Properly Handling Mass Layoffs in China

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Jun. 25 – In a timely article related to the recent troubles by disgruntled workers at a U.S.-owned manufacturing plant in Beijing, we look at the correct procedures for dealing with mass layoffs in China. A “mass layoff” is defined under Article 41 of China’s Labor Contract Law as being when a company terminates the labor contracts of at least 20 employees or a number of employees equal to 10 percent of its total workforce, whichever is lower.

There are several situations in which a company may implement a mass layoff, namely:

  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 renovation, or adjusts the methods of its business operation, and it is still necessary to lay off the number of employees after changing the labor contract
  4. Other major changes occur in the objective economic environment relied upon at the time of conclusion of the labor contracts, rendering them non-performable

Three of these four conditions have been left relatively vague in the Labor Contract Law, which gives the courts quite a lot of discretion concerning how to define them. Foreign enterprises can expect the interpretation of these terms to vary quite widely across different areas of the country.

The process for implementing a mass layoff is as follows:

  1. Company explains the circumstances of the mass layoff to its labor union or directly to the staff 30 days before the intended implementation of the layoff
  2. The opinions of the labor union or the employees are taken into account by the board of the company
  3. The company reports the implementation of the mass layoff to the local labor administration department
  4. Once the 30 day period expires, the mass layoff can be implemented

Note that the government will not usually get actively involved in the mass layoff process, however it is important that companies follow the above procedure carefully.

If the mass layoff is not implemented properly, the government may apply penalties and the employees may also claim additional compensation if their contracts have not been terminated in the appropriate way.

That being said, it is apparent – and increasingly common – that Chinese workers, either individually or en masse as in the recent Beijing case, may deliberately misbehave in order to pocket what now amounts to large amounts of compensation due upon being fired. The Beijing case is particularly nasty in that the workers causing problems and holding the foreign plant manager to ransom were apparently not in danger of losing their jobs. They instead appear to want compensation for dismissal in line with colleagues in a related division that had recently been wound up.

In essence, the workers were angry they had not been fired. The Chinese Labor Union movement needs to address these examples of deliberately provocative labor unrest and encourage their members to abide by the law. If not, China faces losing even more jobs to foreign countries such as India, where labor costs are lower and the termination of workers is limited to one month’s severance pay.

Mass termination of employees should be discussed in full with the responsible authorities, including the Union, and promises extracted from them that workers still under employment will not attempt to disrupt operations. Given the obvious and excessive China sensitivities over the issue, it may also prove prudent to gradually wind down operations in the country and build these costs into a medium-term cash flow plan rather than abruptly terminate, thereby reducing the chances of conflicts arising. Doing so avoids completely the dreaded words “terminations” and “mass layoffs,” and a planned exit may be more wise when considering the general Chinese worker and labor culture, and the increasingly belligerent attitudes towards foreign employers.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

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