practical points.

I. Suspending operations

The current laws and regulations do not provide a clear process or premise for the suspension of operations. Enterprises affected by the epidemic can consider suspending operations as the situation demands. There are, however, certain issues to watch for:

1.              There must be a proper reason for suspension, such as lack of need for production due to decreasing orders or an inability to operate due to traffic restrictions.

2.              An enterprise deciding to suspend operations must explain to employees, in writing, the reason for and length of the suspension, as well as tasks to be fulfilled and compensation standard during the suspension period. The enterprise must also hear the employees’ opinions and answer their questions.

3.              Compensation. For a suspension that is within one pay period, the enterprise must pay the rates stipulated in the employment contract. If the suspension lasts longer, the enterprise may pay based on the amount of work done according to a new rate agreed by both parties (but it cannot be lower than the local minimum rate). For employees without work, the enterprise should pay a living subsidy in accordance with local standards. In Shanghai, the subsidy must not be less than Shanghai’s minimum wage. In Jiangsu and Zhejiang, it should be no less than 80 percent of the local minimum wage.

4.              Though the law does not explicitly require enterprises to send any report to the labour and social security department in advance of a suspension, it is recommended that an enterprise communicate with its local labour and social security department in advance and operate under their guidance.

II. Planning a layoff

If the enterprise still suffers from a labour surplus and experiences a business crisis after taking the above-mentioned measures, a layoff may be inevitable. Under the law, an enterprise can consider the following plans to terminate some or all of its employees:

1.  Termination by mutual agreement

According to Article 36 of the PRC Labor Contract Law, an employment contract may be terminated in writing by the employer and employee’s mutual agreement. The agreement to terminate should contain the date of termination, amount of compensation, settled wages and expenses, and the employer’s disclaimers. An employer is advised to retain all written communications, records, and fully executed mutual termination agreements with its employees.

2.  Termination based on a major change in circumstance

Under the PRC Labor Contract Law, Article 40, Section 3, where there is a major change in circumstance rendering performance of an employment contract impossible, and the two parties fail to agree on an amendment, the employer may unilaterally terminate the contract. In the current epidemic, it is believed that if the epidemic has sufficient impact on an enterprise that it constitutes a major change in circumstance as recognised by common judicial practice, the employer can consider terminating its employees.

However, different local adjudication bodies adopt different standards in assessing what constitutes “a major change in circumstance rendering performance impossible.” Thus, employers must carefully assess whether the epidemic truly presents a serious obstacle to the performance of their employment contracts.

Two types of employees cannot be terminated based on a major change in circumstance: (1) employees that meet the requirements in Article 42 of the PRC Labor Contract Law (for example, female employees undergoing pregnancy, confinement or lactation), and (2) carriers, suspected carriers, and persons having been in close proximity to carriers of the novel coronavirus who are either quarantined or placed under medical observation, as well as employees who cannot work due to quarantine or other emergency measures implemented by the government (collectively referred to as “employees that are not terminable due to the epidemic.”)

3.   Mass Layoff

Under the PRC Labor Contract Law, Article 41, a qualified enterprise requiring a termination of (1) twenty or more employees, or (2) few than twenty but no less than 10 percent of the employer’s workers, may implement a mass layoff. But even with a mass layoff, the enterprise cannot terminate an employee whose termination is forbidden by law (including employees that are not terminable due to the epidemic (as defined above) and employees specified in Article 42 of the PRC Labor Contract Law).

An enterprise planning a mass layoff should first assess whether it meets all legal requirements for such a layoff. But since no uniform standard for determining whether an enterprise conforms to the four situations authorising a mass layoff is seen in today’s legal practice, a decision for mass layoff must be carefully evaluated on a case-by-case basis. In addition, an enterprise must satisfy the procedural requirements for a mass layoff, including giving the labour union or all its employees a 30-day advance notice to explain the situation, hearing the labour union or employees’ opinions, and reporting to the local human resource and social security department after seeking labour union and employees’ opinions.

4.  Ending employment due to dissolution

Article 44 of the PRC Labor Contract Law permits ending an employment contract when an employer decides to dissolve the company. An enterprise needing to close and dissolve as a result of the epidemic may end its contracts with the employees.

III.  Conclusion

Enterprises can reduce the cost of labour and stabilise employee relations by making full use of one or more flexible employment arrangement measures permitted and encouraged by the government. If, after taking these measures, an enterprise still needs to reduce the size of its workforce, it should formulate and implement appropriate redundancy plans to comply with the law and minimise labour disputes.

This article was written by Tracy Liu and Larry Lian of Jingtian Law firm


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