Risk and compliance in layoffs at internet companies

By Shaw Zhao and He Yanling, Jingtian & Gongcheng
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From widespread layoffs in K12 education and training organisations to recent news of “personnel optimisation” and “downsizing” at several large internet companies, the impact of economic and policy shifts on the labour market is gradually manifesting.

Based on current legal provisions and judicial practice, this article discusses reasons for layoffs, and makes compliance suggestions to reduce the legal risks that internet companies may face.

REASONS FOR LAYOFFS

According to a survey by Zhaopin, China’s top online recruitment service provider, business difficulties and structural adjustments account for more than 80% of reasons for personnel optimisation by internet companies, while year-end performance-based eliminations and employees incompetence account for a very small proportion.

Shaw Zhao, Jingtian & Gongcheng
Shaw Zhao
Partner
Jingtian & Gongcheng

It can therefore be concluded that the large-scale talent shift of internet companies is greatly influenced by macro-level economic developments and national policies.

First, as covid-19 continues rampaging worldwide, China’s economic downturn has resulted in a decline in the internet economy’s benefits that have lasted for more than 20 years, while performance growth continued to slow down, or even took a turn for the worse. In addition, internet company expenditure on human resources accounts for a relatively high proportion of cost. Therefore, optimising the structure of human resources has become a method of self-help in conforming to the trend of the times.

Second, regulation of the internet economy by national policies has heightened over the years. On 26 June 2019, the State Administration for Market Regulation (SAMR) issued the Interim Rules on Prohibition against Monopoly Agreements, and the Interim Rules on Prohibition against Abuse of Dominant Market Position.

In 2020, the SAMR subsequently launched anti-monopoly investigations into a number of large internet companies. Taking the Alibaba anti-monopoly case as an example, the company was fined up to RMB18.2 billion (USD2.7 billion). To some extent, the introduction of relevant laws and policies raises stricter compliance requirements for internet industry, further slowing down their development.

COMPLIANCE SUGGESTIONS

In practice, there are three common forms of personnel optimisation in internet companies: dissolution through negotiation; dissolution on the ground of “significant changes in the objective situation”; and economic layoffs. This article focuses on compliance suggestions for these three forms.

He Yanling, Jingtian & Gongcheng
He Yanling
Associate
Jingtian & Gongcheng

(1) Dissolution through negotiation. Under article 36 of the Labour Contract Law, a company and its employees may dissolve labour contracts through negotiation, which involves few risks. On the whole, the labour law is inclined to protect employees. But during the pandemic, local governments of Beijing, Shanghai, Guangdong and other regions have emphasised the principle of balancing protection between employees and employers, to various extents.

In view of this, dissolution of labour contracts through negotiation between employers and employees not only conforms to the policy trend, but also reduces the risk of disputes.

In practice, dissolution through negotiation consists of three steps: making a plan; negotiating with employees; and signing a dissolution agreement. Since such dissolution is based on mutual consent, it is largely applicable to any situation, including the employer not unilaterally dissolving the labour contract under articles 40 and 41 of the Labour Contract Law.

(2) Dissolution on the ground of “significant changes in objective situation”. Under article 40 of the Labour Contract Law, employers have the right to unilaterally dissolve labour contracts on the ground of “significant changes in the objective situation”.

In practice, the identification of “significant changes in the objective situation” is complicated. In view of past trials in Beijing, such changes mainly include force majeure, cease of production, switch to other production, relocation, asset transfer and other material changes of a company due to laws and policies, and change of scope of a franchise.

In the era of the pandemic, trial guidelines in Beijing, Shanghai and Guangzhou all recognise that the impact of the pandemic on business operations may constitute “significant changes in the objective situation”.

Judging from the trial experience in Beijing, if a company dissolves the labour contract on this ground, the court should examine whether companies of the same period, region and nature are able to perform labour contracts normally to evaluate whether the situation matches requirements.

In addition, companies should first negotiate with employees over changing the content of the labour contract, including post and salary adjustment, or shortening of working hours. If negotiations fail, the company may unilaterally dissolve the contract by giving employees a 30-day written notice in advance, or making payment in lieu of notice.

(3) Economic layoffs. Article 41 of the Labour Contract Law sets out details on applicable situations, employees prioritised for retaining, and the initiation procedure of economic layoffs. Upon occurrence of any situation specified in article 41 in the production and operation of a company, if more than 20 employees, or more than 10% of total employees, are to be laid off, the employer may dissolve these labour contracts after performing democratic procedures and reporting to the Human Resources and Social Security Bureau.

In the process, companies should determine in advance the scope of personnel that cannot be laid off, carefully select reasons for layoffs, communicate sincerely with employees in negotiations to avoid intensifying conflicts, and strictly implement procedures.

Especially when reporting to the Human Resources and Social Security Bureau, they should submit supporting material including a description of the situation, layoff plan, compliance with legal situations, and performance of democratic procedures.

In summary, in this unique, historic period dominated by the pandemic, policies that emphasise balanced protection between companies and employees have emerged nationwide, guiding companies and employees to overcome the current difficulties. If a company must resort to layoffs, it is advised they seek assistance from professional lawyers to ensure legal compliance with implementation to minimise economic losses and negative impacts.

Shaw Zhao is a partner and He Yanling is an associate at Jingtian & Gongcheng

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Jingtian & Gongcheng

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77 Jianguo Road
Beijing 100025, China

Tel: +86 10 5809 1026

Fax: +86 10 5809 1100

Email: zhao.xiao@jingtian.com

he.yanling@jingtian.com

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