China's mass layoff laws in tough times

As China’s economy continues to worsen and so many foreign companies seek to “lighten their China footprint” or to leave China entirely, our China employment lawyers are being hit with a big uptick in questions regarding China employee layoffs.

China’s mass layoff laws are strict and protective of employee rights, so it is essential for businesses to understand and comply with these laws to avoid costly legal penalties and reputational damage. China’s mass layoff regulations mean reducing headcount is fraught with legal risks if mishandled. Multi-million-dollar fines, lawsuits, and reputational damage await those who fail to follow the rules.

This post will explain China’s mass layoff rules, including the grounds on which employers can initiate mass layoffs, the procedures employers must follow, and the potential consequences for non-compliance.

China’s Labor Contract Law defines a “mass layoff” (“经济性裁员”) as one of the following:

• An employer reduces its workforce by twenty or more employees, or
• An employer reduces its workforce by greater than 10 per cent of its entire workforce.

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

• The employer reorganizes in accordance with China’s Enterprise Bankruptcy Law.
• The employer experiences significant difficulties in its business operation.
• The employer switches production, adjusts its business model, and modifies its labor contracts, but still must lay off employees.
• The employer experiences other significant changes that modify the economic circumstances which formed the basis for its having signed the labor contracts, and it is unable to perform under the contracts.

The below are some examples of what the Chinese government generally (but not always) considers to be an acceptable business or economic reason for a mass layoff:

• A company downsizes due to financial difficulties.
• A company restructures due to changes in its market or industry.
• A company merges or is acquired by another company, and the new owner decides to eliminate redundant positions.
• A company automates certain tasks, which reduces the need for human workers.
• A company outsources certain tasks to other companies, which reduces the need for human workers.

It is important to note that these are just a few examples, and the scope of what constitutes an acceptable business or economic reason for a mass layoff is not clearly defined in Chinese law. It is also important to note that when China’s economy is suffering - like right now - the Chinese government fights considerably harder to prevent and to punish mass layoffs by foreign companies.

Termination without cause explained

This distinction is crucial because “termination without cause” typically carries with it certain employer obligations, including providing notice to the employee, paying severance, and following specific procedures, as stipulated in China’s Labor Contract Law.

In the context of China employment law, a mass layoff is treated as a “termination without cause.” This means the reason for the employee’s dismissal is not due to any fault or wrongdoing on the employee’s part. Instead, it is usually for broader business or economic reasons that are beyond the employee’s control, such as a company restructuring, downsizing, or changing market conditions.

It contrasts with “termination with cause,” where an employee might be dismissed for reasons like misconduct, breach of contract, or performance issues, and where the employer obligations differ.

Companies - especially foreign companies - should be particularly cautious and well-informed when navigating the intricacies of mass layoffs in China, ensuring they uphold the rights and entitlements of their employees. Employers must comply with the applicable provisions for such terminations, including the prohibitions against terminating certain employees, such as those pregnant or nursing.

At least 30 days before initiating a mass layoff, the employer must present its layoff plan to the labor union or to all of its employees. The employer must then consider any comments it receives and revise and improve the plan accordingly, and file a report with the relevant government authorities.

During a mass layoff, the employer must consider keeping an employee who:

• Has a relatively long-term fixed-term labor contract.
• Has an open-term labor contract.
• Is the only one working in the household and needs to support elderly or minor dependent(s).

If the employer wishes to bring new employees on board within six months after it has gone through a mass layoff, it must notify and give preference to its former employees in hiring.

Companies considering China employee layoffs should develop a compliant strategy that includes the following:

• Reviewing all employee contracts and HR policies for alignment with layoff protocols.
• Analyzing the business need for layoffs and viable alternatives like hour reductions.
• Creating a detailed layoff plan for implementation when needed.
• Ensuring proper consultation with labor unions or employee representatives.
• Budgeting for severance packages and potential penalties.

Repercussions for non-compliance

Failing to comply with China’s mass layoff laws can result in severe penalties, including the following:

Monetary fines: Businesses can be subjected to substantial fines, oftentimes based on the salaries of the impacted employees. This can lead to significant financial burdens, especially for large-scale operations.

Compensation to affected employees: Companies can be required to pay severance to their terminated employees, which can be a considerable expense, especially if the layoffs are extensive.

Reinstatement of employment: In certain cases, companies might be ordered to reinstate the wrongfully terminated employees, which can further complicate workforce management. We see this as particularly common during tough economic times and more likely to occur to companies that have not received the local labor bureau’s “blessing” before the layoff.

In addition to these legal penalties, companies that violate China’s mass layoff laws also may face reputational damage and difficulty attracting and retaining employees in the future. Employees laid off unfairly are more likely to leave negative reviews of the company online and share their stories with others. This can make it difficult for the company to recruit and retain top talent in the future. It is also not uncommon for mass layoffs in China to lead to protests from employees and labor unions, and even violence.

Given these potential consequences, it’s paramount that you understand and strictly adhere to China’s regulations governing mass layoffs.

Arlo Kipfer is an attorney with Harris Sliwoski in Seattle and Beijing, advising clients on China, Latin America, and Web3 business issues.