Layoffs in China

As the economy slowly picks up from the impact of COVID-19, some companies may develop redundancy plans for cost control before the general economic situation fully recovers. The legal procedure governing layoffs may, nevertheless, be complicated for companies to comply with. This article briefly discusses the legal aspects of layoffs in China under the current legislative framework.

Layoffs Versus Normal Termination

Layoffs are governed by Article 41 of China’s Labor Contract Law, and are a way to greatly reduce the workforce at a potentially low cost. The payments to be made under the laws and regulations on layoffs are half of those to be made to employees terminated the normal way without a statutory ground. However, the procedures for layoffs are complicated and may take a comparatively longer period of time to complete. Some employers find the procedures troublesome and inconvenient and may therefore want to avoid the application of laws and regulations on layoffs. On the other hand, a normal termination without legitimate causes can be processed quickly but at higher costs, as discussed below.

Statutory Threshold for Layoffs

The very first thing one should know about layoffs in China is the minimum number of employees to be laid off that enables a company to initiate and qualify for a layoff, and therefore to potentially benefit from the more favorable rules and conditions in terms of severance pay. According to China’s Labor Contract Law, a company can only apply for a layoff if at least 20 employees (or less than 20 employees but accounting for 10% or more of the total number of employees of the company) will be laid off.

Based on this rule, one may think that it is easy to find a way to apply for a layoff.  However, this may not be the case. In addition to the minimum number of employees to be laid off, there are certain statutory grounds (introduced below) which also play a critical role in determining whether an employer can initiate a layoff. An employer can only apply for a layoff if both the number of employees to be laid off and one or more statutory grounds are satisfied. 

Statutory Grounds for Layoffs

The statutory grounds for an employer to legally justify a layoff are that the company:

restructures pursuant to the Enterprise Bankruptcy Law;

suffers serious difficulties in production or business operations;

changes its production or methods of business operation, or introduces a major technological innovation, and after amending the labor contracts, still needs to lay off the employees; or

can no longer perform the labor contracts due to major changes in the objective economic circumstances based on which the labor contracts have been concluded.

Despite such statutory grounds, the circumstances under items 2) to 4) are quite general and vague, and there are no specific standards for an employer to determine if it falls under any of them. Therefore, whether an employer can successfully apply for a layoff can only be determined on a case by case basis by the relevant supervising administrative bodies.

Procedure for Layoffs

In a layoff, an employer must go through the following major procedures:

Those Exempt from or Prioritized in Layoffs

According to the Labor Contract Law, the following categories of employees are exempt from being laid off:

employees who had been engaged in operations that would expose them to occupational disease hazards and have not undergone an occupational health check-up before leaving work, or are suspected of having contracted an occupational disease and are being diagnosed or under medical observation as a result;

female employees during their pregnancy, maternity leave or breastfeeding period;

employees who have been confirmed as having lost or partially lost their capacity to work due to an occupational disease or a work-related injury while working for the employer;

employees during their statutory medical treatment period required as a result of suffering from an illness or a non-work related injury;

employees who have worked for the employer for at least 15 consecutive years and are less than 5 years away from the legal retirement age. 

In addition, the following categories of employees have priority in being retained by the employer in a layoff:

employees with open-ended term labor contracts without a fixed-term;

employees with fixed-term labor contracts valid for a relatively long period; and

employees who are the only wage earners in their household and have minor or elderly family members to support.

Statutory Minimum Compensation Payment in Layoffs

The Labor Contract Law stipulates that the statutory minimum compensation payment for each employee involved in a layoff is calculated as one month's salary per year of service with the employer. Monthly salary means the average monthly salary of the employee during the 12 months prior to being laid off (including all allowances and any bonuses actually paid to the employee during those 12 months). For employees whose monthly salary is higher than three times the average monthly salary at the municipal level, the compensation payment is capped at three times the average monthly salary at the municipal level and subject to a maximum of 12 years’ service. On the other hand, the compensation payment for a normal termination without legitimate causes is twice that of a layoff (i.e., two month’s salary per year of service with the employer).

Consequences for Non-compliance

If an employer fails to comply with the Labor Contract Law and other relevant laws and regulations on layoffs, the employer could be fined by the labor authority. Furthermore, the employees concerned can claim compensation from the employer for unlawful termination. If an employee wins the case, he/she can either request payment of double the statutory minimum (i.e., two month’s salary per year of service with the employer) or choose to continue to work for the employer under the labor contract, if applicable.

Concluding Remarks

In view of the above, an employer may consider a layoff in order to lower the costs incurred.  In doing so, it is advisable for an employer to:

check if it satisfies any of the statutory grounds for layoffs;

identify those employees who should be exempt from being laid off and those who should be retained, and determine the number of employees to be laid off accordingly; and

carry out the layoff in strict compliance with the statutory procedure and pay the compensation in accordance with the law.

Depending upon the number of employees usually involved in a layoff, a professional advisor should be engaged to ensure compliance with relevant laws and to handle communications with the supervising administrative bodies.