Handling Mass Layoffs in China’s Manufacturing Sector

By Allan Xu, Manager, Business Advisory Services
Editor: Alexander Chipman Koty

Following China’s lowest annual growth in a quarter century in 2015, many analysts are pessimistic about the state of the country’s economy. According to the American Chamber of Commerce in Shanghai, 20 percent of American manufacturers operating in China plan to lay off employees in the coming year. Indeed, the manufacturing sector – China’s leading industry – could be the economy’s biggest victim. Mass layoffs may be unavoidable for many manufacturing companies that are facing declining demand and rising business costs.

However, implementing mass layoffs in China is a complicated procedure that requires adherence to strict procedures and, under some conditions, explicit government approval. When restructuring a company at such a large scale, employers must take caution of government regulations and the rights of their workers. Failure to satisfy regulations and procedures when carrying out mass layoffs can lead to rejection from the government, workplace disruptions, and costly labor disputes that companies can ill-afford when already in a fragile fiscal state.

Conditions

Legally speaking, economic redundancy is when an employer lays off 20 or more employees or over 10 percent of its total number of employees. In order to protect workers’ rights, a company can only carry out mass layoffs under specific circumstances. According to the Labor Contract Law of the PRC, an employer may execute economic redundancy in the following situations:

• The company undergoes restructuring pursuant to the provisions of the Enterprise Bankruptcy Law of the PRC;
• The company has serious difficulties in production and business;
• The company undergoes a change of production, significant technological reform, or change of mode of operation and, upon variation of labor contracts, there is still a need for retrenchment; or
• The objective economic circumstances for which the conclusion of a labor contract is based have undergone significant changes and as a result thereof, the labor contract can no longer be performed.

RELATED: Payroll and Human Resource Services from Dezan Shira

Procedure

If a company qualifies for economic redundancy, it must follow a particular procedure to downsize lawfully. As long as any of the above conditions are satisfied, a company can proceed with a mass layoff through the following steps:

• Announce the situation to the relevant labor union or all staff 30 days in advance of the planned downsizing;
• Seek the opinion of the labor union or the employees;
• Develop a proper scheme for enacting the redundancy;
• Report the redundancy scheme to government labor administrative authorities;
• Announce the formal scheme of economic redundancy to all staff, terminate labor contracts with laid-off staff, and settle their severance payments.

Reporting to government labor administrative authorities is not simply a formality to receive a bureaucratic rubber stamp. Government officials use their discretion to determine whether a company qualifies for economic redundancy, and in some cases can be quite strict. There also appear to be unofficial regional variations in enforcement standards. For example, Beijing has a reputation for being tough on employers, while Shanghai is generally more amenable to greenlighting layoffs. In any case, liaising with the local labor bureau before formally submitting an application helps mitigate uncertainty and increases the likelihood of success.

Beyond complying with government requirements, companies must be conscious of the impacts merely applying for economic redundancy can have on its employees. Announcing layoffs 30 days in advance inevitably introduces various complications to the workplace. Employees may feel dejected and protest, and particularly desperate workers may try to seize or damage company assets, such as official company chops. On the other hand, if the economic redundancy application ends up being rejected, employees are empowered to negotiate more lucrative severance payments from the employer. Developing a strategic plan to approach certain employees before formally announcing mass layoffs can help employers retain control over what is often an unpredictable process.

Other Considerations

When engaging in economic redundancy, staff cannot be laid off indiscriminately. Special consideration must be paid to vulnerable workers who retain additional government protection, such as pregnant and injured employees. For example, Article 42 (b) in the Labor Contract Law of the PRC regulates that an employer cannot rescind a labor contract with an employee where that worker has contracted an occupational illness or suffered an injury while working for the employer and is confirmed to have lost their labor capability wholly or partially. In this case, the injured or otherwise indisposed worker’s contract cannot be rescinded during mass layoffs. Awareness of the makeup of the company’s staff and their legal rights when developing a layoff scheme facilitates a smoother and more amicable transitional process.

While economic redundancy is not a pleasant approach to scaling down a struggling business, it is essential to be prepared should the need arise. Employers should be prudent when planning a mass layoff to avoid rejection from the government and contentious labor disputes. Further, companies would be wise to develop programs to help laid off employees transition to new jobs and insulate them from the shock of unemployment. Employers must be mindful of strategies to lessen the impact of mass layoffs on both the company’s bottom line and the well-being of their workers in order to successfully weather challenging economic periods.

Human Resources and Payroll in China 2015
This edition of Human Resources and Payroll in China, updated for 2015, provides a firm understanding of China’s laws and regulations related to human resources and payroll management – essential information for foreign investors looking to establish or already running a foreign-invested entity in China, local managers, and HR professionals needing to explain complex points of China’s labor policies.

Labor Dispute Management in China
In this issue of China Briefing, we discuss how best to manage HR disputes in China. We begin by highlighting how China’s labor arbitration process – and its legal system in general – widely differs from the West, and then detail the labor disputes that foreign entities are likely to encounter when restructuring their China business. We conclude with a special feature from Business Advisory Manager Allan Xu, who explains the risks and procedures for terminating senior management in China.

How to Restructure an Underperforming Business in China
In this issue of China Briefing magazine, we explore the options that are available to foreign firms looking to restructure or close their operations in China. We begin with an overview of what restructuring an unprofitable business in China might entail, and then take an in-depth look at the way in which a foreign company can go about the restructuring process. Finally, we highlight some of the key HR concerns associated with restructuring a China business.

• Previous Article Investing in China’s Biotech Industry
• Next Article Accounting Records in China: Keeping up to Date with the New Regulations