Layoff strategies during business transformation

By Pan Jiaying, City Development Law Firm
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In recent years, as China has opened up and its reforms deepened, the nation has stepped into a period of economic transformation and industrial restructuring, from a high-speed and extensive economic development mode to one that is under the “new normal”, and driven by gradual reform and innovation.

潘佳㼆 PAN JIAYING 建纬律师事务所律师 Associate City Development Law Firm
City Development Law Firm

At the same time, more enterprises intend to adopt the strategy of industrial transfer, due to China’s declining competitive edge in industry, with the aim of seeking new growth. A total transformation is expected to take place in long-term business direction, operational models and resource allocation for the purpose of enhancing capacity and sharpening competitive advantages.

Real estate companies are facing the same transformation problems as those in other sectors. During the process, some may choose to retain their existing business operations and implement diversification strategies, while others may completely quit their industry and enter new sectors. Companies choosing to drop the original business unit and adjust organizational structure are bound to face serious problems with staffing and layoffs.

Whether these problems can be properly resolved will directly affect the normal operations and management of the enterprises after transformation. The author analyzes two legal solutions for massive layoff problems faced during business transformations based on her years of experience as a corporate counsel.


The first solution concerns layoffs for economic reasons, subject to articles 41 and 42 of the Labour Contract Law. Layoffs for economic reasons means the employers dismiss some employees with one-off compensation payments as a means of improving production and operations, with the aim of protecting the competitiveness and viability of the enterprise and overcoming temporary difficulties.

It is one of the main ways for employers to exercise their right to terminate labour contracts. The Labour Contract Law allows employers to lay off employees for economic reasons subject to certain conditions, which reflects the rights granted by law to manage their own affairs. Article 41 of the Labour Contract Law clearly defines the substantive and procedural conditions of layoffs for economic reasons. Meanwhile, article 42 of the Labour Contract Law sets out six types of employees who cannot be terminated by way of layoffs for economic reasons, or under any circumstances. As regard to layoffs for economic reasons, although it is clearly defined in the law and its execution cost falls in between illegal termination and maintenance of employment relationship, there are many drawbacks from an operational perspective. First, given the prohibition in article 42, some employers may have to face incomplete layoffs because some types of employees cannot be laid off for economic reasons – this may increase the burden on enterprises and affect efficiency.

The substantive conditions required for layoffs for economic reasons provided in article 41 are also abstract and unclear. For example, there is no statutory standard for “encountering serious difficulties in production and business operations”. Too many procedural conditions may also hinder the progress of layoffs, which may lead to illegal terminations in cases where relevant legal procedures are not followed.


The second solution is that the employers may dissolve the business ahead of schedule and terminate the labour contracts with employees subject to article 44 of the Labour Contract Law. Termination of labour contracts means the employment relationship established by the contracts is terminated due to the emergence of certain legal facts, and the original rights and obligations between the employers and employees no longer exist.

Article 44 of the Labour Contract Law provides relevant circumstances under which labour contracts may be terminated. Where all the other conditions cannot be met by enterprises during their business transformation, decision-makers of enterprises may make decisions subject to paragraph 5 of article 44, i.e. “the employer makes a decision to liquidate its business ahead of the schedule”, and thus meet the conditions of terminating labour contracts. According to the Company Law, a shareholders meeting or the resolution of a general meeting of shareholders may decide to dissolve the company.

In this solution, employers have completely lost their subjectivity and have no ability to execute labour contracts. Therefore, where the labour contracts of employees are terminated according to this solution, they shall not be subject to article 42 of the Labour Contract Law, and this may not lead to incomplete layoffs as per the first solution.

During the execution of this solution, companies need to ensure that the dissolution decisions made by the shareholders, or a general meeting of shareholders of the employer, have been implemented. Furthermore, the employer shall fulfil its notification obligations properly with regard to termination of the labour contracts, and inform the employees of dissolution reasons, process, proposed methods of termination and procedures etc., by ways of posting an announcement, sending emails or written material, or a posting on a website. It then becomes legal and justified for the employers to terminate the labour contracts with the employees upon completion of the above substantive and procedural requirements.

Of course, although the execution of this solution is relatively convenient and will not cause any problems, decision-makers are recommended to conduct asset stripping and a series of related work first in the process of transformation, because after all, the cost of layoffs is the dissolution of the enterprise.

Pan Jiaying is an associate with City Development Law Firm




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