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Labor and employment law challenges in business transformations

China

Workforce restructuring

The key practical issues in workforce restructuring include:

  • Legal justification
  • Works council and employee representatives’ process
  • Labor administration process
  • Costs and timing
  • Litigation risk

Applicable legislation

In mainland China, the primary national level legislation related to collective redundancy is the Employment Contract Law of China (ECL) and the Circular of Ministry of Labor and Social Security on Promulgating the Provisions on Enterprises Using Redundancy for Economic Reason. Each city may also have its own local rules regarding the same.

Collective redundancy rules apply to the termination of:

  • 20 or more employees
    Or
  • Less than 20 employees but comprising more than 10% of the enterprise's workforce

The complex process has five key features:

  1. Legal justification
  2. Works council or assembly of employee representatives consultation
  3. Labor administration approval
  4. Robust social plan
  5. HR legal costs

Required legal justification

Workforce restructuring must be justified by the following economic or financial grounds:

  • Restructuring in accordance with the enterprise bankruptcy law
  • Severe operational difficulties
  • Changes in products, technological reforms or adjustment in business model
  • Other objective economic circumstances (such as when the contract can no longer be performed)

Works council/unions or other employee consultation requirements

Consultation requirements with works council/unions

Trade unions: Trade unions may play a role in the large-scale redundancy process. The employer must choose to notify the trade union or all employees 30 days prior to implementing the collective redundancy. The employer must present its redundancy plan to the trade union or all employees, including the following information:

  • The enterprise production and business operations
  • List of the redundant personnel
  • Planned date of redundancy and how it will be implemented
  • Compensation plan for retrenched personnel as per the legal provisions, government regulations and the collective contract (if any)

The employer must solicit the opinion of the trade union or all employees on the redundancy plan, and try to revise and improve the said plan accordingly. A trade union has the power to demand the employer’s review and change the employer’s decisions on collective redundancy if the employer is found to take redundancy in violation of the law, regulations and the collective employment contract signed between the employer and the employees.

Consultation requirements with other employee representatives

There is no obligation to consult other employee representatives before or during the collective redundancy process.

Consultation requirements with employees

The employer is required to notify and consult either the trade union or all of its employees before collective redundancy, solicit their opinion on the redundancy plan, and try to revise and improve the plan accordingly. For more information see “Consultation requirements with works council/unions.”

Approval/notification of the labor authorities or other government authorities

The employer shall report and file the redundancy plan with the labor administrative department after the information and consultation processes with the trade union or all employees have taken place. Approval from the labor administrative department is necessary for implementing the proposed collective redundancy.

Employee selection criteria

In mainland China, employers are not free to choose which employees will be made redundant in a collective redundancy process. Employers must give priority to the following employees in order to retain their employment in collective redundancy along with the consideration of their actual requirements:

  • Employees who have fixed-term employment contracts with the company for relatively long terms
  • Employees who have indefinite-term employment contracts
  • Employees whose families have no other employed persons and have elderly or minor family members to support

Further, employers are restricted from terminating an employment contract in a collective redundancy under the following circumstances:

  • Employee engaged in a work that exposed him or her to the risk of occupational illness, and the employee either has not yet completed a pre-dismissal health exam or is suspected of having a work-related illness for which he or she is being diagnosed or examined
  • Employee with occupational illness or sustained a work-related injury, due to which he or she had been confirmed as having totally or partially lost the ability to work
  • Employee with an illness or sustained a non-work-related injury and is currently within the medical treatment period
  • Pregnant employees or employees within the maternity leave or post-natal period
  • Employee who has been working continuously with the employer for 15 years or more and is within the 5 years of the statutory retirement age
  • Employee subject to other circumstances as stipulated by laws and administrative regulations

Actions required to limit the negative impact and social plan

The employer must take actions, including a social plan, aimed at limiting the negative impact of the collective redundancy, depending on the means available to the company. Procedurally, before the general approval process involving the participation of the employees or the trade union, the employer must take the following appropriate mitigating measures:

  • Discontinuation of new staff recruitment
  • Termination of the service of all contingent workers serving the employer at that time period
  • Discontinuation of overtime work
  • Negotiation of salary reductions with employees

Internal alternative employment/redeployment
The employer must provide their impacted employees with training course(s) or help with re-employment where possible.

Other measures
The employer must take other measures such as providing financial aid to the impacted employees. The employer is also required to provide compensation (i.e., statutory severance calculated based on the years of service) to the impacted employees.

Estimated timeline

There is no legal time frame to complete the collective redundancy process, which may vary based on the number of impacted employees, size of the company, involvement of the labor administrative department and whether there are unresolved disputes between the employer and employees.

However, in practice, the information or documentation and consultation processes with a trade union or all employees and reporting procedure with the labor authorities may take about one to three months.

Estimated costs

Mandatory costs

The key components of mandatory HR legal costs include the following:

  • Payment of compensation to impacted employees
  • Salary for the last month’s service (even if the employee is released from working during such period)
  • Severance payment in accordance with the number of years worked for the employer, at the rate of one month's salary for each full year of service. Where the period of service is six months to one year, it shall be calculated as a full year; where it is less than six months, the severance payable shall be one-half of a month's salary, entitlement to bonus (if any) and other payments agreed by the parties in the employment contract or based on the employer’s rules and policies

Customary additional costs

The measures of other costs, such as social plan, may vary depending on the size and means of the company, and the employer’s potential to provide for a large range of measures to limit the negative impact of the redundancies.

In practice, employers in mainland China provide an ex gratia payment to the impacted employees in order to limit the negative impact of the redundancies and limit or avoid the possibility of any labor disputes.

Hiring restrictions post-redundancy

There is no hiring freeze period applicable following a collective redundancy. However, within six months after the collective redundancy has taken place, the employer is required to report the following matters to the local labor administrative department:

  • Number of new recruitments
  • Time of recruitment
  • Conditions of recruitment
  • Other relevant information when hiring new employees (within six months after such redundancy)

Further, where an employer makes redundant employees and hires new employees within six months after collective redundancy, a notice must be given to those employees who were made redundant; and all other circumstances being equal, such persons must be given priority in the hiring process.

Litigation risk

Interested parties

Once the labor authorities’ process is over, and not before, the impacted employees may bring a claim or apply for labor arbitration or litigation related to the collective redundancy process within one year from the date on which the impacted employee knew or ought to have known that his or her rights had been infringed.

Litigation cannot stop or slow down the collective redundancy process. However, as a result of litigation, the collective redundancy process may be declared void and such redundancy will be deemed as an illegal termination even if the labor administration had provided the employer with its approval.

Damages and other remedies

Challenges could lead to civil remedies, but no criminal sanctions.

Damages for unfair dismissal
If the collective redundancy process is declared void, the impacted employees can either claim for reinstatement to his or her job position or for payment of damages for wrongful termination.

If an employee does not request for reinstatement or where the contract could no longer be performed, the employer is required to compensate the employee by paying 200% the severance amount required by law. The severance amount is based on the number of years worked for the employer, at the rate of one month's salary for each full year of service. Where the period of service is six months to one year, it shall be calculated as a full year; where it is less than six months, the severance payable shall be one-half of a month's salary.

Reinstatement
If the collective redundancy process is declared void, the impacted employees can either claim for reinstatement to his or her job position or for payment of damages for wrongful termination.

If the claim for reinstatement is successful, in addition, the employer is also generally ordered to pay the employee’s salary up to the date of the arbitral award or judgment (as the case may be). This issue could be significant since legal proceedings may drag on for more than a year in mainland China.

Criminal sanctions
There are no criminal sanctions.

Country-specific issues

There are no other labor and employment law issues specific to mainland China.

Contact

Primary Contact for China Labor and Employment Law

Jane Dong
Chen & Co. Law Firm
+86 21 2228 8378

Global Labor and Employment Law Guide
Workforce restructuring
2016-07-01
China
CN

Contacts