Many firms operating in China have started to review their employment arrangements to trim down costs and align capacity with present work levels. Restructuring options range from soft measures such as engaging workers on a part-time basis to hard measures such as reducing wages or work hours, imposing compulsory leave or laying off employees. In extreme cases, a company may even be forced to declare bankruptcy.
In light of the recently reinforced PRC labour law regime, firms must handle employment arrangements delicately and cautiously and be mindful that poorly structured actions may result in additional costs and risks for the company. Embittered legal battles commonly accompany attempts to restructure employment arrangements. In 2008, when factory shutdowns were a common occurrence, the number of labour-related lawsuits nearly doubled and suits rose by 95%, marking the biggest year-on-year increase of any type of suit.
In this article we review the provisions of the PRC Labour Contract Law (LCL) relating to restructuring employment arrangements, including:
n part time employment;
n wage reductions;
n reduced work hours and compulsory leave; and
n redundancy and bankruptcy.
We conclude with some considerations for firms contemplating alternative measures for restructuring employment arrangements to manage challenges arising from the global financial crisis.
Part-time employment
In the current economic climate, to help manage operations, one option is for firms to consider alternative employment arrangements with existing staff or when engaging new employees. For the latter, employers may wish to engage staff on a part-time basis to reduce exposure to long-term salary costs, especially where continued business revenue is unstable. With part-time employment, wages are calculated on an hourly basis and each work day should generally not exceed four hours or 24 hours per week. Unlike fixed, open or project-based employment where a written contract must be entered into within the first month of employment and in most cases, economic compensation paid upon termination, part-time workers may be employed by oral agreement and severance payments are not payable on termination. On the other hand, part-time staff are free to stop working at any time and the expense of replacing workers can be high. Short-term employment contracts may promote workforce stability but employers must make severance payments when the contract expires.
Reducing wages
An employee’s wages may only be reduced in accordance with statutory requirements (deducting employee individual income tax or social security contributions), a court order or an arbitral award. Wage deductions outside the statutory realm must be mutually agreed upon between an employer and employee with the resulting wage level to remain above local minimum wage standards published biennially by Chinese provincial labour administrations. Such a reduction will be considered an amendment to the employment contract and thus permitted under the LCL.
The minimum wage floor is based on services rendered during prescribed ordinary work hours. As such, to determine if minimum wages have been paid, overtime pay, late-night or extra shift allowances, work performed under extreme temperatures, underground or in toxic or hazardous environments and social security insurance and other statutory welfare benefits should be excluded.
Reduced work hours or compulsory leave
Employers have a general obligation to provide normal working conditions to employees. This precludes employers from unilaterally reducing employee work hours or imposing unpaid leave on employees. Although PRC Labour Law allows an employer to impose compulsory leave or reduce work hours under special circumstances, the employer remains obliged to pay wages. Compulsory leave or reduced work hours are permitted if the employer suspends certain areas of its business operations or production but the employer must continue to pay wages (unless the suspension was caused by the employee i.e. damages machinery on assembly line). The amount payable depends on the duration of the suspension relative to the wage payment period (weekly or monthly). In particular, if an employer suspends business or production:
(a) if it is for a period less than one wage payment period, the employer must continue to pay the amount agreed in the employment contract; or
(b) if it is for a period exceeding one wage payment period and the employees cease providing normal services, the employer must pay a wage equal to the minimum cost of living as specified under local standards.
Redundancy
An employer has full autonomy to lay-off employees if the lay-off is limited in scope and within the ordinary course of a company’s business. However, certain procedures apply to mass lay-offs. A mass layoff takes place if greater than 20 employees or more than 10% of the employer’s total workforce (whichever is lower) are made redundant. To engage in mass lay-off, the workers or local labour union must be consulted. In addition, the employer must demonstrate that the redundancy is necessary due to significant changes in its business operation. A significant change to business operations includes:
(a) reorganisation according to the PRC Enterprise Bankruptcy Law;
(b) serious difficulties in production or operations;
(c) switching production, undergoing a material technological makeover or adjusting the mode of operations; or
(d) any material change to the objective economic circumstances making it impossible for the employer to continue with the original employment contract.
Local governments may formulate detailed standards on the criteria for mass layoffs. For example, the Beijing Labour Bureau has published specific conditions under which an employer’s business operation may be considered to be experiencing “serious difficulties”. These include the following circumstances:
(a) the employer is insolvent and is in the period of reorganisation as announced by a People’s Court;
(b) the employer suffered three consecutive years of operational losses;
(c) 80% of the employees have no work to do; and
(d) the employer has been unable to pay minimum living allowances to its employees for six consecutive months.
General legislative provisions coupled with local variations on what constitutes redundancy present challenges in determining whether circumstances have indeed been met. To determine if an employer may lawfully initiate a redundancy process, it may help to consider whether:
(a) the proposed redundancy is caused by revoking the company’s business licence or authority imposed reorganisation;
(b) there are changes in objective circumstances that could not be foreseen when the original employment contract was concluded; and
(c) there are alternatives other than redundancy.
It is advisable that employers consult with competent local labour administrations before implementing any redundancy plan.
Who cannot be laid-off?
Certain employees cannot be laid off or may only be laid-off in priority to others. Employees cannot be laid-off if they:
(a) have engaged in operations exposing them to an occupational disease hazard and have not undergone pre-departure occupational health examination, or are suspected of having an occupational illness and are being diagnosed or are undergoing medical observation;
(b) have contracted an occupational illness or sustained a work-related injury with the employer and have been confirmed as having lost all or part of their capacity to work;
(c) have contracted an illness or sustained a non-work-related injury and the applicable period of medical treatment for that injury has not expired;
(d) are pregnant, in confinement or in a nursing period; or
(e) have been employed for at least 15 successive years and are less than five years away from the statutory retirement age.
Further, an employer is required to retain, in priority to others, those employees with a fixed long-term or open-ended employment contract or who are the only employed person in their families and whose families include dependant elderly persons or minors. In contrast, employees on unpaid sabbatical with a mandatory rehire provision will not be afforded any additional protection. An employer will simply be required to ensure that the employee is paid appropriate economic compensation when being laid-off.
Given the number of factors involved in determining the priority of who may be laid-off, the selection of redundant employees cannot be arbitrary and must be well supported. Employers must know their employees well. They should keep detailed and clear records and establish high quality human resource management systems to ensure that information is properly captured and updated.
Redundancy procedures
Redundancy procedures set out in the LCL are relatively scant. There remains uncertainty as to the timing and formalities required of employers. Subject to regional variations as to practice, the basic redundancy process that employers should adopt is set out in Article 41 of the LCL. They are as follows:
(a) Assess the redundancy threshold: Assess whether the proposed reduction in employees will trigger redundancy thresholds and whether the company is in a position to proceed with the redundancy.
(b) Prepare a redundancy plan and supplementary materials: The LCL requires employers to prepare a redundancy plan as a working document for discussion with interested parties. However, no detailed requirements for a redundancy plan have been specified. In Shanghai, it is common practice for a redundancy plan to contain information on the number of employees to be laid-off, the percentage of the employer’s work force that are to be made redundant, a list of the employees to be made redundant (including details of the names, identification numbers and employment contract terms), economic compensation to be paid and plans to rehire if there is an economic upturn. That is, if the employer’s financial situation improves and decides to hire workers, the employer must first offer employment to employees previously made redundant. In addition, it is normal practice to include supplementary material (internal and external documents) justifying the proposed redundancy.
(c) Arrange meeting with labour union or all employees: At least thirty days before starting a redundancy, the employer must meet labour union representatives or all employees to explain and solicit comments on its redundancy plan.
(d) Revise the redundancy plan to incorporate employee comments: While the LCL only requires an employer seek the comments of the relevant labour union or its employees, a prudent employer should revise its redundancy plan to address any expressed concerns and anticipate any objections to which labour authorities might be sensitive. This is because the redundancy plan must be submitted to labour authorities with a report noting comments from the labour union or employees.
(e) Submit redundancy plan to relevant authorities: The LCL does not indicate what documents should be submitted, how long a review will take or what particulars the authorities will consider in their review. Local policies and practices may serve as a practical guide. In Shanghai, labour administrations require the following documents when reviewing an employer’s plans for redundancy:
(i) copies of the business licence and the labour union’s legal person certificate. In absence of a labour union, the material reflecting the voting process of all staff representatives signed by all employees is required;
(ii) personal information on the representatives of the labour union or all employees;
(iii) a written redundancy plan; and
(iv) a Redundancy Reporting Form indicating reasons for the redundancy, how and when an explanation of the redundancy was given to the labour union or all employees, and the comments from the labour union or all employees.
(f) Publish the redundancy plan: Although formal approval from the competent labour administration is not required by law, the authority’s opinions almost always play a decisive role in how an employer executes a mass layoff. The employer should make every effort to ensure that the labour administration has no objection to or concerns with the redundancy plan before it is formally announced to workers or published.
(g) Terminate employment contracts and make severance payments: The employer may terminate employment contracts at any time after the reported redundancy plan is published; it is no longer necessary to provide 30-days advance notice of a termination as would normally be the case. The employer must also determine and pay the appropriate economic compensation within 15 days of termination. This will include ensuring that any unused annual leave or outstanding social insurance contributions are appropriately calculated and paid.
(h) Issue certificate of termination: Article 50 of the LCL requires an employer to issue a certificate of termination to redundant employees immediately on termination of employment and, within 15 days thereafter, transfer all employment files and social insurance accounts to the new employer or, if the employee has not secured new work, the employee’s resident administration office. The Certificate must contain the terms of the terminated employment contract, the date of termination, the position of the employee and the duration of employment. If a Certificate is not issued to an employee, the employer will be ordered by the labour administration to do so and made liable for any damages suffered by the employee.
Bankruptcy
If a firm is declared bankrupt, an employment contract will be deemed terminated. The employer must pay appropriate economic compensation in accordance with PRC labour and bankruptcy laws. Specifically, severance pay is calculated by multiplying the number of years of employment served by the relevant employee by the employee’s average monthly wage for the twelve months prior to termination. Wages includes bonuses, subsidies, allowances, overtime payments and wages paid under special circumstances but excludes social insurance or welfare benefits.
A difficult balance
A range of employment restructuring options are available to firms operating in China but the PRC Labour Law regime gives unions and local government labour bureaus an important role in relation to restructuring measures, especially those involving redundancy. It may be prudent for firms to cultivate their relationship with unions and local government authorities but they must, at the same time, retain their operational independence. This is a difficult balance. What is clear is that firms in China are not free to do as they please with employment arrangements and practical and commercial legal advice will become all the more important. The PRC labour regime requires firms to successfully manage multiple stakeholders, which may be a significant challenge for management at present in the current environment. However it is generally understood that, amidst the current economic envirnoment, the Chinese government is less inclined to strictly enforce PRC labour laws against foreign firms. In a country where policy carries near equal weight to law, it will be interesting to observe how this will play out.
By Martyn Huckerby, Sharon Wong and Alex Yang of Mallesons Stephen Jaques
At a glance
The financial crisis has caused many companies to restructure in China. Options range from engaging workers on a part-time basis to reducing wages, imposing compulsory leave or laying off employees. In extreme cases, a company may be forced to declare bankruptcy.
The PRC Labour Contract Law (LCL) governs most of these actions and its provisions must be scrutinised.
Wage deductions outside the statutory realm must be mutually agreed between an employer and employee with the resulting wage level to remain above local minimum wage standards. Although the law allows employers to impose compulsory leave or reduce work hours under special circumstances, the employer remains obliged to pay wages. In the case of redundancies, procedures set out in the LCL are relatively scant. There remains uncertainty as to the timing and formalities required of employers.
Finally, if a firm is declared bankrupt, an employment contract will be automatically terminated. The employer must pay appropriate economic compensation in accordance with labour and bankruptcy laws.