China employment law guide

As regular readers of this blog know, China’s employment laws are very much location based. See China Employment Law: Local and Not So Simple. For this reason, much of what I write about employment law focuses on Beijing and Shanghai and Shenzhen, as those three cities contain the bulk of foreign companies with Chinese employees.

I have of late been focusing on Beijing because it recently came out with new employment laws. Earlier this year I wrote my first piece about Beijing’s new labor laws, called the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes (关于审理劳动争议案件法律适用问题的解答)(“the Responses”). These new laws focus mostly on adjudicating labor disputes more fairly, effectively and consistently. That post focused on Beijing’s new rules on reinstating employees to their old jobs when an employer’s termination decision has been deemed unlawful. Those new rules essentially say that a Beijing employer that unlawfully terminates an employee must reinstate that employee to his or her previous position unless one of a limited number of circumstances exists that render the original employment contract no longer able to be performed.

In Beijing’s New Employment Laws, I wrote how these new laws indicate Beijing is inching closer to Shanghai by becoming more employer friendly. That post focused on how Article 13 of the Responses allows Beijing employers to terminate an employee who seriously violates labor disciplines or professional ethics, even if the employer’s rules and regulations and employment contracts are silent on the specific employee misconduct.

In this post, I focus on how the Responses reduce a Beijing employer’s ability to terminate an employee on the basis of there having been a “significant changes in objective circumstances.” Before I explain what this will likely mean for you as a Beijing employer, here is a quick summary of the law. The PRC Labor Contract Law allows employers to terminate an employee by providing either 30 days’ written notice or by paying the employee one additional month’s wage, where the “objective circumstances” that gave rise to the employment contract cannot be realized and, even after negotiations between the employer and the employee the parties cannot reach agreement on amending the contract. Employers in China often rely on this ground for terminating employees after a restructuring.

The Responses define “significant changes in the objective circumstances” as changes that cause an employment contract or its main terms to be unable to be performed or would make continued performance unfair (e.g., performance would be prohibitively expensive). These significant changes need to have occurred after the employment contract and have been unforeseeable when the employment contract was concluded. The Responses further provide that such changes include the following situations: (1) force majeure caused by natural disasters (e.g., earthquakes, fires or floods), (2) changes in laws, regulations or policies that result in major changes such as relocation, asset transfer or ending or switching production, or change of state or collective ownership of the employer, and (3) changes of the business scope of employer who is a franchisee.

As noted above China employers would offer fight unlawful employee termination claims by claiming the termination was justified due to significant changes in objective circumstances. Beijing’s Responses suggest this defense will be less likely to succeed in the future for terminations that do not stem from changes in laws, regulations or policies.

Even without Beijing’s new Responses, our China employment lawyers have never been big fans of this defense in Beijing (or in most other cities in China) because it is seldom successful and it is usually expensive to mount. It requires the employer both show  “significant changes in objective circumstances” and that “the parties were unable to reach an agreement on amending the contract” after negotiations. In one case in Shanghai, where the employer’s foreign parent company had sold certain assets and businesses which resulted in ceasing production in China and elimination of the employee’s position in, the court did find that the employer satisfied the first two elements of such a defense by finding that there had been (1) an occurrence of significant changes in the circumstances, and (2) the employment contract could no longer be performed as a result of such changes. But it then found that the employer had failed to produce sufficient evidence regarding the parties having tried to negotiate an agreement on amending the contract. Lacking this third element, the court held the employer’s termination decision was wrongful.

Termination on this ground has also always been limited and, for example, expressly not permitted in any of the following situations:

(1) Being engaged in operations exposed to occupational disease hazards, the employee is not given pre-departure occupational health examinations, or being suspected of an occupational disease, and is in the process of being diagnosed or is under medical observation;

(2) Having contracted an occupational disease or being injured at work, the employee is confirmed to have totally or partially lost the ability to work;

(3) The employee is on medical leave for medical treatment for illness, or for non-work related injury, and;

(4) The employee is pregnant, on maternity leave or nursing;

(5) The employee has worked for the employer continuously for 15 years and is less than 5 years away from the statutory retirement age; or

(6) any other circumstances provided by laws or administrative regulations.

Because it can be extremely difficult for an employer to ensure it meets all the legal requirements related to a “significant change” termination such that it can meet its burden of proof when sued, this termination route is rarely the most effective one to take. As is usually true of employment terminations across the board in China, mutual terminations with settlement agreements and claim releases are the safest route for employers to take.

For more on how best to handle your China employment law matters, I urge you to check out my recently published e-book (soon to come out in paper form) entitled, The China Employment Law Guide: What You Need to Know to Protect Your Company as  a quick and easy China employment law reference for companies with employees in China.