Managing risks in terminating employees

By Wu Kun and Zhang Yubo, Tiantai Law Firm

In its daily operations, an enterprise has the right to unilaterally terminate the labour relationship with its employees according to articles 39 and 40 of the Labour Contract Law. However, the authors find that many enterprises arbitrarily terminate their labour relations with employees without careful assessment. Lawyers, who are reviewing the evidence of the sued enterprises, find that the legality and rationality of their evidence are not sufficient to support the termination. As a result, these enterprises lose a large number of lawsuits. Based on the five steps of risk management, namely “investigating facts, applying laws to facts, examining evidence, assessing risks, and taking actions”, the authors briefly analyse the five control nodes that enterprises should pay attention to when terminating their employees.

labour contract
Wu Kun
Tiantai Law Firm

In a case handled by the authors, the defendant joined the plaintiff on 1 September 2009 to serve as a brand training officer. Due to a change in brand strategy and the significant change of objective circumstances, the plaintiff notified the defendant of termination of labour contract and paid the defendant their average monthly salary over the previous 12 months as compensation, but the defendant believed that the plaintiff had illegally terminated the labour contract. The labour arbitration award and the first-instance judgment in this case both affirmed that the enterprise had illegally terminated the labour relation and should pay the employee compensation for its misdeed in accordance with the law.

As a case of terminating labour relations with the employee due to the major changes of the project caused by a third party, the authors analysed the case according to the five steps of risk management as follows:

Investigating facts

labour contract
Zhang Yubo
Tiantai Law Firm

This step is to identify the reasons and facts of the project changes, and find relevant evidence. For example, in this case, the plaintiff submitted the Strategic Transfer Agreement and its annexes to prove that the brand for which the defendant is responsible would gradually be separated from the plaintiff’s administration, and the fact that the plaintiff would no longer operate the brand had been established, thus, constituting a major change in the objective circumstances. In fact, the court of first instance also confirmed on the basis of this evidence that the condition of brand strategy shift constituted a major change in the objective circumstances under which it is impossible to perform the labour contract.

Applying laws to facts

This step is to select applicable laws according to the facts of the investigation and analyse the required evidence. According to article 40 of the Labour Contract Law, if the objective conditions on which the labour contract are concluded have changed significantly, resulting in the failure of the labour contract to be performed, and the employer and the employee fail to reach an agreement on changing the content of the labour contract after negotiations, the employer may terminate the labour contract by giving written notice to the employee 30 days in advance or by paying the employee an extra month’s salary.

It is thus clear that if an employer terminates labour relations with employees on the ground of “major changes in objective circumstances”, two major premises must be satisfied: (1) the termination of the labour relation is a major change in objective circumstances; (2) the employer has negotiated with the employee but failed to reach an agreement on the change.

In this case, the plaintiff provided evidence to prove that the termination of the labour relation was based on an objective condition, but did not provide any evidence to prove that a negotiation had been held with the defendant but failed to reach an agreement. Therefore, the court decided that the plaintiff’s termination of the labour relation was illegal, and the plaintiff needed to pay compensation to the defendant. Therefore, enterprises need to prepare evidence by focusing on specific elements when dealing with labour relations.

Examining Evidence

This step is to examine all relevant evidence available to the company according to the facts investigated, such as, relevant cooperation agreements signed between the company and external third parties, labour contracts signed by the company and its employees, records of communication about transferring positions between the company and its employees, termination of labour relations, etc. In this case, the plaintiff also claimed to communicate with the defendant on 10, 17 and 22 September 2015, but failed to reach an agreement.

However, the plaintiff actually failed to provide evidence of negotiations on 10 and 22 September with the defendant and the sound recording on 17 September was not comprehensive. The result of the final judgment shows that insufficiency of evidence is the main reason for losing the lawsuit.

Assessing risks

This step is to assess whether the facts on which the company’s decision to terminate the labour relations are based are clear, and whether the evidence is sufficient according to the investigated facts, the legal provisions to be referred to and the evidence organized according to the legal provisions, so as to fully judge whether the company’s termination procedure is legal and reasonable. If there are certain risks in the termination of labour relations, the enterprise needs to fully assess the possible costs, including the average pre-tax salaries and service years of employees.

Taking actions

In this step, the enterprise confirms the final action plan based on the results of risk assessment. The action plan may be to immediately make a decision to terminate the labour relation, or reach a settlement agreement with employees, or change the management mode, suspend the decision of termination, etc.

As local governments of various regions require enterprises to reasonably and prudently exercise management rights over employees through administrative means, when local enterprises exercise unilateral management rights over employees based on their business needs, matters about the personal interests of employees, such as transferring positions, reducing salaries, terminating labour relations, etc., should all be carefully assessed to ensure that there is sufficient evidence to prove that the action process and results are reasonable and legal. To sum up, enterprises can greatly reduce the legal risks caused by defects of action by referring to the five analysis steps introduced above.

Wu Kun is an associate and Zhang Yubo is a paralegal at Tiantai Law Firm

labour contract

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