Primary legal bases for employee settlements at internet companies

By Qi Bin and Wilson Dong, Xin Bai Law Firm

The wave of lay-offs and shutdowns among internet companies that reared its ugly head from last year is still looming now, and even the once illustrious big names cannot escape the pains of job cuts and better efficiency.

Theoretically, though, there is nothing distinctive about the legal bases for the discharge or termination of employment contracts in internet companies. Nevertheless, the unique employment pattern in this sector means that practically, priority in choice of the legal bases and the difficulty with which the rules are applied will differ from the cases of traditional companies.

Qi Bin
Xin Bai Law Firm
Director, Partner

Harmony comes first – terminate the contract by mutual consultation. For whatever reasons that companies lay off people, there is no doubt that they want the whole process to be smooth and steady. If both parties are able to reach consensus on the compensation, payment schedule and the relocation methods through mutual consultation, the likelihood of mass disturbance and labour disputes will decrease markedly.

Noteworthy is that, according to the Labour Contract Law and relevant judicial interpretation, monetary compensation is mandatory, even when the employer proposes termination through consultation. The agreement both parties reach is valid and effective unless it violates the laws or mandatory administrative regulations, or there exist fraudulent, coercive acts or other circumstances where a party is taking advantage of the other’s disadvantageous position in such agreement. To terminate the employment contract by consultation under article 36 of the Labour Contract Law should be the preferred solution for internet companies in their employee settlement.

A potent alternative – major changes in objective conditions. The law does not prohibit the company from sacking employees who have no fault, when and if certain conditions defined in laws are met. Many people are inclined to think that article 40.3 of the Labour Contract Law is a panacea for unilateral dismissal of employees. Actually, the abuse of this provision reflects people’s misinterpretation of the intention of the legislation.

董传羽 WILSON DONG 信栢律师事务所律师 Associate Xin Bai Law Firm
Wilson Dong
Xin Bai Law Firm

First, the application of article 40.3 is only premised on the change of the objective conditions “on which the conclusion of the employment contract is based” (rather than the change of any circumstance or condition that may happen), and such change should be material and severe enough to render the employment contract no longer enforceable. After all, the intention of the legislation is to encourage termination by consultation. Only when both of the above-mentioned conditions are met, and no agreement is reached after consultation, may the employer unilaterally sack the employee on the ground of article 40.3.

In accordance with the Explanations of Several Clauses of the Labour Law, issued by the General Office of the former Ministry of Labour, the major changes in the “objective conditions” refer to the relocation, merger or asset transfer of the company, etc., which are commonly seen in internet companies. Under these circumstances, where a material change in the objection conditions is constituted, if an internet company cannot terminate the employment contract by consultation it may consider applying the legal ground of “major changes in the objective conditions”. The lawsuit may fail, but is not as unfeasible as some academics allege.

Prudential application – lay-offs for economic reasons. For one reason or another, many companies are actually cutting jobs for economic reasons, but dare not claim so. Theoretically, however, a company may cut jobs based on article 41 of the Labour Contract Law as long as it meets the requirements and performs the obligation of explaining and reporting in strict accordance with the procedure defined by the law.

By applying lay-offs for economic reasons, a company is able to lay off a large number of redundant employees at one time for a relatively small economic cost, but this provision is only applicable under particular circumstances, namely, there are strict requirements on the number or percentage of the employees to be laid off, and the reasons and reporting procedures of such a lay-off. Further, in practice, some local human resources and social security authorities are not willing to accept the lay-off reports based on various considerations.

For some start-up internet companies, the requirement on the percentage of the employees to be laid off is not a big obstacle, since the total number of employees is small. And, thanks to rapidly advancing technology, the sector often sees more business shifts, technological transformations and equivalent changes that constitute a legitimate ground for lay-offs for economic reasons. Besides, as such a company is still young, there are not many employees who have stayed with the company for a long time, or signed labour contracts with no fixed employment term, and thus should be retained in priority as required by law.

In light of the above, the internet company may consider lay-offs for economic reasons, albeit on a prudent basis.

The last resort – dissolve or bankrupt the company. Every company has a life cycle from birth to death, which might be very short for internet companies. When the operation falters and a company decides to dissolve or go through the bankruptcy procedure, the employment relation with each and every employee will end, regardless of whether there is anyone who is seriously ill, under medical treatment, is injured at work or suffers occupational diseases, or who is a female employee in pregnancy, maternity or lactation period, provided, however, that the employer is obliged to pay monetary compensation to such employees, as is required by the Labour Contract Law.

Among the clients of the authors, some are internet giants that dissolved certain entities because of business transformation. They paid decent compensation to some of their employees, and, for example, paid the wages to female employees in pregnancy and lactation until the end of the lactation period.

As this is more of a gesture of humanity than a statutory requirement, such practice cannot be taken as a universal reference, and of course not every internet company can afford such practice. In fact, some female employees failed to resist the temptation of lucrative gains brought by pregnancy and therefore exercised fraud during the lay-off process, but this is not something for this article to dwell upon.

Qi Bin is the director and partner, and Wilson Dong is an associate at Xin Bai Law Firm

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