Responses by Matthew Durham, Partner, Clyde & Co Shanghai
Is there a requirement in China for employers to legally justify redundancies and if so, what reasons do they need to provide?
Labour laws in the People’s Republic of China are very protective of employees. Employers can only terminate employment contracts unilaterally in certain specific (and limited) circumstances prescribed by law.
These fall broadly into two categories: (i) for cause type situations without notice or severance; and (ii) other reasons, with notice and severance, including incompetence, inability to return to work at the end of the statutory medical treatment leave period when suffering from a non-work related injury or illness, company closure and workforce reduction.
Redundancy, as understood in many and especially common law jurisdictions, is not a ground for termination under Chinese law. That said, employers can terminate using the workforce reduction ground if the company restructures pursuant to the local Bankruptcy Law, suffers serious difficulties in production or business operations, or changes its business method or production or introduces a major technological change. There must be at least 20 employees included in the downsizing (or 10% of the staff if there are less than 20 employees in the company).
Employers cannot necessarily cherry pick the employees to be included in a reduction. Certain categories of employee are broadly exempt from termination except for cause, such as female employees during pregnancy and for one year after the birth, and long-serving employees who are less than 5 years from retirement. In addition, the following categories of employee have priority against being selected for termination under the workforce reduction:
- employees with open term contracts;
- employees with long duration fixed term contracts; and
- employees who are the sole wage earner of their household and have a minor or elderly person to provide for.
Different rules may apply to foreign nationals, as it is possible for them to be employed by an entity outside China under the laws of the relevant jurisdiction and then assigned / seconded to work for a group entity in China. In which case Chinese laws typically do not apply and the redundancy should be handled under the governing law of the contract. Foreign nationals employed directly by an entity in China must have a local law governed employment contract. That said, in Shanghai a special regime allows employers to agree on specific provisions in contracts for foreign nationals, effectively opting out of certain PRC law requirements. In this case, a redundancy normally would follow the wording of the contract.
What is the statutory minimum notice period for redundancies (if any)?
There is no notice period as such, but the employer must explain the circumstances of the workforce reduction to all employees (not just those affected) or to the labor union of the company at least 30 days in advance and consider their opinions and feedback prior to proceeding with the reduction. Given this requirement and the need for the employer to file a report with the local labour bureau the process normally takes at least 6 – 8 weeks in practice.
What is the statutory minimum calculation for redundancy payments (if any)?
Statutory severance calculated as one month’s salary per year of service with the employer and subject to a maximum of 12 years’ service. Monthly salary means the average monthly salary of the employee during the 12 months prior to termination (including all allowances and any bonus actually paid to the employee during the period). For periods of service prior to 2008 the actual monthly salary (calculated in this way) applies. For periods of service from 2008 onwards, monthly salary is capped at three times the average monthly salary for the relevant city. In Shanghai this is currently RMB 12,993 (approximately $2,000). In Beijing the cap is currently RMB14,016. The cap is normally altered each year in line with the newly published average monthly salary for the relevant location.
According to law, what are the main steps that employers must take during a redundancy process?
As mentioned above, the employer must explain the circumstances of the workforce reduction to all employees or to the labor union at least 30 days in advance. The employer is also required to file a report with the local labour bureau explaining the circumstances. The labour bureau has the right to request that the company change its proposal if it believes this is not legal, or not fair to employees, otherwise the labor bureau can refuse to give a written acknowledgement of the report being filed. This amounts to a de facto approval process.
What are the consequences for employers who fail to comply with redundancy laws? What kind of compensation can employees claim, and is the amount capped?
The labour authorities can seek to have the terminations unwound, as well as to fine the company. Employees can bring a claim for unlawful termination. If successful, as is very likely, the employee can request one of the following remedies:
- payment of double statutory severance, calculated in accordance with the formula above; or
- reinstatement to the position with the employer under the employment contract.
Statutory minimums aside, what is the standard practice for making redundancies and calculating payments at large financial institutions in China?
If there is no legal ground for termination under Chinese law, such as for the “redundancy” of a single employee, this normally means that the employer must either wait until the expiry of a fixed term contract (if applicable) or negotiate a mutual termination with an employee.
There is no set formula or market rate for severance for a mutual termination. While the statutory severance calculation can be used as a basis from which to negotiate a mutually agreed package, in practice the amount paid normally will be significantly higher than this because there is no obligation for the employee to agree to a mutual termination. It is common to see employers offer severance based on actual salary (i.e. not subject to the cap) for the years of service, sometimes with an additional month or two on top.
The situation can be similar for a workforce reduction. Legally speaking statutory severance is sufficient, but it is common in practice to see employers pay one or two additional months of salary on top of the statutory amount in order to facilitate a smooth process with employees and the labour bureau.