China Employee Mass Layoff Laws

It is not news that China’s economic growth has been slow. We have so far this year seen employee layoffs in China by such well-known companies as Lenovo, Samsung, HTC, Yahoo, and Zynga China. This mass layoff trend will now doubt continue even if China manages to quickly shore up its economy, especially in industries such as clothing, electronics, machinery, and furniture. In this post, I discuss a few of China’s basic rules regarding “mass layoffs” in China.

Under China’s labor laws, a “mass layoff” is defined as one of the following:

1. An employer reduces its workforce by twenty or more employees, or
2. An employer reduces its workforce by more than 10% of its entire workforce.

A mass layoff is treated as a unilateral termination by the employer for purposes of Chinese labor law. This means that the employer is usually required to provide severance pay to the employees it terminates. Companies that engage in mass layoffs usually use a “N+1” formula, essentially giving each employee one month’s salary for every year he or she worked for the company, plus an additional one month’s salary. Some big companies offer more generous severance pay, sometimes going up to N+6.

Under China’s Labor Contract Law, an employer may initiate mass layoffs only under one of the following four circumstances:

1. The employer undergoes a reorganization in accordance with the PRC Enterprise Bankruptcy Law.
2. The employer experiences significant difficulties in its business operation.
3. The employer switches production, makes major technological innovation, adjusts its business model, and after modifying its labor contracts, still needs to lay off employees.
4. The employer has experienced other significant changes that modified the economic circumstances which formed the basis for its having signed the labor contracts, and it is unable to perform under the contracts.

A number of the key terms referenced above have been left undefined. For example, the law is silent on what constitutes “significant difficulties in the business operation” and there is no national standard on this. Rather, China arbitration centers and courts generally use local standards in defining “significant difficulties.” For example, in Beijing, an employer is deemed to be experiencing “significant difficulties in its business operation” if the following are true:

1. It is “in deficit” for three continuous years
2. The deficit has increased every year
3. It is insolvent
4. 80% of its workforce has stopped working, and
5. It is unable to pay its employees’ living allowances for six continuous months.

It is also unclear what is meant by “other significant changes that modified the economic circumstances.” In practice, this usually refers to a situation where the employer switches or stops production, but again, (and as is the case with pretty much every aspect of China employment law) the rules on this vary by locale.

At least thirty days before initiating a mass layoff, the employer is required to present a plan to the labor union or to all of its employees (if there is no labor union representing its employees) for reducing its staff. The employer must then consider any comments it might receive from its union or its employees and then revise and improve its layoff plan accordingly, and then file a report with the relevant authorities. Even though the law does not specifically say the employer needs to wait until its report has been approved by the labor bureau before it can initiate the layoff process, some places (such as Shanghai) treat the filing requirement as requiring prior government approval. So again, it’s important that you comply with your local situation.

In my last post on mass layoffs in China — about a year ago — I wrote how China’s Ministry of Human Resources and Social Security had recently issued Draft Regulations on Corporate Mass Layoffs and that might help clarify matters. These new rules have never been implemented and so they have not really helped to clarify the the process. As things now stand, we generally advice that you follow all of the rules on mass layoffs and if at all possible, get all of your terminated employees to sign a China-appropriate settlement and release agreement as well.

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We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.