China Employee Layoff Risks

China is not an employment-at-will jurisdiction and terminating China employees is nearly always difficult. To make things even more challenging, many foreign companies doing business in China manage their China affairs from afar. To prevent employment (and especially termination)-related problems, you need to use enforceable employment contracts and employer rules and regulations and you also should have a basic understanding of your China employees.

Let’s take a look at two China employment scenarios.

Scenario 1. The foreign parent company decides to significantly reduce its headcount in China due to lack of profits. It sends a notice to the affected China employees about the imminent layoff, saying it will pay statutory severance to the employees. Several employees bring a labor arbitration claim against the company right away.

In this scenario, what the employer is attempting to do is a mass layoff. Before a China employer can initiate such a process, it must conduct an analysis to confirm whether its situation qualifies for a mass layoff under Chinese law. This requires it review each employee’s situation to confirm whether it can terminate all employees as part of a mass layoff. For example, Chinese law prohibits an employer from laying off a pregnant employee. Employee mass layoffs are a huge deal in China and they invariably involve a complex process, and any employer looking to start a mass layoff should have a solid plan in place before proceeding with its layoff decision.

Scenario 2. The employer asks a long-term employee to resign so it can save the costs of retaining her as a full-time employee. The plan is to then hire her as an independent contractor right after her resignation.

This plan has major flaws. First, asking a long-term employee to resign is a no-go because China employees know that if they resign, they will not be legally entitled to any statutory severance. As a result, virtually no China employees will resign unless they have found another opportunity or they plan to bring a claim against the employer for statutory severance, plus damages. Second, China dislikes independent contractors and misclassifying an employee will get the employer into trouble. Chinese authorities, arbitrators and judges consider terminating someone and then rehiring them as an independent contractor as a circumvention of Chinese employment laws and they will rule against the employer in the relevant proceeding. It does not matter whether the employee is happy with this new arrangement. Although it is understandable the employer wants to cut HR costs, certain costs cannot be cut (such as mandatory social benefits contributions) and the costs of violating the mandatory law is much higher than any costs saved.

Acting in accordance with what is considered customary or acceptable in the jurisdiction of the parent company is not enough to keep you out of trouble in terms of China’s employment laws. Nor is just paying employees a good salary. To do well with your China employees you must be sure to always comply with all national and local employment laws and treat your China employees per Chinese national and local employee culture.