HR Concerns in China during the Restructuring Process

September 3, 2015 Posted by China Briefing Reading Time: 6 minutes

By Dezan Shira & Associates
Adam Livermore and Silke Neugebohrn

Except where the investor chooses to sell the company, a restructuring will mostly mean that employees will need to be laid off. The way employees are terminated, and the liabilities that the company has to incur, will differ depending on the situation. It goes without saying that companies would have to pay any outstanding salaries and social security contributions. Investors should be aware that under certain circumstances, not paying employees their salaries for more than three months constitutes a crime, and may lead to fines and even prison sentences for the executives involved. Instances where employees or local governments exert pressure by less formal means are not unheard of. The employer and employee can end the relationship by mutual agreement, which is the most advisable. In such a case both parties can work out a compensation arrangement for the employee’s temporary loss of livelihood.

Termination by the employer

An employer may only terminate a labor contract for a limited number of reasons. There is no such thing as ‘at will’ termination in Chinese law. In most cases, the employer will need to pay the terminated employee a severance payment.

Termination with 30 days’ notice

Under one of the following grounds, the company may terminate an employee:

The employee is incompetent for the position, even after training or a job transfer;
The employee can no longer work after becoming sick or injured, if a) the medical problem is unrelated to employment at the company, b) the employee has proven unable to do the original work after returning from medical leave, and c) the employee cannot be assigned other work;
The objective situation on which the labor contract was based has significantly changed, meaning that the labor contract can no longer be performed.

Before terminating the contract, the employer must have discussed the options to change the contents of the labor contract with the employee, and no agreement was reached. The last reason would be the most relevant in the event of a restructuring. Such objective situations would include physically relocating the company, the moving of assets, change of market circumstances, the revamping of production, a change in the production tasks of a factory, or the cancellation of a project. The burden of proof lies with the company, and may or may not be accepted by the arbitration tribunal or court in a labor dispute.

Note: a merger, acquisition or any change in the equity ownership would not of itself constitute such a situation. Therefore, when a company is taken over by new investors, it cannot terminate the employees merely for that reason.

The minimum statutory severance payment is one month’s salary for each year the employee has worked, for up to twelve years. For time less than a year but more than six months, a month’s salary is also paid. For time less than six months, half a month’s salary needs to be paid. To determine what amount constitutes a month’s salary, one has to look at the average salary the employee has received over the past twelve months, not including social security contributions. The average monthly salary figure is capped at three times the local monthly average salary as declared by the government of the municipality or city. This figure is amended every year, usually in July. For example, the current average salary for Beijing is RMB 5,793, so the cap amounts to RMB 17,379. This cap was only introduced from January 2008 and does not apply to employment prior to that date. When moving to terminate an employee’s labor contract, the company must either give 30 days’ notice or give an additional month’s severance pay.

Immediate termination

There are five instances in which the employer may dismiss an employee without severance payment. These all relate to some grave form of employee misconduct, such as lying during the application process or committing a criminal offense. If the company can prove this, it may terminate the employee immediately.

Mass lay-off

The special form of employee termination termed mass lay-off provides companies with an additional four grounds for termination, if over 20 employees, or over 10 percent of its staff are terminated.

The company is being restructured under the Chinese Bankruptcy Law;
Serious difficulties have occurred in production or operations;
The company is drastically changing its production methods, making the terminated staff unnecessary;
The company’s objective economic situation on which the contract was based has changed considerably, making continued employment impossible. The implementation of a mass lay-off is as follows:

The company explains the circumstances of the lay-off to its labor union or, where there is none, directly to the staff, 30 days prior to the intended implementation.
The company hears the labor union or assembled employees’ opinions, and takes these into account.
The company reports the implementation of the mass lay-off to the local labor administration department.
Once the 30-day period expires, the mass layoff can be implemented. In such a case, the company would still have to pay the statutory severance payment.

Protected classes of employees

Unilateral termination with notice, including mass lay-off, is not allowed for certain types of employees, such as those on maternity leave, or those under medical examination for work-related incidents. Having any of these employees on the payroll would increase the costs of maintaining a dormant company.

Company de-registration

In the case of de-registration, an employee settlement plan has to be submitted with the application for de-registration. For companies with a large number of employees, the liquidation approval may be difficult to obtain if authorities suspect these employees may cause unrest after being dismissed. It might therefore be an option to terminate staff by mutual agreement before commencing the procedure. Since the company will cease to exist, all labor contracts will need to be terminated, including the classes of employees that are normally protected from dismissal. All staff will be entitled to the statutory severance pay. Some provinces and localities however have enacted local regulations to provide additional benefits for the protected groups of employees. For example, in Jiangsu, if a pregnant employee’s contract is terminated because the company is being dissolved, the company needs to pay her the amount that the labor bureau would normally have paid her, like maternity benefits and medical costs. Such payments can add up to a significant sum, so companies are well-advised to check with the labor bureau whether such a policy is in place.

This article is an excerpt from the June issue of China Briefing, titled “How to Restructure an Underperforming Business in China“, in which we explore the options that are available to foreign firms looking to restructure or close their operations in China. We begin with an overview of what restructuring an unprofitable business in China might entail, and then take an in-depth look at the way in which a foreign company can go about the restructuring process. Finally, we highlight some of the key HR concerns associated with restructuring a China business.

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