After China’s lowest annual growth in a quarter century in 2015, many analysts are pessimistic about the state of the country’s economy. According to the American Chamber of Commerce in Shanghai, 20% of American manufacturers operating in China plan to lay off employees in the coming year. Indeed, the manufacturing sector—China’s leading industry—could be the economy’s biggest victim. Mass layoffs may be unavoidable for many manufacturing companies facing declining demand and rising business costs.
However, implementing mass layoffs in China is a complicated process that requires adherence to strict procedures and, under some conditions, explicit government approval. When restructuring a company on such a large scale, employers must take caution of government regulations and the rights of their workers. Failure to satisfy regulations and procedures when carrying out mass layoffs can lead to rejection from the government, workplace disruptions, and costly labor disputes companies can ill-afford when already in a fragile fiscal state.
Conditions Needed
Legally speaking, economic redundancy is when an employer lays off 20 or more employees or more than 10% of its total workforce. In order to protect workers’ rights, a company can only carry out mass layoffs under specific circumstances. According to the Labor Contract Law of the PRC, an employer may execute economic redundancy in the following situations:
- The company undergoes restructuring pursuant to the provisions of the Enterprise Bankruptcy Law of the PRC
- The company has serious difficulties in production and business
- The company undergoes a change of production, significant technological reform, or change of mode of operation and, upon variation of labor contracts, there is still a need for retrenchment
- The objective economic circumstances on which the conclusion of a labor contract is based have undergone significant changes and, as a result thereof, the labor contract can no longer be performed.
Procedure to Downsize
If a company qualifies for economic redundancy, it must follow a particular procedure to downsize lawfully. As long as any of the above conditions are satisfied, a company can proceed with a mass layoff through the following steps:
- Announce the situation to the relevant labor union or all staff 30 days in advance of the planned downsizing
- Seek the opinion of the labor union or the employees
- Develop a proper scheme for enacting the redundancy
- Report the redundancy scheme to government labor administrative authorities
- Announce the formal scheme of economic redundancy to all staff, terminate labor contracts with laid-off staff, and settle their severance payments
Reporting to government labor administrative authorities is not simply a formality to receive a bureaucratic rubber stamp. Government officials use their discretion to determine whether a company qualifies for economic redundancy and in some cases can be quite strict. There also appear to be unofficial regional variations in enforcement standards. For example, Beijing has a reputation for being tough on employers, while Shanghai is generally more amenable to green-lighting layoffs. In any case, liaising with the local labor bureau before formally submitting an application helps mitigate uncertainty and increases the likelihood of success.
Beyond complying with government requirements, companies must be conscious of the impact merely applying for economic redundancy can have on its employees. Announcing layoffs 30 days in advance inevitably introduces various complications to the workplace. Employees may feel dejected and protest, and particularly desperate workers may try to seize or damage company assets, such as official company chops (printed company seals or stamps). On the other hand, if the economic redundancy application ends up being rejected, employees are empowered to negotiate more lucrative severance payments from the employer. Developing a strategic plan to approach certain employees before formally announcing mass layoffs can help employers retain control over what is often an unpredictable process.
Other Considerations
When engaging in economic redundancy, staff cannot be laid off indiscriminately. Special consideration must be paid to vulnerable workers who retain additional government protection, such as pregnant and injured employees. For example, Article 42 (b) in the Labor Contract Law of the PRC regulates that an employer cannot rescind a labor contract with an employee where that worker has contracted an occupational illness or suffered an injury while working for the employer and is confirmed to have lost his or her labor capability wholly or partially. In this case, the injured or otherwise indisposed worker’s contract cannot be rescinded during mass layoffs. Awareness of the makeup of the company’s staff and their legal rights when developing a layoff scheme facilitates a smoother and more amicable transitional process.
While economic redundancy is not a pleasant approach to scaling down a struggling business, it is sometimes necessary, so being prepared is essential. Employers should be prudent when planning a mass layoff to avoid government rejection and contentious labor disputes. Furthermore, companies would be wise to develop programs to help laid-off employees transition to new jobs and insulate them from the shock of unemployment. Employers must be mindful of strategies to lessen the impact of mass layoffs on both the company’s bottom line and the well-being of their workers in order to successfully weather challenging economic periods.
Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at [email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.