When structuring an acquisition or disposal of a business in China, the transfer of employees is one of the key points that the parties need to consider.

Under PRC law, if an acquisition or disposal is structured as a share deal, so that  the buyer acquires the equity in the target company, the employees of the target company will remain employed by the company and the employment relationship will be unaffected by the transfer of the shares . In addition, the change of company name and/or the legal representative of the target company would not affect the employment relationship with its employees.

In the case of a merger of two Chinese companies, the successor of the original employer takes on the employment contract, as it  assumes the rights and obligations of the original employer under the merger plan. It is not necessary for the surviving entity to enter into new employment contracts with the  employees as part of the implementation of the merger, since in such circumstances this occurs by operation of law.

If an acquisition or disposal is structured as an assets deal, where the buyer takes over the assets (and employees) of an existing company, the employees of that company are not automatically transferred by operation of law. China lacks the  legislation (which is common in other jurisdictions) providing for the automatic transfer of employees in such circumstances. Under PRC law,  the transfer of the employees can only be effected by terminating the existing employment contract with the existing employer and entering into a new employment contract with the new employer, both of which are subject to each employee’s consent. The parties involved in such a transfer will also need to agree on how to deal with the previous service period of each employee, which can either be inherited by the new employer or alternatively severance pay is paid by the existing employer and the new employer then employs such staff without any prior service period being recognised.

In practice, there have been a number of recent examples in China where employees have protested against unsatisfactory plans for their transfer. Therefore, it is important that the employee transfer plan is carefully considered from both a legal and industrial relations perspective before announcing the plan to the employees.