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                             Issue 10,October 2011

 Featured Article

Enterprises to lay off
　

         In response to current economic climates, some of our clients have been expressing to our law firm their desires to learn more about relevant Chinese labor laws and regulations on employee layoffs. We think this topic might become more and more germane to other businesses in China; thus, we have dedicated this issue of our newsletter to address ways by which a company may implement workforce reduction.
        From our practice experiences, typically an employer has at least two legal options when considering work force reduction: (I) “economic downsizing” and (II) employment contract termination through mutual negotiation.
 

I. Economic Downsizing

        “Economic downsizing” is a term used in Chinese labor law to describe a situation where a company terminates a sizeable number of its employees. Specifically, relevant laws stipulate that a company may lay off at least 20 of its workers or 10% of its entire workforce (if the targeted layoff employees are less than 20 people) if (i) the company is experiencing severe difficulties in its production or business operations or (ii) there are major changes in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, which has now rendered the employment contracts unperformable.

         If a company meets one of the two criteria stated, it must also fulfill the following requirements:
         (1) Explain layoff decision to labor union, if any, or entire workforce 30 days in advance and provide relevant production and operational data;
         (2) Prepare employee layoff proposal in which targeted employee, date of layoff and layoff implementation plan must be presented to labor union or entire workforce for discussion and input;
         (3) Report employee layoff proposal and employee feedbacks collected to SIP labor administrative department for approval;
         (4) After receiving approval from labor administrative department, company may lay off targeted employees with the payment of economic compensation (or severance payment) in accordance with applicable laws.

          With respect to economic compensation or severance pay, Chinese law requires that the amount of such payment shall be based on employees’ respective years of employment service, with compensation of one month salary for every full year worked at the company. (The monthly salary is determined as the average salary of each respective employee in the last 12 months prior to the layoff.)
         Also note that there are certain employees especially protected under labor law even during periods of business operational difficulties. In other words certain employees are protected against workforce reduction. Particularly, a company’s employment layoff plan must not include the following group of employees:
         (1) those engaged in operations exposing him to occupational disease hazards and has not undergone a pre-departure occupational health check-up, or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation;
         (2) those who have been confirmed as having lost or partially lost his capacity to work due to an occupational disease contracted or a work-related injury sustained with the employer;
        (3) those who has contracted an illness or sustained a non-work-related injury, and the set period of medical care therefore has not expired;
       (4) female employee in her pregnancy, confinement or nursing period; and
       (5) those who have been working for the employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age;

      Finally, priority must be given to the following employees to keep their positions:
       (1) those who have signed with the employer fixed-term employment contracts with a relatively long term;
       (2) those who have signed open-ended employment contracts with the employer; and
       (3) those who are the only ones in their families to be employed and whose families have an elderly person or a minor for whom they need to provide.

II) Work Force Reduction through Negotiation with Affected Employee

       Another approach to reduce company employees in the face of business slowdown is to negotiate individually or collectively with employees targeted for layoffs.
      If a company successfully negotiates with its employees to terminate existing labor contracts, the company shall pay severance or economic compensation to terminated employees; the actual amount would be based on mutual negotiations.
      However, challenges arise when employees chosen for layoff refuse to be terminated and a company cannot rely on any justifiable causes as grounds to unilaterally terminate employee contracts. In the face of this reality, if a company insists on laying off employees, the company risks triggering penalties contemplated under Chinese law which requires a 200% payment of regular severance as damage compensation.
      Thus, the worst scenario in a company’s plan to reduce workforce is that it does not quality for “economic downsizing”, that it cannot successfully negotiate to end employment contract with employees and that its unilateral decision to terminate is countered by employees exercising their rights to remain employees. Apart from this worst case, the next worst case hypothetical is that unilaterally terminated employees decide not to return to work but seeks damages equaling 200% of severance pay based on years of service.
      The table below summarizes the possible options available to a company contemplating workforce reduction and corresponding economic compensation (severance payment) or damages it may have to pay for exercising each option:

       If a company is considering to layoff production line workers, sometimes there are other methods of reducing such workforce by, for example, completely eliminating their overtime work hours. For this particular group of employees, they depend heavily on overtime work and may leave a company voluntarily if overtime work is not available. On the contrary, the same tactic may not work as well for office staff.