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Labor law in China has clear rules on redundancies and reductions of force

Challenging market conditions around the world have forced multinational corporations to adapt and change. An employer contemplating possible redundancies and reductions in the workforce must understand the regulatory framework, as well as its legal obligations and implications.

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Redundancy refers to the termination of employment agreements without cause. There is no statutory definition of a collective dismissal, which is equivalent to an unjustified dismissal. This means that an employee dismissed in a mass dismissal exercise will have the same rights as an employee dismissed without cause.

In China, the Labor Contract Law (LCL) stipulates that an employer may terminate an employee by reason of redundancy, depending on the following:

  • The employer restructures in accordance with the Enterprise Bankruptcy Law of China;

  • The employer encounters serious difficulties in production or business operations;

  • The employer has amended labor contracts as a result of switching production, introducing material new technological innovation or revising business methodologies, and still needs to reduce its workforce;

  • The employer can establish that other major changes in the objective economic circumstances, which were relied upon when the labor contract was concluded, now render the contract impossible to perform.

These justifications are only valid if it is necessary to lay off 20 or more employees, or there are fewer than 20 employees affected but they account for more than 10% of the total number of the employer's workforce.

The redundancy ground for termination of employment cannot be relied upon for individual termination of employment.

According to the LCL, before executing a workforce reduction, the employer is required to explain the circumstances 30 days in advance to the labor union or all the employees, and to take the opinions or suggestions from the labor union or any employee into consideration.

Once this is done, the employer must report the workforce reduction plan to the local labor authority for review and filing.

An employer in China is only required to consider alternative employment for employees before exercising the workforce reduction if the company switches production, introduces technological innovation or revises business methodologies, and still needs to reduce its workforce after amending the labor contracts.

Certain employees are protected in the event of a termination by reason of redundancy:

An employee who is engaged in occupational disease-prone work who has not had a medical examination to determine whether they are free from such disease, or is in any diagnostic or observation period pending such determination;

  • An employee who has been confirmed as having lost or partially lost capacity to work due to an occupational disease contracted or a work-related injury sustained with the employer;

  • An employee who is suffering from an illness or sustained a non-work-related injury, and is still within the set medical treatment period;

  • An employee who is pregnant, on maternity leave or within a nursing period;

  • An employee who has worked continuously for the employer for 15 years or more and is within five years of the legal retirement age.

The LCL establishes that the following employees will have priority to be retained:

  • An employee who has entered into a comparatively longer fixed term labor contract with the employer;

  • An employee who has entered into an open-ended labor contract with the employer;

  • An employee who is the only one employed in their family, and has to support elderly or minor family member(s).

Laid-off employees have priority to be rehired if an employer that has reduced its workforce intends to hire new employees again within six months.

Before exercising a workforce reduction, an employer must report the workforce reduction plan to the local labor authority for review and filing following a consultation with the labor union or all the employees.

Companies must pay an employee terminated by reason of redundancy accrued remuneration up to the termination date, all outstanding wages, payments in respect of accrued but unused annual leave, and any pro-rata contractual bonus up to the time of termination.

The law in China states that an employer should arrange for its employees to use up all accrued statutory annual leave before termination. Otherwise, the employer must pay salary in lieu to such employees, which amounts to 200% of the normal rate.

If the employer provides discretionary annual leave to the employee in addition to the statutory annual leave, the employer can set out in its annual leave policy as to whether and how the untaken discretionary annual leave should be compensated.

Where an employee is entitled to a bonus under the labor contract (the 13th month salary), regardless of whether or not such contractual bonus is subject to certain conditions (such as being payable solely at the discretion of the employer), it is generally accepted by the labor dispute arbitration committee or the court that the bonus must be paid by the employer to the leaving employee on a pro-rata basis and based on the same criteria the employer would apply to other existing employees.

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The statutory economic compensation is “Monthly Salary x Service Year.” This means the average monthly salary (including wages, bonus, allowance, and other income) of the employee during the 12 months prior to the termination.

It depends on the local rules as to whether the monthly salary shall be capped at three times the local average monthly salary for the previous year as published by the local government when calculating the statutory economic compensation.

“Service Year” refers to year(s) that the employee worked for the employer (plus the year(s) of service recognized by such employer, if any).

It depends on the local rules as to how the service year is calculated and whether it shall be capped.

Any period equal to or more than six months but less than one year will be counted as one year, and any period less than six months will be counted as half a year; and the service year shall be capped at 12 years if the employee’s monthly salary is capped as required above (being three times the local average monthly salary).

While the statutory economic compensation is the minimum amount of severance payment that an employer must pay to the employee, the employer has the right to offer any additional amount as an ex-gratia payment on top of the statutory economic compensation.

There are several penalties if an employer fails to follow the statutory process. The arbitration committee or the court may consider that the reasons for termination are insufficient, and it may order that the employee be reinstated.

If the employee does not request reinstatement, or if the labor contract can no longer be performed, the employer may be required to pay damages to the employee at twice the rate of statutory economic compensation.

In practice, it is likely that the employer may still have to pay full salary to the employee during the period from the termination date to the date when the final award takes effect. Depending on the labor dispute resolution process, such a period may range from three months to over one year.


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