China Employment Law Alert: Assuring Proper Process in Branch Closures

Restructuring is an increasing feature of employment in China as multinationals consolidate their businesses and bring their own practices and efficiencies to those businesses.  Chinese law only allows for role eliminations in narrow circumstances and imposes strict procedural requirements upon role eliminations.  Employees may be entitled to be reinstated and claim compensation if role elimination is not justified or the procedural requirements are not followed.

A high-profile labor arbitration case ruled on recently in Changde, in China’s central Hunan province, has provided multinationals with clearer guidance on the employment process needed upon a closure of a branch.  64 employees had brought claims against global retailer for wrongful termination after the retailer chose to close a branch store to end a three-month labor dispute.  The ruling that was issued has confirmed that the Chinese mass lay-off procedures and negotiation requirements do not apply to a branch closure.

Mass lay-offs - what is required?

Before reducing headcount in China, an employer needs to first assess whether there are sufficient legal grounds to justify the terminations and, secondly, whether they constitute a mass lay-off (where 20 or more employees are to be terminated, or 10% or more of the total workforce). Where the terminations constitute a mass lay-off, this triggers a 30-day consultation period with the labor union and employees, and reporting obligations to the labor authorities. 

Can a branch closure trigger a mass lay-off?

In the recent case, the store that was closed was registered as a branch company, which is usual in the retail industry, and the employees claimed the shut-down of the branch store constituted a mass lay-off as defined by the Chinese labor law.  The impacted employees claimed that their employer did not follow the prior consultation and reporting requirements and, if the terminations were held to be a mass lay-off, it would then have entitled the employees to be reinstated in their old roles and compensated for lost wages in the interim.

The arbitrators held that the terminations did not trigger a mass lay-off and so employees were not entitled to reinstatement or compensation. The reasons highlight how Chinese labor law develops unique nuances as it continues to develop.  The arbitrators held:  

(1) a mass lay-off refers to part of the workforce losing their jobs. It does not apply when all employees of an employer are terminated;

(2) a mass lay-off assumes the employer will continue its business operations. In this case, the branch store closed entirely;

(3) the employer’s other operations in the province were not taken into account under (1) and (2), on the basis this would impact their “stable employment status”.

Is there a general duty to consult on terminations, even where they do not amount to a mass lay-off?

The employees also claimed an independent obligation to consult with employees exists under Chinese law before an employer can eliminate roles. This argument was based on the Chinese labor law principle that all significant matters directly concerning employees’ vital interests must be subject to general procedural safeguards, in particular a duty to inform and consult with employees. 

The arbitrators again held against the employees, on the basis that this general principle applies only to the ongoing employee/employer relationship, but not to termination of that relationship, which is regulated by the specific requirements of the Chinese Employment Contract Law.  It may still be the case that this is not a universal principle: the arbitrators may have been influenced by the fact the employer in this case had in fact gone some way towards informing and consulting employees individually. 

Given the arbitrators’ finding, the majority of the affected employees have now reached settlement with their former employer, with a minority appealing the decision.  Their appeal should be heard within 15 days after the arbitration decisions.

What does this mean for employers?

This decision is good news for employers as it indicates that, under the right circumstances, the mass-layoff rules under Chinese law might not apply to all collective redundancies.  Employers will still need to tread carefully when terminating employees, as Chinese law remains restrictive both when terminating on an individual and mass basis.

We will keep a close eye on further developments and keep our clients updated.

If you would like further information please contact any member of our International Employment Law practice.