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Crucial Tips for Employers Terminating an Employee in China

Main Concerns Employers Must Keep in Mind When Terminating an Employment Contract

Regardless of the country or industry, employers face many difficulties and need to make tough decisions. Some of these include organization restructuring, business integration, change of operation mode, enterprise relocation, asset reorganization, etc.

In each situation, employers often need to terminate the employment contract for the reasons such as “the objective conditions taken as the basis for a conclusion of the employment contract have materially changed.” However, from the judicial authority’s point of view, such reasons for termination are considered illegal termination.

Thus in the case of China, the Employment Law and Human Resource Committee of Dacheng constructed a summary and study on the problems to be kept in mind by employers at times of termination of employment contracts due to significant changes of objective conditions. Below the references regarding this matter will be discussed in 3 parts respectively.

1. Uncertainties and Vagueness

Abstract legislation leads to uncertain results in arbitration and litigation in spite of the above-listed legal grounds in section I, the expression “significant changes of objective conditions” involves two abstract concepts, i.e., “objective conditions” and “significant changes”; and abstract concepts surely lead to uncertain ruling results.

What are “objective conditions”? Only the clarification generally explains and illustrates three specific conditions: enterprise relocation, takeover, and asset transfer. There is no definition of “objective conditions” in the Employment Contract Law and relevant judicial interpretations. Therefore, what is regarded as “objective conditions” and what are “significant changes”?

In fact, there is no official standard or means of differentiation in judicial practice. Judges/arbitrators may exercise their sole discretion based on the specific fact of the cases, resulting in different verdicts of same type of cases in different courts or even by different judges of the same court.

2. Are Operation Rights Enough to Justify Termination?

Can the exercise of operation rights be considered as “significant changes of objective conditions?” Nowadays market competition in China has become increasingly fierce. Employers must adjust operation direction and business strategy in a timely manner to adapt to such market changes. This usually inevitably results into demanding organization restructuring, business integration, change of operation mode or other actions so as to remain their competitive edge in the market. These actions are the modes by which employers exercise their independent rights of operation and may result in “change or termination of employment contract,” hence end up affecting the labor rights of certain employees.

Man Carrying box with belongings after loosing job

Furthermore, in the above-mentioned situation, employers’ operation rights and employees’ labor rights are in conflict. Provided that it is not expressly specified by law, the legitimate rights and interests of both employers and employees will be guaranteed with the intervention of arbitrator/judge. In judicial practice these days, more and more courts tend to support employers’ termination of employment contract due to exercise their operation rights. In other words, where an employer fails to perform the employment contract due to exercise its operation rights, the judicial authority may hold that as an occurrence of “significant change of objective conditions.

3. So What should Employers Pay Attention to?

As the legal provisions are ambiguous, employers should consider carefully before terminating any employment contract due to significant changes of objective conditions.

In conclusion, there are 6 key points that employers at termination of employment contracts due to significant changes of objective conditions need to keep in mind:

  1. Organization restructuring, business integration, change of operation mode or any other change should really happen and should not be “made up as an excuse.” The court would not support the termination if it ascertains the employer terminates the employment contract on the excuse of such change.
  2. The change must be significant. A slight adjustment is not enough to making it impossible to fulfill the employment contract. How to identify a significant change? It is identified on a subjective judgment. According to Chinese law, a change may be identified as significant change only if the employment contract cannot be performed for the reason of such change. Thus the employer should consider whether it constitutes a significant change at the termination of the employment contract or not.
  3. The employer should negotiate with the employee on change of the employment contract and fail to reach a consensus before involving the law.
  4. The employer should give a written notice 30 days in advance or pay the employee one month’s salary in lieu of the notice.
  5. Under any of the six circumstances set forth in Article 40 of the Employment Contract Law, the employer shall not terminate the employment contract due to significant changes in objective conditions.
  6. The employer shall offer severance pay to the employee.
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