Employers in China should take note of these new local laws, and take steps to ensure compliance. 

While perhaps the dire economic situation in the United States has received the lion’s share of media headlines, it is worth noting that China’s economic health has also been adversely affected by the global economic crisis.  In some provinces—particularly along the southeastern coast -- thousands of enterprises have laid off millions of employees. This turn of events has government officials concerned about the country’s stability, and as a result the response at all levels of government has been swift. The central government enacted a $585 billion stimulus package in November 2008, much of it slated for labor-intensive construction projects intended to employ individuals who have been recently laid off. Complementing such vigorous action by the national government, provincial and major city governments (e.g., those of Guangdong province, Fujian province, Shanghai and Chongqing) have promulgated rules or policies regarding layoff procedures that seek to slow the rate of unemployment.

Internal Remedies Must Be Exhausted Before a Layoff Can Occur

Most of the newly issued local rules stipulate that an employer must take certain measures before one of its employees is laid off.  These measures include the following:

  • Reducing an employee’s work hours
  • Requesting an employee take leave and receive a “living” subsidy (e.g., Guangdong province requires an employer to pay no less than 80 per cent of the minimum monthly salary of the area where the employer is located)
  • Negotiating with an employee regarding any reduction in salary, or the suspension of an employee’s employment contract for a certain period of time without payment.

If an employee is laid off, an employer is obligated to prepare and submit a report to the relevant government authority, which would then verify that certain measures (such as those mentioned above) have been taken.

Layoffs Must Be Conducted According to Procedures and Requirements of the New Labor Contract Law

As a general matter of policy, the newly issued local rules are intended to reinforce the procedures and requirements regarding layoffs detailed in the Labor Contract Law of China (effective 1 January 2008) and its Implementing Rules (issued on 18 September 2008).  As such, if a layoff is unavoidable, an employer must ensure that it has been done in accordance with the Labor Contract Law.

Circumstances That Permit an Employer to Lay Off an Employee

According to the Labor Contract Law, an employee can only be laid off if an employer experiences any of the following situations:

  • Undergoes restructuring pursuant to the Enterprise Bankruptcy Law (generally, an order or judgment issued by the competent court would be sufficient to prove that an enterprise is undergoing a restructuring)
  • Encounters serious difficulties with production and/or business operations
  • Switches production, introduces a major technological innovation or revises its business method, and, after amendment of its employment contracts, still needs to reduce its workforce
  • Experiences a major change in the objective economic circumstances it relied upon at the time of the conclusion of the employment contract that now prevents the performance of said contract 

Requisite Procedures to Be Followed in Order to Layoff an Employee

Most of the newly issued local rules provide detailed procedural requirements for those employers that plan to reduce their workforce by 20 or more persons, or less than 20 persons but 10 per cent or more of the total number of the enterprise’s employees.  Generally speaking, these procedures require employers to take the following actions:

  • Make a layoff plan in writing, which must clearly delineate which employees are to be laid off, the time and steps to be taken to enforce such layoffs, the arrangements for the payment of severance, social security, etc.
  • Explain the layoff plan to either the relevant trade union or to all employees 30 days in advance of its implementation date in order to solicit their advice
  • Report to the relevant branch of the Ministry of Human Resources and Social Security a before the layoff plan will be implemented
  • Conduct certain follow-up work (e.g., issuing proof of termination to an employee, conducting transferring procedures of the worker’s file and social insurance account) after the layoff plan has been carried out

It should be noted that different localities utilise different standards regarding the level of government to which a wholly foreign-owned enterprise (WFOE) must report its layoff plan.  For example, for a WFOE located in Shanghai, if its registered capital is US$10 million or more, it must report to the municipal level of the Ministry of Human Resources and Social Security.  In contrast, the standard used in Chongqing is not the amount of registered capital but the number of employees to be laid off.  Therefore, if a WFOE located in Chongqing intends to lay off more than 200 employees, it must report to the municipal level of the Ministry of Human Resources and Social Security.

Other Obligations for Employers

All of the newly issued local rules reiterate the following employer obligations contained within the Labor Contract Law:

  • An employer must retain “priority” persons (i.e., those who have open-ended employment contracts).
  • An employer cannot lay off an employee in certain circumstances (e.g., if the employee is pregnant or nursing)
  • Where an employer has reduced its workforce plans to hire additional employees within six months of the original workforce reduction, it must give notice to the employees who had been dismissed and give them preferential treatment during the hiring process.

Because of the deteriorating economic situation in some provinces, some commentators have argued that the enforcement of the Labor Contract Law may be weakened.  Others presume that the Labor Contract Law was not promulgated at the right time and that the obligations it creates for employers may make it difficult for some enterprises to survive.  However, with the promulgation of the local rules regarding layoffs, the Chinese government has sent a message that the Labor Contract Law is indeed the law of the land, and its provisions will be rigorously enforced.