As business needs and strategic objectives evolve, multi-national corporations commonly restructure their operations, often requiring significant numbers of employee terminations.  In China, the current legal scheme for mass employee layoffs requires a choice between unilateral termination by the employer for redundancy and termination via a mutual separation agreement with the employee.

A proposed new regulation makes this long-standing model a lot more complicated.  In December 2014, the Ministry of Human Resources and Social Security (“Ministry”) released a Draft Regulation on Mass Layoffs (“Draft”) providing new detailed rules on the conditions and procedures for mass layoffs. 

Noteworthy to employers are the following changes.

  1. Employers Must Try to Retain Employees.

According to the Draft, mass layoff will only be permissible if the employer has first implemented employee retention actions (“Retention Actions”).  Retention Actions must be disclosed to the trade union (or all employees) and the local government authority.  This requirement necessarily extends the timeline and cost of any anticipated mass layoff.

It’s not all bad news in this respect.  The Draft permits employers to reduce employee working hours or salaries without their consent under certain circumstances if that helps to avoid a mass layoff… provided of course that the trade union (or employee representatives) agree.

Another positive element is that employers that implement Retention Actions may be eligible to receive government subsidies.  The idea is to incentivize employers to design their restructuring plans to have less impact on employees.  Specifics on subsidies have not yet been provided and it is not yet clear how any reductions in working hours and salaries may affect subsidy eligibility.

The appropriate Retention Actions will depend on the circumstances behind the Layoff:

Click here to view table.

  1. Layoff Selection Criteria Must Be Disclosed.

The current law requires that employers disclose certain information to the trade union (or all employees) and the local government authority, such as the reason for the mass layoff and the number of impacted employees, but not selection criteria.  The Draft changes this:  employers will also have to disclose the criteria for selecting impacted employees.

This can create numerous other problems for employers.  The selection criteria are usually one of the most contentious issues in a mass layoff process.  If the criteria must be disclosed to impacted employees, employers will need to be much more cautious.  Disgruntled employees can cause issues and potentially derail the layoff process.

  1. No More Mass Layoffs Via Mutual Separation Agreements.

Under the current law, an employer can undertake a mass layoff by entering mutual separation agreements with employees without needing to involve a government authority.  This can be a great benefit for employers that don’t want government scrutiny of their restructuring plan, or want to expedite the restructuring process. 

The Draft, however, seeks to eliminate this option.  Under the Draft, if the mutual separation process impacts 20 employees or more, the employer must advise its trade union (or all employees) and report the number of impacted employees to the local government authority 30 days in advance of the layoff, regardless of whether the employment terminations are unilateral or by agreement.  If the employer fails to do so, it may be subject to a fine up to RMB 20,000.

So, to recap:  There is a new regulation proposed in China that will dramatically change the mass layoff landscape if implemented in its current form.  It will be more burdensome for employers to terminate a large number of employees, and the process will necessarily be more protracted because of the Retention Actions requirements and the need to involve a government agency if the impacted employee threshold is met.  The Draft is presently under review by the Ministry.