Reducing Labor Costs in China with a Sustainable Workforce Structure

Optimizing labor costs sustainably in China involves adopting flexible employment practices, adapting to economic challenges, and implementing effective compensation structures. This multifaceted approach ensures cost savings while keeping the workforce motivated and engaged.

As labor costs rise and become a pressing issue, optimizing labor costs while maintaining a sustainable workforce structure has been increasingly important for effective company management.

Utilizing temporary staff, outsourcing, and other flexible employment methods can help reduce long-term fixed costs and align labor expenses with operational demands. Additionally, designing effective compensation structures and incentive programs is crucial for keeping staff motivated. In extreme cases, businesses could also consider downsizing or adjusting employees’ salaries for direct cost savings.

This article explores various strategies for optimizing labor costs.

Adopting flexible employment models

The concept of “flexible employment” has gained significant attention in recent years, driven by the macroeconomic environment. Economic downturns and intensifying competition have made flexible employment a necessity in the VUCA (Volatility, Uncertainty, Complexity, Ambiguity) era. This approach not only helps enterprises control costs but also enhances efficiency, flexibility, and competitiveness.

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Broadly speaking, flexible employment encompasses various labor solutions beyond full-time employment. These include labor dispatch, part-time work, re-employment of retirees, outsourcing, workforce sharing, platform-based employment, and other service relationships utilized by enterprises. Each method has distinct legal implications, working hours, remuneration, and termination conditions, presenting different advantages and disadvantages, as illustrated in the following table.

Choosing the optimal strategy

When choosing the most suitable employment method, businesses need to consider multiple factors, including business needs, labor costs, legal compliance, employee management efficiency, and corporate culture:

• Business needs and goals: First, businesses should analyze their current and future business needs to determine whether they require short-term temporary labor or long-term stable employment. This involves considering the temporary, cyclical, or long-term nature of projects, as well as the required professional skills and personnel scale.
• Labor costs: Businesses need to assess the cost implications of different labor solutions. This includes both direct costs (such as wages, social security, and benefits paid directly to employees) and indirect costs (such as recruitment, training, and management costs). It is natural for businesses to aim for solutions that provide the best value for money while maintaining quality.
• Flexibility and scalability: Businesses should consider how flexible and scalable the labor solutions are. This is particularly important for businesses that experience seasonal fluctuations or are in growth phases. Flexible solutions can help manage varying workloads without overcommitting resources.
• Employee management efficiency: Companies should consider the impact of the employment method on management efficiency and staff stability.
• Compliance and risks: Businesses must ensure that the chosen employment method is legal and compliant and evaluate whether potential risks are within their tolerance range.

Given the diverse situations and demands of businesses, there is no one-size-fits-all solution. Not all companies are suited for flexible employment methods, nor are all positions appropriate for such an approach. However, one thing is certain: companies must prioritize their objectives—you can’t have your cake and eat it too. In practice, beyond tailoring labor solutions to the company’s specific circumstances, businesses should also categorize and classify applicable personnel, beginning with small-scale pilots. Management practices should be adjusted accordingly, rather than relying on previous employee management models.

Working hour systems and cost savings

Work hour systems define specific work hours, rest periods, and overtime rates for employees. In China, there are three main work hour systems: the standard work hour system, the comprehensive work hour system, and the non-fixed (flexible) work hour system. The latter two systems are considered “special work hour systems”, which require special approval and compliance requirements.

Proper application of these systems can help companies save costs and optimize efficiency due to the following factors:

• Improving work efficiency: Special working hour systems allow companies to flexibly arrange employees’ working hours based on production needs. This flexibility enables companies to utilize human resources more effectively, reducing idle time or inefficiencies caused by standard working hour systems and thereby improving overall work efficiency.
• Meeting special work demands: In certain industries, such as engineering, transportation, and healthcare, work demands can be unpredictable and urgent. Special work hour systems better accommodate these needs, ensuring that human resources are quickly available when required, thus preventing production or service interruptions due to staff shortages.
• Reasonable overtime control: Special work hour systems allow companies to arrange employees’ working hours and overtime more effectively, avoiding unnecessary overtime and reducing overtime pay expenses.
• Optimizing compensation structure: By implementing special working hour systems, companies can optimize and adjust their compensation structures, converting some overtime pay into fixed salaries or performance bonuses, thereby reducing overall labor costs.

Designing effective compensation structures

Before adjusting salary structures, it is essential to understand the components of total compensation and their impact. Total compensation typically includes fixed salary, variable salary, benefits, work-life balance, performance and recognition, and development and career opportunities. Each component plays a role in attracting, retaining, motivating, and recognizing employees.

To offer competitive, attractive, and motivating compensation, companies can:

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• Set “SMART” KPIs (Specific, Measurable, Achievable, Realistic, Timed).
• Establish robust performance appraisal systems.
• Adjust the percentage of basic salary and performance bonuses.
• Introduce employee stock incentive programs to retain and motivate valuable staff.

Labor cost saving in extreme situations

In extreme situations, when businesses encounter heightened cost constraints, they may explore more measures such as deferring salary payments, suspension of production, reducing salaries, or downsizing. These actions generally come with higher compliance standards and increased labor dispute risks, necessitating careful planning and implementation.

Deferring salary payment

While businesses may be permitted to defer wage payments during financial difficulties, they are typically required to meet specific conditions and adhere to procedural guidelines.

In the following table, we list wage deferral rules in Beijing, Shanghai, Jiangsu, and Shenzhen as examples. Among others, how to identify “production and operation difficulties” still needs to be judged following local standards and cannot be generalized. Likewise, when identifying the “reasons” for deferred payment (in Shenzhen’s Regulation on Wage Payment to Employees) or the “(serious) impact on cash flow” (in regulations of Suzhou and Shanghai), employers should also factor in local practices.

Suspension of production

In the case of suspended production, the salary payments are allowed to be adjusted. While the rules vary from one city to another, in general, the enterprise shall consult with the employee(s) in accordance with the relevant provisions on wage payment during the period of suspension of production:

• If the suspension period is within one wage payment cycle, salaries shall be paid according to the standards stipulated in the labor contract; and
• If the suspension period goes beyond more than one wage payment cycle, the living allowance shall be paid by the enterprise, and it should be in accordance with the relevant local regulations.

Referring to the regulations of Zhejiang Province, Hubei Province, and Shaanxi Province, the employer is required to pay a living allowance of 70~80 percent of the local minimum wage.

Reducing salaries

In most cases, salary reductions must be understood and agreed upon by employees. Occasionally, pay cuts coincide with position adjustments. Employers bear the responsibility of demonstrating the fairness and reasonableness of such changes.

Companies are required to follow “democratic procedures”, such as equal consultation with trade unions or employee representatives. Companies are also encouraged to treat affected employees equitably, implement proportionate reductions, and act within a reasonable timeframe. To minimize labor dispute risks, separate amicable negotiations with employees are advisable.

Downsizing

Under China’s legal framework, companies have several grounds for downsizing their workforce, including economic layoff, contractual impossibility, early dissolution, or mutual agreement. Each of these grounds holds distinct conditions, procedural requirements, and compensation rules.

For example, an economic layoff requires a 30-day notice in advance, consultation with the trade union, and reporting to the union. Moreover, there are special employees that cannot be laid off. We provide a comparison of different options in the table below.

*Usually refers to a situation where a contract cannot be fulfilled due to unforeseen circumstances or events beyond the parties’ control. The term used in Chinese Labor Contract Law is “significant changes in objective circumstances”.

Summary

Optimizing labor costs with a sustainable workforce structure requires a multifaceted approach. By leveraging flexible employment methods, adapting to economic challenges, and designing effective compensation structures, companies can achieve cost savings while maintaining a motivated and efficient workforce. Each business must assess its unique situation and production or service needs to implement the most suitable strategies for labor cost optimization.

(This article is an excerpt from the latest issue of China Briefing Magazine, “Cost Reduction Strategies in China“.)

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