Guangdong Human Resource and Social Security Department promulgated The Draft Opinion on Preventing and Handling Labor Disputes Occurred during Enterprises Transformation and Upgrade (the “Draft”), soliciting public opinions.

The Draft emphasizes the continuing performance of the original employment contract under the change of employer’s investor (shareholder). However, where the employment contract is unable to be performed due to the employer’s transformation or upgrade, the employer shall negotiate with the employee and amend the employment contract upon mutual agreement; where a mutual agreement cannot be reached, the employer may unilaterally terminate employment contract and pay severance under the ground of “a major change to the objective circumstance has occurred”.

In addition, the employer, before the transformation and upgrade, shall inform the employee of major issues, e.g. the reasons and changing items, due to the transformation and upgrade. At the mean time, it shall lay down the employee placement schedule, and make it go though the democratic procedures and publicizing procedures.

KWM Comments:

Guangdong Province is the forefront of Chinese Reform and Open-up, the center of Chinese manufacturing industry, with many export-oriented labor-intensive enterprises of small or medium size. In the process of transformation of these enterprises, labor disputes occur from time to time, and are likely to become mass incidents. In this context, the Draft’s specifications of legal issues in the labor disputes are of strong guiding significance. As to the Draft, the employer should pay attention to two circumstances, the continuing performance of employment contract in equity transfer, and the employer’s unilateral termination on the ground that “a major change to the objective circumstance has occurred” which renders the employment contract unable to be performed, and mutual agreement cannot be reached on amending employment contract.