Answer: The major changes in objective situation we usually refer to is the one under Article 40 (3) of the Employment Contract Law, by which employers may terminate their employees in case of major changes in objective situation and subsequent failure of negotiation, rather than the confusing major changes in objective situation under Article 41 (4) of the law for economic redundancy. 1 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”.
In order to distinguish the scope of application of these two statutory provisions, the judicial practice tends to limit the Article 40 related major changes in objective situation to the situation where employers are unable to retain employees due to major changes from external environment, and define the Article 41 related major changes in objective situation under economic redundancy as where employers are forced to lay off employees in batches due to serious operational hardships. Please refer to My employer terminates my employment contract on the ground of major changes in objective situation. Is it legal? My company is experiencing business hardship. Can we reduce workforce for survival?
Obviously, the aforementioned two circumstances may well coincide, although possibly different, as an employer’s internal business hardships may well be caused by external environment changes. The coincidence and distinction of these two legal provisions have caused wide ambiguity and confusion.
On the one hand, this will lead to employers’ feeling at loss as both legal provisions might be applicable. For example, if the number of employees to be laid off reaches the standard of economic redundancy (10% of staff or more than 20 employees), or if an employer having only two employees dismisses one employee (50% in layoff, reaching the percentage standard of the economic redundancy), the employer would be confused about whether the termination should be proceeded on the ground of Article 41 related major changes in objective situation under economic redundancy or Article 40 related major changes in objective situation. The legal procedure requirements of the two in the termination of employment relationships are distinct, the former requiring to notify the trade union or employee congress and report to the labor department, while the latter requiring to negotiate with the employees for contract alterations. Mistaken chose of avenue may result in serious consequences such as punitive damages.
For example, in the case of Cheng Lizhuo before Liaoning Provincial High Court in 2014, due to equity restructuring, the employer terminated employees from multiple departments on the ground of Article 40 related major changes in objective situation and placed them in other companies. The number of employees terminated obviously meets the characteristics of economic redundancy. Liaoning Provincial Procuratorate appealed claiming that this was an economic redundancy under Article 41. Liaoning High Court, however, finally rejected the appeal and found that the transfer of equity causing numerous employees’ layoff constituted Article 40 related major changes in objective situation. In another case of Zhang Mou (sic) v a cement company before Huizhou Intermediate Court in 2016, the employer executed an economic redundancy due to serious operational hardship, while the number of employees laid off fell short of the statutory requirement on economic redundancy, the dismissal therefore was found illegal.2Huizhou Intermediate People’s Court announced the second typical case of labor disputes in 2016: the employment contract dispute between Zhang and a cement company-economic redundancy.
Another prosecutorial appealed case, involving the confusion between the two types of major changes in objective situation, had an opposite outcome. In the case of Xin Deshan before Shandong High Court in 2019, the employer laid off a batch of employees due to a government-led policy restructuring. The employer did not specify the legal basis of the layoff on the notices of dismissal to the employees involved, while pointing out later that the employees were ability incompetent even after training, and that the layoff was implemented based on the poorest-performance-out under the requirements of the policy restructuring. The decision of the second-instance court tended to hold that, even if the number of terminated employees and other factors meet the characteristics of economic redundancy, the lay off was still implemented under Article 40 related major changes in objective situation. However, after the Shandong Provincial Procuratorate appealed, the Shandong Provincial High Court ultimately set aside the decision, upheld the procuratorate’s stance that the layoff should be found to be economic redundancy, and found the layoff illegal due to mistaken choice of termination procedure.3Shandong Provincial People’s High Court (2022) Lumin Zai No.209 Civil Judgment on Civil Retrial of Labor Dispute between Xindeshan and Weifang Xingsheng Highway Engineering Co., Ltd.
On the other hand, this ambiguity can also lead to situations where neither of the two legal provisions is applicable to a circumstance, leaving employers with no laws to rely on. For instance, an employer, facing a general business hardships, has to reduce the number of employees for an operational strategy adjustment to prevent potential serious challenges in the future. This is manifestly normal and reasonable managerial measure by any companies in a market economy. However, under the Employment Contract Law, the employer may not be able to terminate the employments under the provisions of Article 41 for economic redundancy, as current judicial decisions seem to be limited to situations where the employer has incurred losses for two or three consecutive years, and there are strict requirements regarding the number of employees to be laid off in economic redundancy. Please refer to ” My company is experiencing business hardship. Can we reduce workforce for survival?” Additionally, a termination by the employer applying Article 40 related major changes in objective situations may also not necessarily be legal, as the terminations resulting from such strategic adjustments may not necessarily meet the requirements of this legal provision. Please refer to ” My employer terminates my employment contract on the ground of major changes in objective situation. Is it legal?” Whether strategic adjustments by companies are permissible for legal layoffs under Article 40 or 41 of the Employment Contract Law is currently a highly contentious issue in judicial decisions, making it impossible to achieve consistent rulings. This brings serious uncertainty to businesses in China implementing their business strategies to mitigate market risks.
The divergent understandings and practices in these cases illustrate the defects of the law, which rigidly stipulates a number of grounds for employment terminations, providing no feasible implementation rules and interpretation for legal principles of lawful termination. We are in the view that this principle should be to balance the employers’ rights in business survival and development and employees’ labor rights and interests, and the employer’s termination must conform to the fundamental principle of balanced fairness and reasonableness of the law under specific circumstances.
Future legislative amendments should consider merging these two legal provisions, allowing judges to take into account the legitimate, reasonable needs of business operations (including technological upgrading, strategic adjustment, operational efficiency, etc.4Whether enterprises are allowed to lay off employees for the purpose of improving operational efficiency is an issue involving the principles of labor legislation. The current employment law does not seem to allow it.), the personal circumstances of employees (such as length of service, historical contribution, etc.), public order and good morals and other factors, so that a judge may determine whether an enterprise is justified to terminate the employment contract(s) of a specific employee(s) in order to promote harmonious employment relations and social and economic development. Stipulating rigid provisions with planned economic management mindset will either excessively restrict the development rights of companies or seriously damage the fair rights and interests of employees who are in particular difficulties. Employment law is the law of human nature, and judges should have discretion based on the human nature and fairness and just.
This article is a part of our new book“Employment Law in China: A Practical Guide. A book about “What should I do” with case laws.”Stay tuned, and the book will soon be published as an electronic books!
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
- 1The 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”.
- 2Huizhou Intermediate People’s Court announced the second typical case of labor disputes in 2016: the employment contract dispute between Zhang and a cement company-economic redundancy.
- 3Shandong Provincial People’s High Court (2022) Lumin Zai No.209 Civil Judgment on Civil Retrial of Labor Dispute between Xindeshan and Weifang Xingsheng Highway Engineering Co., Ltd.
- 4Whether enterprises are allowed to lay off employees for the purpose of improving operational efficiency is an issue involving the principles of labor legislation. The current employment law does not seem to allow it.