How to dismiss employees in china

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As several high profile labour disputes having arisen between foreign employers and local workers in 2010, now is the time to make sure that your company is following legal procedures before laying off workers. Local lawyer Erex Chen of V&T law firm in Shanghai explains how to handle this important HR process without risking legal trouble.

While well-prepared companies have human resources procedures in place for most situations, the rapid development of China’s labour regulations mean that you need to constantly update these procedures to ensure that they continue to conform to the latest government guidelines.

Regarding laying off of employees, on January 8, 2009, the Shanghai Human Resources and Social Security Bureau promulgated a “Notice on Implementation of Employee Layoff Report by Employers”, which provides legal guidance for companies which need to lay off employees because of economic difficulties. This notice, taken together with the Employment Contract Law of the PRC, means that companies considering laying off team members for economic reasons will need to first consider the following points:

Defining a Layoff Under Chinese Law

According to Article 41 of China’s Employment Contract Law, a layoff may be defined as follows:

If any of the following circumstances makes it necessary to reduce workforce by 20 persons or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the enterprise’s employees, the Employer may reduce the workforce after it has explained the circumstances to its labour union or to all of its employees 30 days in advance, has considered the opinions of the labour union or the employees and has subsequently reported the workforce reduction plan to the labour bureau:

restructuring pursuant to the Enterprise Bankruptcy Law;

serious difficulties in production and/or business operations;

the enterprise switches production, introduces a major technological innovation or revises its business method, and after amendment of employment contracts, still needs to reduce its workforce; or
other major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them unperformable.

Therefore, a layoff under China law refers to situations where the employer needs to reduce workforce by 20 person or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the company’s employees.

Working With union s and Employees Before Layoffs

Based on Article 41 of the Employment Contract Law, if any of the above four conditions is satisfied, the employer has the option of laying off employees. For companies which are suffering economic difficulties, the second condition i.e. serious difficulties in production and/or business operations can apply.

However, it should be noted that, even in cases that meet the criteria above, the layoff process cannot be a unilateral action by the employer. The employer needs to confer with the labour union or announce to all of its employees 30 days in advance, consider their opinion and report the workforce reduction plan to the local labour bureau. Only after this condition is satisfied will the employer be allowed to lay off its employees.

Submitting a Workforce Reduction Plan to the Labour Bureau

According to the Notice, when an employer submits a workforce reduction plan to the labour bureau, the following documents are required:

The employer’s Business License and labour union Legal Person Certificate. If there is no labour union in the company, then the employer shall provide a list of employee representatives elected by all employees to represent them;

Personal data of the labour union representative or employee representatives, including name, ID number, position, and other employment information;

The Workforce Reduction Plan, which shall include the number of employee to be laid off, the proportion of laid-off employees, a list of employees to be laid-off (including name, ID number, and employment term), the standard of severance payment and any remedial measures taken by the employer.

Information regarding the employer’s explanation of the rationale for layoffs as presented to the labour union or all employees.

Strictly speaking, the labour bureau’s role is to examine the Workforce Reduction Plan and it has no right to approve or rejct the Plan. However, in actual practice, the labour bureau may use its influence to urge the employer to restructure the layoff plan or avoid the layoff altogether. With this in mind, it is imperative for the employer to prepare carefully before presenting the workforce reduction plan and to seek advice from professionals experienced in this process wherever possible.

Which People to Layoff

According to the law, the employer shall also realize the following issues in the process of layoff:

According to Chinese labour laws, when reducing the workforce, employers should place a priority on retaining the employees that meet the following criteria:

Persons who have concluded with the company fixed-term employment contracts with a relatively long term;

Persons who have concluded open-term employment contract with the employer;

Team members who are the only ones in their families to be employed and whose families have an elderly person or a minor for whom they need to provide support.

However, during the process of layoff, some companies may try to retain new employees with strong work ability but lay off old employees who have may have worked at the company for a long time but whose performance may be deemed lacking. This may cause dispute if it is not handled properly.

Paying Severance

Along with identifying the right people to lay off, perhaps the greatest risk for disputes regarding layoffs arises from paying severance according to legal regulations. Chinese labour law spells out the requirements for severance pay to laid off workers clearly, and employers will need to abide by these guidelines if they are avoid conflict.

Severance payment shall be based on the number of years that an employee has been working for the company at the rate of one month’s salary for each full year worked.
Any period of not less than six months but less than one year shall be counted as one year.
The severance payment payable to an employee for any period of less than six months shall be half of his monthly salary.

Rehiring After a Layoff

If an employer should find that it needs to hire again within six months of reducing its workforce, the company is required to give notice of this hiring to any persons laid off and hire them back on a preferential basis over new employees.