New Rules Clarify Requirements for Mass Layoffs in China

By Steven Elsinga

On December 31, 2014, China’s Ministry of Human Resources and Social Security released a draft amendment on mass layoffs. The draft invites the public to provide comments and feedback, with the final version going into effect on January 31 of this year.

What is considered a mass layoff?

According to Chinese law, a mass layoff occurs when two conditions are met. First, the company is dismissing over 20 employees, or the number of employees to be dismissed exceeds ten percent of the company’s total staff.

The draft rules newly clarify that for a branch company with its own business license, the calculation is based on the staff number and percentage at the branch company, not the whole company.

Second, the dismissal is due to one of four reasons:

1. The company undergoes restructuring under the Enterprise Bankruptcy Law.
2. The company suffers serious problems with production or other business operations.
3. The enterprise changes products, makes important technological renovations, or adjusts the methods of its business operation, and it is still necessary to lay off the number of employees after changing their labor contracts.
4. Other major changes occur in the objective economic environment previously used as the basis of employee labor contracts, rendering them non-performable.

Once mass layoff status is triggered, the company is provided with additional grounds to dismiss employees, but the procedure to do so is somewhat more complicated than normal and requires notifying the authorities and the labor union.

Some employees are given priority during a mass layoff. These are:

1. Employees on an open-term contract;
2. Employees with a fixed-term contract of longer duration; and
3. Employees who are the sole wage-earner of a household, with under-age or elderly dependents

If your company plans to hire new staff within six months of downsizing, it should give preference to previously dismissed staff, offering the same working conditions as before. As with a regular termination, the company will need to pay severance compensation.

Companies encouraged to maintain staff, government offers subsidies

The draft rules require the company facing any of the situations described above to first find alternatives to dismissing a large number of staff. In case of reasons I and II described above, the company is encouraged to train staff on site, reduce work times, adjust wages and let staff take turns working in shifts. For reason III, the company is encouraged to retrain staff to be used for other positions or enhance their skill set, to avoid dismissing staff. The company can discuss its options with the labor union or a staff representative.

 RELATED: Properly Handling Mass Layoffs in China

The local department of Human Resources and Social Security can provide assistance or subsidies to pay workers a living allowance, their social security benefits or the cost of retraining staff.

Further requirements

If the company still needs to reduce staff after these measures have been taken, it needs to inform the labor union or all staff members.

In its statement, the company should ensure that one of the four reasons for the mass layoff is made explicit, together with the reasons behind it. It should provide evidence to show this, for example production and operations data. It should also explain the impact of the situation on production, and what departments or divisions of the company are affected. Lastly, management needs to describe what measures were taken to avoid having to dismiss staff.

Along with this statement, the company needs to publicize a plan to reduce staff. This plan must include:

• The legal basis for the layoff;
• The scope of the downsizing, with the number and percentage of staff members to be dismissed;
• The selection criteria for deciding what staff members to dismiss;
• The time and implementation steps; and
• The standard and manner of compensation payments.

The management needs to hear reasonable suggestions put forward by the labor union or the staff, and make amendments based on these, if necessary. After that, the company can finalize the downsize plan and publish a list of names of the staff members to be dismissed.

 RELATED: End of the Line: Terminating an Employee in China

Having consulted the labor union or the staff, the company needs to submit a layoff report to the local Human Resources and Social Security Bureau. The report must include the following:

• The layoff plan as presented to the staff or labor union;
• A list of names of the people to be dismissed;
• Materials showing that the company has announced the dismissal to the staff and properly heard the suggestions and opinions of the staff or labor union;
• A plan detailing how the company intends to pay wages, severance payments and social security benefits in time, if possible;
• A description of measures taken to avoid terminating staff; and
• Additional information required by the local bureau.

If the report is complete, the bureau will acknowledge receipt of the documents immediately. Where the report is not complete, it will advise the company to revise the documents within a set amount of time.

Ten days after the bureau has received the documents, the company may implement the layoff. It must then pay out severance payments, and any social insurance or wages in arrears. These must be paid in currency, not in kind (in the past, factories have been known to give dismissed staff some of the company’s products to sell on the street).

If the company fails to inform the labor union or the staff 30 days in advance, or does not hear their opinions and suggestions, they may demand that the company repeat the procedure.

Conclusion

In essence, the procedure that management needs to follow for a mass layoff has not changed much. The draft regulations mainly formalize the various steps that were left somewhat vague in previous legislation. Companies may now have a better understanding of what concrete actions are needed in the event of a mass layoff.  The new specification for branch companies strongly raises the bar for what is considered a mass layoff. The amendment shows a clear preference for maintaining staff as well, and for the first time making subsidies available to keep staff employed.

For a consultation on the implications of these new regulations on your business, or advice on managing employment contracts in China, please contact the HR and payroll professionals of Dezan Shira & Associates at dalian@dezshira.com.

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