Article 40(3) of the Employment Contract Law provides that if the objective circumstances on which an employment contract was concluded have undergone significant changes, resulting in the failure to perform the employment contract, and no agreement on amending the employment contract is reached after negotiation between employers and employees, the employer can unilaterally terminate the employment contract according to law.
Partner
Jingtian & Gongcheng
In practice, different regions, even different adjudication institutions of the same region, have different interpretations and decisions on whether the employer has the legal basis to dismiss employees based on this provision, leading to great uncertainty in the results of such cases.
In a collective labour dispute case that the authors handled in Shanghai, the employer was unable to operate for a long time due to closure of business, and hence terminated about 20 employment contracts unilaterally, based on the provision of “significant changes of the objective circumstances”, leading to a collective labour dispute. The authors will share relevant experience on handing this case, offering reference for employers on evaluating whether the termination of employment contract has legal basis, and how to properly handle related disputes.
Statutory condition 1: Requirement of the objectivity of “major changes”
For a long period of time, the adjudication institutions believed that “significant changes of the objective circumstances” stipulated in article 40(3) of the Employment Contract Law should be limited to certain conditions of article 26 of the Explanations of the Ministry of Labour regarding Provisions of the Employment Contract Law, which are the event of force majeure, or other circumstances that make the contract impossible to perform, such as enterprise relocation, a merger of the enterprise, and the transfer of the enterprise asset.
In recent years, the adjudication institutions seem to have returned to the original intent of the legislation. They are no longer limited to the above-mentioned statutory circumstances, but rather evaluate and assess whether the conditions of the specific case are changes that cannot be changed by the subjective will of the employer.
One of the key points for the adjudication institution’s review is: “Whether the relevant circumstances meet the requirements of objectivity.” In this aspect, the authors suggest that the employer list the circumstances that meet the characteristic of “objectivity”, in order to increase the chances of being recognised by the adjudication institution.
In the above-mentioned collective dispute case, the author explained to the adjudication institution that the closure and reform of the employer’s business were mainly caused by three objective circumstances. First, the brand and business model authorisation party and the employer terminated their co-operation, resulting in the employer being unable to continue to use the original business model.
Second, the original premises of the employer’s business was undergoing an urban renewal planning as the government required, and it was subject to the government’s approval when the planning could be completed and the original premises could be upgraded. Third, the covid-19 pandemic caused companies of the employer’s industry general operational difficulties.
The adjudication institution finally determined that the above-mentioned incident was beyond the ability of the employer to decide and control, and that the employer was unable to operate due to the superimposed effects of the above-mentioned incident, which was indeed a “significant change of objective circumstances”.
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Jingtian & Gongcheng
Statutory condition 2: “Consequential” requirements that make the employment contract unable to be performed
After deciding on meeting the “objectivity” requirement, the adjudication institution will further examine whether the changes of objective circumstances lead to the failure of performing the employment contract. The author assisted the employer to provide sufficient evidence to prove that the above-mentioned three objective conditions could lead to the failure of performing the employment contract.
For example, the original employment contract was made based on the original operational mode and operational content, and with the termination of the co-operation between the brand authorisation party and the employer, the original contract lacked the basis to continue the performance.
Statutory condition 3: The “procedural” requirement to negotiate about change
The employer and the employee negotiating to change the employment contract is a statutory and necessary procedure for the termination of the contract when the objective circumstance changes significantly. In judicial practice, the adjudication institution usually believes that the above-mentioned “change of employment contract” should be a change to the primary and necessary content of the employment contract.
Arranging employees to another employer (including affiliated companies) is a change of the employer, and is generally considered not to be within the scope of “employment contract change”. If this is used as a condition on the negotiation of change, the employer would face a high risk of being deemed to have illegally terminated the employment contract.
The highest risk in the labour dispute case handled by the authors was that the employer made the transfer of employees to work in its affiliated company as a negotiation condition. The authors explained and demonstrated to the adjudication institution that providing other positions by the employer was the only reasonable option, which was eventually upheld.
For example, the employer could not carry out the operation and business, since the brand party stopped the authorisation, and could not offer positions by itself while its affiliated companies were able and willing to offer positions. However, to avoid risk, the authors would not recommend the adoption of the above-mentioned method, because each case has its own characteristics, and the adjudication institution will consider comprehensively whether the termination is legal and reasonable based on the overall situation, including the goodwill shown by the employer during the negotiation process.
Employers should carefully apply article 40(3) of the Employment Contract Law. On the one hand, employers should try their best to negotiate with employees on terminations. On the other hand, if the negotiation fails, based on the above-mentioned three requirements, the employer should properly plan the whole process, implement each step, and collect corresponding evidence to reduce the risk of losing the lawsuit.
Tracy Liu is a partner and Yannis Hu is an associate at Jingtian & Gongcheng
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