Answer: Major change in objective situation, as stipulated in Article 40 of the Employment Contract Law, refers to the circumstance where the objective situation on which the employment contract(s) is based has changed significantly, rendering it impossible to implement the employment contract(s), and subsequently the employer and the employee have failed to reach an agreement on altering the content of the employment contract(s) through negotiation. In such case, the employer may legally terminate the contract, conditional on paying economic compensation.
What kinds of situation constitute a major change in objective situation is not stipulated by law and is quite complex in practice. The former Ministry of Labor’s interpretation of major changes in objective situations refers to the occurrence of force majeure or other circumstances that make it impossible to implement the employment contract(s), including company relocation, merger, transfer of company assets, but excluding economic redundancy.1Article 26 of the Explanation on Several Articles of the Labor Law of the People’s Republic of China issued by the former Ministry of Labor stipulates that the “objective situation” in this article refer to the occurrence of force majeure or other circumstances that make it impossible to perform all or part of the terms of the employment contract, such as enterprise relocation, merger, transfer of enterprise assets, etc. It also excludes the objective situation listed in Article 27 of this Law (referring to economic redundancy). Beijing Weibaifang Science and Trade Co., Ltd. and Jinmingguang Labor Dispute Second Instance Civil Judgment Beijing First Intermediate People’s Court Civil Judgment (2022) Jing 01 Minzhong No.10196. “The deterioration of business conditions, the inability to continue operating, and the transfer of stores are within the scope of the company’s business adjustment and the operational risks it should bear. It is not major change in objective situations that cannot be foreseen at the time of the conclusion of the contracts, such as the suspension of production and change of production due to force majeure or policy changes after the conclusion of the employment contract as stipulated in the aforementioned law.”From the perspective of judicial decisions, it appears that courts in various parts of China generally consider that major changes in objective situation are limited to major changes in the external environment that cannot be changed and controlled by the companies, instead of general business disruptions or institutional adjustments to improve operations.2The Supreme People’s Court issued the first “100 Excellent Judgment Documents”, Jilin Provincial High Court (2017) Jimin No.296, Qiu Lihong v. Shentian Pharmaceutical (China) Co., Ltd. for retrial of labor disputes. “therefore the interpretation of “major changes in objective situation” should be limited to the major changes that occur in the external environment of the enterprise, that the enterprise cannot change or control. They are the facts that the enterprise has to face and accept, instead of the situation of ordinary poor business operation or the management mode changes for the enterprise pursuing higher profits.” This is the view of the case of Qiu Lihong before Jilin Provincial High Court in 2017, which was issued by the Supreme Court as the first “100 Excellent Judgment Documents”.
In practice, courts generally recognize the major changes in objective situation caused by external reasons (especially government-led restructuring). For example, according to Chen Fading case before the Taizhou Intermediate Court of Zhejiang Province in 2019, some employees lost their positions because their departments’management system were changed at the request of the government; therefore this constitutes a major change in objective situation. 3Intermediate People’s Court of Taizhou City, Zhejiang Province, (2019) Zhe 10 Min Zhong No.664, Civil Judgment of Second Instance of Labor Dispute between Chen Legal and Yuhuan Market Development Service Center. In the case of Zhang Wei v Fushun Natural Resources Bureau before Liaoning Fushun Intermediate Court in 2019, the court held that the government-led reform of official vehicles led to the layoff of drivers was a major change in objective situation. The courts does not recognize those changes of general nature, especially the non-major changes in ordinary business situation decided by the company independently, as major changes in objective situation. For example, in the case of Li v a foreign-invested company, one of the Ten Exemplary Labor Dispute cases in Beijing in 2016, the court decided that the internal adjustment of the enterprise was not a major change in objective situation. 4The Beijing Municipal Bureau of Human Resources and Social Security released one of the top ten typical cases of labor disputes in 2016: the employment contract dispute between Li and a foreign-funded company-the internal adjustment of the enterprise is not a “major change in objective situation”. “As an operator, when an employer concludes an employment contract with a employee, it should foresee the possible fluctuations in the market and the possible changes in production and operation strategies. If it is really necessary to transfer the employee¡¯s position due to the needs of production and operation, the employment contract shall be changed or terminated in writing by mutual agreement. If no agreement can be reached, the employer can arrange the employee to work in similar or close positions, and can not arbitrarily reduce the wage standards of the employee, let alone simply terminate the employment contract.” The case of Yingsikang Information Technology (Shenzhen) Co., Ltd. before Guangzhou Intermediate Court of Guangdong Province in 2021 also points out that major changes in a company’s equity do not necessarily constitute major changes in objective situation.
From many judicial decisions, what is more vague and controversial is whether the court should recognize a major changes in objective situation when a company implements a strategic management adjustment. In the case of Feng, Bei mou (sic) Electronics Company before the Hangzhou Intermediate Court of Zhejiang Province in 2016, the court held that the fact that some employees had been dismissed from their departments had proved the existence of major changes in objective situation, and in the case of Zhao Benfa before Guangdong Provincial High Court in 2018, the courts of the first and second instances in Guangzhou both held that the abolition of departments by the employer due to business strategy adjustment had been partially implemented, proving a major change in objective situation.5Zhejiang Hangzhou Intermediate Court (2016) Zhe 01 Min Zhong No.1515, Labor Dispute between Feng Mou-mou and Bei Mou-mou Electronics (Hangzhou) Co., Ltd.However, in the case of Zhou Mou-su (sic) Online Information Company before the Beijing Third Intermediate People’s Court in 2020, the court confirmed that the selling or out-outsourcing of departments or businesses as a whole did not necessarily constitute a major change in objective situation.6The Guangdong Provincial People¡¯s High Court issued the seventh of nine typical cases of labor disputes: Huang sued a real estate company for labor disputes-the termination of employment contracts on the grounds of changes in the company’s equity is illegal. Beijing Third Intermediate People’s Court (2020) Beijing 03 Civil Judgment No.3801, Zhou v. Online Information Company Labor Dispute-the criteria for determining major changes in objective situation at the time of the conclusion of the employment contract. “The unpredictable major changes in the conclusion of the employment contract usually refer to force majeure caused by natural disasters, major changes in the employer’s relocation, transfer of assets or suspension of production, change of production, transfer (or change) of system, due to changes in laws, regulations and policies, or major changes in the business scope of the employer with the nature of franchising. According to the statements and evidence of both sides in the trial, the online information company chose to outsource Zhou’s department to a third party in order to reduce costs, improve efficiency, and improve audit efficiency in an all-round way. This situation does not belong to the objective situation on which the conclusion of the employment contract is based. “In the case of Xiamen ABB Switch Company before Fujian Xiamen Intermediate People’s Court in 2018, the court held that the strategic adjustment of the company was not a major change in objective situation.
This vagueness in practice is exacerbated further because of the confusion between the major changes in objective situation under Article 40 and the major changes in objective situations under the Article 41 of the Employment Contract Law.7 The Employment Contract Law, Article 40 (3), “where the objective situation based on which the employment was entered into has significantly changed, rendering the implement of the contact impossible, and both parties fail in reaching agreement in altering the contract after negotiation. Article 41 (4) “other circumstances where the objective situation based on which the employment contact was entered into has significantly changed, rendering implementation of the contract impossible “. The law uses the same term in two different statutory provisions related to employment termination without distinguishing the applicable scopes. This is a regrettable legislative flaw, resulting in courts in practice suffering contradictions and confusions. Please see “What are the differences between terminations due to economic redundancy and the major changes in objective situations?”
Therefore, if you are terminated by the employer on the ground of major changes in objective situation under Article 40, you need to see how the employer explained the specific “objective situation” in the termination notice. If the employer encounters a major change in the external environment, it may be legal. On the contrary, if it is only a general business adjustment, it is unlikely to constitute a lawful termination. If the company was implementing an overall strategic adjustment, the legality of the termination may depends on whether the company encountered operational difficulties and has other reasonable grounds for termination.
If an employer intends to terminate the employment contract due to a major change in objective situation, it must notify the employee one month in advance, or pay one month’s wage in lieu of notice, and pay economic compensation. If the major changes in objective situation are not established, the employer is likely to have made an illegal dismissal and is liable for punitive damages. For the calculation method of payment in lieu of notice, economic compensation and compensation, please refer to
“How to calculate the payment in lieu of notice?”, “How to calculate economic compensation?”, “How to calculate punitive damages?”
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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.
Email: wangdong@royalaw.com
- 1Article 26 of the Explanation on Several Articles of the Labor Law of the People’s Republic of China issued by the former Ministry of Labor stipulates that the “objective situation” in this article refer to the occurrence of force majeure or other circumstances that make it impossible to perform all or part of the terms of the employment contract, such as enterprise relocation, merger, transfer of enterprise assets, etc. It also excludes the objective situation listed in Article 27 of this Law (referring to economic redundancy). Beijing Weibaifang Science and Trade Co., Ltd. and Jinmingguang Labor Dispute Second Instance Civil Judgment Beijing First Intermediate People’s Court Civil Judgment (2022) Jing 01 Minzhong No.10196. “The deterioration of business conditions, the inability to continue operating, and the transfer of stores are within the scope of the company’s business adjustment and the operational risks it should bear. It is not major change in objective situations that cannot be foreseen at the time of the conclusion of the contracts, such as the suspension of production and change of production due to force majeure or policy changes after the conclusion of the employment contract as stipulated in the aforementioned law.”
- 2The Supreme People’s Court issued the first “100 Excellent Judgment Documents”, Jilin Provincial High Court (2017) Jimin No.296, Qiu Lihong v. Shentian Pharmaceutical (China) Co., Ltd. for retrial of labor disputes. “therefore the interpretation of “major changes in objective situation” should be limited to the major changes that occur in the external environment of the enterprise, that the enterprise cannot change or control. They are the facts that the enterprise has to face and accept, instead of the situation of ordinary poor business operation or the management mode changes for the enterprise pursuing higher profits.”
- 3Intermediate People’s Court of Taizhou City, Zhejiang Province, (2019) Zhe 10 Min Zhong No.664, Civil Judgment of Second Instance of Labor Dispute between Chen Legal and Yuhuan Market Development Service Center.
- 4The Beijing Municipal Bureau of Human Resources and Social Security released one of the top ten typical cases of labor disputes in 2016: the employment contract dispute between Li and a foreign-funded company-the internal adjustment of the enterprise is not a “major change in objective situation”. “As an operator, when an employer concludes an employment contract with a employee, it should foresee the possible fluctuations in the market and the possible changes in production and operation strategies. If it is really necessary to transfer the employee¡¯s position due to the needs of production and operation, the employment contract shall be changed or terminated in writing by mutual agreement. If no agreement can be reached, the employer can arrange the employee to work in similar or close positions, and can not arbitrarily reduce the wage standards of the employee, let alone simply terminate the employment contract.”
- 5Zhejiang Hangzhou Intermediate Court (2016) Zhe 01 Min Zhong No.1515, Labor Dispute between Feng Mou-mou and Bei Mou-mou Electronics (Hangzhou) Co., Ltd.
- 6The Guangdong Provincial People¡¯s High Court issued the seventh of nine typical cases of labor disputes: Huang sued a real estate company for labor disputes-the termination of employment contracts on the grounds of changes in the company’s equity is illegal. Beijing Third Intermediate People’s Court (2020) Beijing 03 Civil Judgment No.3801, Zhou v. Online Information Company Labor Dispute-the criteria for determining major changes in objective situation at the time of the conclusion of the employment contract. “The unpredictable major changes in the conclusion of the employment contract usually refer to force majeure caused by natural disasters, major changes in the employer’s relocation, transfer of assets or suspension of production, change of production, transfer (or change) of system, due to changes in laws, regulations and policies, or major changes in the business scope of the employer with the nature of franchising. According to the statements and evidence of both sides in the trial, the online information company chose to outsource Zhou’s department to a third party in order to reduce costs, improve efficiency, and improve audit efficiency in an all-round way. This situation does not belong to the objective situation on which the conclusion of the employment contract is based. “
- 7The Employment Contract Law, Article 40 (3), “where the objective situation based on which the employment was entered into has significantly changed, rendering the implement of the contact impossible, and both parties fail in reaching agreement in altering the contract after negotiation. Article 41 (4) “other circumstances where the objective situation based on which the employment contact was entered into has significantly changed, rendering implementation of the contract impossible “.