Employee protests and labor unrest are on the rise in China in all senses – overall occurrences, frequency, geographical spread, number of employees involved, and media coverage. Such unrest can take a variety of forms, including strikes, lock-outs, production slow-downs, legal actions, and media campaigns. Foreign companies in particular are increasingly faced with a workforce that is more willing and determined to collectively assert their rights. Labor unrest, in whatever form, can complicate, delay, and potentially even scupper a potential “transaction”. While each circumstance is different, communications often can be vital to the process.

Causes

Labor unrest now arises regularly in a number of different circumstances, especially in connection with workforce reductions, business closures or relocations, and acquisitions. Employees are pushing for higher than statutory entitlements or, in some cases, for severance or benefits to which, strictly and legally, they have no entitlement.

In other cases, employees are using these circumstances to bring to light actual or alleged non-compliance with legal obligations, such as failure to pay overtime, especially when a change or transaction requires their cooperation.

Labor unrest, in whatever form, can complicate, delay, and potentially even scupper a potential “transaction”. While each circumstance is different, communications often can be vital to the process.

Legal Basis

PRC law is silent on whether employees have an express right to strike—there is no automatic right to terminate employment due to organization of or involvement in a strike or other labor unrest. There is always a delicate balance between keeping the population happy and maintaining social stability.

In lock-outs and similar situations, the police will normally observe, but not take action, saying that such events are a civil dispute to be resolved by the parties. The police are more likely to intervene in situations involving domestic companies or institutions.

Mass Lay-Off

The global financial crisis, economic downturn, and rising costs have forced many companies to consider restructurings, downsizings and closures.

Under PRC law, there is a right for employers to reduce their staff if experiencing financial losses, major technological changes, or other similar situations. However, the employer must conduct a consultation with all employees (or with the company’s labor union or staff representatives), file a report with the labor bureau and pay severance. While no outright approval is required, they may ask the company to reconsider the proposed package. This is where the threat of unrest becomes very tangible.

In practice, many companies try to negotiate a mutual termination with affected employees by offering a more than statutory severance in return for the employee signing a separation agreement and a smooth exit.

The Role of Labor Unions

Labor unions are a complicated area in China. Companies may have a labor union within the company (with elected and appointed employee representatives) under the official All China Federation of Trade Unions, but large companies may have different unions and representatives in separate branches and sites within the company. This can make negotiations complex if dealing with different groups.

Union representatives are increasingly aggressive, organized and savvy in representing employee interests.

Acquisitions

For an asset deal, there is no mechanism for employees to automatically transfer with the assets. Accordingly, buyers and sellers need to coordinate closely and communicate with employees to be transferred. Employees have the right to be paid severance by the seller or have their period of service recognized by the buyer. Increasingly, employees are seeking to have severance paid and negotiating a package that is above the statutory calculation And if a higher level of severance is offered to transferring employees, any remaining employees may seek to negotiate the same deal in case the seller lays them off after the sale.

For a share deal, legally there is no change to employment, other than the change of ownership of the employer. Employees remain on their existing contracts and on the same terms and conditions. It is increasingly common, however, for employees to seek to obtain assurances or payments, regardless of whether they have any legal entitlement.

In some cases, there is uncertainty or nervousness regarding the new owner. Chinese employees often feel nervous if the sale will result in transfer of ownership to a Chinese buyer. Employees fear that their rights will not be respected, and therefore seek assurances future lay-offs and what severance package will apply in such a scenario. Employees are aware that labor unrest can put pressure on a proposed deal and that a buyer may potentially treat unrest as a material adverse change and walk away.

Employee nervousness in these situations is increased in locations or industry sectors where it would be hard for employees to find equivalent positions if they are laid off. While there may be understandable concerns or legitimate grievances behind labor unrest in relation to proposed transactions, such as failure by the seller to pay the correct social insurance or pension contributions, there can also be a strong element of opportunism, fuelled by media reports of pay-outs or concessions.

Strategies for Avoiding Unrest

Compliance – Employers should check that their existing policies and practices comply with relevant laws, especially in relation to mandatory payments and benefits.

Law and Practice – It may not be sufficient to comply with the bare minimum required by law. In practice, foreign companies are often held to a higher standard, regardless of whether this is legally required.

Preparation and Strategy – Employers should prepare for any lay-offs, transactions, or other scenarios in which employee unrest could arise, before employees get wind of any changes. Consider arranging for private security to be on-hand and keeping the company’s PR team informed to manage media aspects. Above all, confidentiality and timing are vital. Employers should identify how many different unions there may be within the company and ensure a coordinated and consistent approach to dealing with employee representatives.

Communication – Clear and timely communication with employees is critical. Many instances of unrest have come about because employees were not given clear details about a given situation. This can lead to nervousness and panic. Employers should also engage local authorities where possible. Communications should not only stress that the company is complying with applicable laws, but also seek to show a considered and reasonable approach to any changes and how these will affect employees.

As always when doing business in China, plan ahead and have a strategy!