Answer: Your company wanting to reduce the number of employees because of economic hardship may constitutes an economic redundancy. Economic redundancy refers to the situation provided in Article 41 of the Employment Contract Law, where an employer can legally lay off employees when facing severe business hardship.
According to this regulation, economic redundancy bears three characteristics: first, it apply to collective layoffs of more than 20 people or more than 10% of the total number of employees; second, applicable circumstances include bankruptcy, reorganization, serious operational hardships, technological innovation and operation adjustment, and other major changes in objective situation (these changes should be due to operational hardship), that make it impossible to perform the employment contract; third, procedurally employers must notify the trade union or the employee congress, consider their responses, and report to competent labor authority.
According to the aforementioned characteristics, the law not only requires a legal number of redundant employees for a legal economic redundancy, but also requires economic redundancy to meet substantive and procedural requirements.
The substantive conditions of economic redundancy include one of three situations.
The first situation is that the employer is reorganized according to the bankruptcy law in China. If the company is unable to repay its debts that are due, is insolvent, clearly lacks the capacity, or is impossible to repay the debts, the company or its creditors may apply to the court for reorganization. If the court grants to reorganize, the company will meet the substantive condition for economic redundancy. This kind of reorganization must be decided by the court, and the reorganization decided by the company itself does not fulfill the requirement under the first situation.
The second situation is that the company encounters serious operational hardships. As for how to identify “serious operational hardship”, in the past, some regions have stipulated rules such as two-year or three-year of financial losses, certain shutdown rate, and proportion of employees that have been stood down.1On September 5, 1994, Article 27 of the Ministry of Labor’s Explanation on Several Articles of the Labor Law of the People’s Republic of China stipulates: “The definition of serious operational hardships shall be interpreted in accordance with the provisions of local governments.” The Tianjin Municipal Labor and Social Security Bureau, the Interim Provisions on the Economic Redundancy by Enterprises in Tianjin (Jin Lao Ban (2001) No.241), stipulates that the following conditions shall be met at the same time if serious operational hardships really require the redundancy: (1) The actual losses in production and operation have lasted for more than three consecutive years (the year of financial final accounts), and the amount of losses has increased year by year. And there is no obvious improvement in the production and operation conditions; (2) The operating rate is less than 60% for two consecutive years, and more than 50% of the employees are laid off and waiting for work; (3) The wages of the employees on duty for more than six consecutive months cannot be paid according to the minimum wage standard stipulated by this Municipality. The former Beijing Municipal Department of Labor, Jing Lao Jiu Fa (1995) No.56 (abolished), stipulates that serious operational hardships are “three consecutive years of operating losses and the amount of losses increasing year by year, insolvency, 80% of the workers being suspended from work, and they being unable to pay the living expenses of workers according to the minimum living standard for six consecutive months.” Zhejiang Province Former Labor Department, Zhe Lao Li (1995) No. 2, Notice on forwarding the Regulation on Enterprise Economy Redundancy Personnel, “The reference standard for employers being economic redundancy due to serious operational hardship is: due to market reasons, having insufficient production orders in two consecutive years, causing half shut-down with no hope of turnaround.”However, as these rules may be too stringent on employers, in practice, the courts usually examines whether the employers have suffered losses based on evidence such as financial reports, company board or trade union documents in the past two or three years. For example, in the case of Huanghua and Lejin Electronics Company before Beijing High Court in 2020, the company provided four years of financial audit reports and documents from board of directors and trade union. The court considered them sufficient to prove the existence of serious operational hardships. The case of Yashili (Ma’anshan) Sales Company before Guangzhou Intermediate Court of Guangdong Province in 2019 also reflects a similar determining principle.2Liu Yan, Heilongjiang Longshi Star Media Co., Ltd. Civil Judgment of the Second Instance of Labor Dispute Civil Judgment of Harbin Intermediate People’s Court of Heilongjiang Province (2018) Hei 01 Min Zhong No.8311. Zheng Ying, Fuzhou Huarong Property Management Co., Ltd. Civil Judgment of Second Instance of Labor Dispute Civil Judgment of Fuzhou Intermediate People’s Court of Fujian Province (2020) Min 01 Min Zhong No.4099. (Loss for two years).
The third situation is that the transformation of company management or technology requires redundancy. This transformation includes change of production, major technological innovation or adjustment of operation mode, and other major changes in objective economic conditions on which the employment contract is based at the time of its conclusion, which make it impossible to continue the employment contracts.
Economic redundancy must also follow legal procedures. Employers must report to the labor administrative authority after notifying their trade union or employee congress and considering their response. An economic redundancy in violation of these procedures will be considered an unlawful dismissal. Among them, the procedure of informing trade union or employee congresse and listening to their opinions must be strictly observed, violating which will result in illegal dismissals. However, whether failure to report to the labor administrative department, after notification of trade union or employee congress, constitutes a procedural illegality is controversial in judicial practice. The 2014 Wang Haiying case before the Second Intermediate People’s Court of Beijing held that failure to report the labor authority was only a minor flaw in the procedure and did not affect the legitimacy of the redundancy.3Civil Judgment of Second Instance on Labor Dispute between Wang Haiying and Dongjiang Mixiang Garden (Beijing) Catering Co., Ltd. (2014) Er Zhong Min Zhong Zi No.08363 of the Second Beijing Intermediate People’s Court.
For economic redundancy due to transformation of company’s management or technology, the company must first negotiate with the employees to alter their contracts. If it fails, the employer may then implement the procedure of notifying the trade union or the employee congress, considering their responses, and reporting to the labor administrative department before implementing the economic redundancy.4Guangdong Baodian Minghui Trademark Co., Ltd. and Huang Chunfa Labor Dispute Appeal Case Dongguan Intermediate People’s Court of Guangdong Province Civil Judgment (2014) Dong Zhong Fa Min Wu Zhong Zi No.864.
Employers must notify trade unions or employee congresses one month in advance of economic redundancy, or pay one month’s wage in lieu of notice, and pay economic compensation. Employers’ violating the rules on numbers of employees to be laid off, substantive or procedural requirements shall lead to illegal termination and the liability of punitive damages. For the calculation method of payment in lieu of notice, economic compensation, and punitive damages, please refer to “How to calculate the payment in lieu of notice?”, “How to calculate economic compensation?”, “How to calculate punitive damages?”
It should be noted that certain types of employees are legally protected from dismissal when employers implement economic redundancy. Please refer to “What types of employees are entitled to special non-termination protection in employers’ layoffs?”
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Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
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- 1On September 5, 1994, Article 27 of the Ministry of Labor’s Explanation on Several Articles of the Labor Law of the People’s Republic of China stipulates: “The definition of serious operational hardships shall be interpreted in accordance with the provisions of local governments.” The Tianjin Municipal Labor and Social Security Bureau, the Interim Provisions on the Economic Redundancy by Enterprises in Tianjin (Jin Lao Ban (2001) No.241), stipulates that the following conditions shall be met at the same time if serious operational hardships really require the redundancy: (1) The actual losses in production and operation have lasted for more than three consecutive years (the year of financial final accounts), and the amount of losses has increased year by year. And there is no obvious improvement in the production and operation conditions; (2) The operating rate is less than 60% for two consecutive years, and more than 50% of the employees are laid off and waiting for work; (3) The wages of the employees on duty for more than six consecutive months cannot be paid according to the minimum wage standard stipulated by this Municipality. The former Beijing Municipal Department of Labor, Jing Lao Jiu Fa (1995) No.56 (abolished), stipulates that serious operational hardships are “three consecutive years of operating losses and the amount of losses increasing year by year, insolvency, 80% of the workers being suspended from work, and they being unable to pay the living expenses of workers according to the minimum living standard for six consecutive months.” Zhejiang Province Former Labor Department, Zhe Lao Li (1995) No. 2, Notice on forwarding the Regulation on Enterprise Economy Redundancy Personnel, “The reference standard for employers being economic redundancy due to serious operational hardship is: due to market reasons, having insufficient production orders in two consecutive years, causing half shut-down with no hope of turnaround.”
- 2Liu Yan, Heilongjiang Longshi Star Media Co., Ltd. Civil Judgment of the Second Instance of Labor Dispute Civil Judgment of Harbin Intermediate People’s Court of Heilongjiang Province (2018) Hei 01 Min Zhong No.8311. Zheng Ying, Fuzhou Huarong Property Management Co., Ltd. Civil Judgment of Second Instance of Labor Dispute Civil Judgment of Fuzhou Intermediate People’s Court of Fujian Province (2020) Min 01 Min Zhong No.4099. (Loss for two years).
- 3Civil Judgment of Second Instance on Labor Dispute between Wang Haiying and Dongjiang Mixiang Garden (Beijing) Catering Co., Ltd. (2014) Er Zhong Min Zhong Zi No.08363 of the Second Beijing Intermediate People’s Court.
- 4Guangdong Baodian Minghui Trademark Co., Ltd. and Huang Chunfa Labor Dispute Appeal Case Dongguan Intermediate People’s Court of Guangdong Province Civil Judgment (2014) Dong Zhong Fa Min Wu Zhong Zi No.864.