Typical cases guide compliance on unilateral furloughing

By Leo Yu, Jingtian & Gongcheng 
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Under the impact of the pandemic, unilateral furloughs as a means of settling employees during the crisis transition period have been put to use by many enterprises. In practice, the relevant legislation remains unclear on compliance regarding unilateral furloughs. If an enterprise implements one without careful evaluation, it could face the legal risk of breaching the law regarding furloughing, and being ordered by the court to pay back wages, or even severance pay.

喻鑫, Leo Yu, Partner, Jingtian & Gongcheng
Leo Yu
Partner
Jingtian & Gongcheng

The latest similar case search regulations and typical cases issued by the Supreme People’s Court (SPC) play a crucial role in determining the compliance of unilateral furloughs.

The implementation of a unilateral furlough by an enterprise should be premised on the fact of its having suspended work or production, and must be objective and justifiable

Case No. 5 in the Typical Cases of Labour and Personnel Disputes, was jointly issued in 2020 by the SPC and the Ministry of Human Resources and Social Security. An individual surnamed Zhang was an employee of the customer club of a certain automotive company. Being affected by the pandemic, the company completely suspended work and production, starting in February, with the intent to resume work in March.

However, as it was still required to implement the pandemic prevention and control policy requirements, it could not resume work, and the relevant employees of the business department in question remained off work. The company paid Zhang his wages at the cost of living expenses rate. Zhang initiated arbitration on the grounds that the company had maliciously reduced his wages, but following the hearing, the company was deemed to have acted lawfully.

Commentary: Article 12 of the Provisional Provisions for the Payment of Wages, issued by the former Ministry of Labour, provides that, where “a suspension of work or production is caused by a reason not attributable to the workers”, the enterprise is required to pay wages and benefits at the furlough rate. Although the provision expressly states that the implementation of a unilateral furlough is predicated on the enterprise suspending work or production, it is silent on how to determine if a suspension of work or production is constituted, including the reason for, and the scope of, such a suspension.

The author argues that an enterprise must be in a state of having suspended work or production to implement a unilateral furlough, but in doing so, it must keep in mind the following three things.

First, the suspension of work or production must be objective. Determinations in judicial practice are mainly guided by the objective factual results of such a suspension. In practice, an enterprise is not required to have suspended all work or production – a portion of the business, certain departments, or certain jobs may have suspended work or production.

Second, the suspension should be justified, and not targeted. If, in the same job in the same department, some have resumed work but others remain off work, or if there obviously is no possibility of resuming work but employees are deliberately unilaterally furloughed for an extended period of time, there is a possibility that the enterprise will be found to have maliciously abused unilateral furloughing to infringe its employees’ lawful rights and interests, if no reasonable explanation can be given.

Third, the reason for the suspension of work or production. In the majority of cases, such suspension falls within the scope of the enterprise’s operational autonomy, which does not overly restrict the specific reason, except in the clear event where it is attributable to the workers. A suspension can be based on objective external factors, e.g., a natural disaster, infectious disease epidemic, etc., or alternatively, on internal business adjustments of the enterprise, e.g., outsourcing of business, closing down of a department, etc. However, if a dispute arises, the enterprise has the burden of proving the reasonableness and sufficiency of the suspension.

The enterprise is required to pay wages and benefits in full for the period of the unilateral furlough according to law

In Case no. 4 in the SPC’s typical labour cases, a machinery company suspended work and production from 3 February for pandemic prevention and control, and an individual surnamed Ding was off work until 15 March, not providing labour to the company during that period.

The company’s wage payment period runs from the 10th of the month in question to the ninth of the following month. The company paid Ding’s wages as normal for the 10 January to 9 February, but only paid him basic cost of living expenses from 9 February, which triggered the arbitration.

Commentary: How employee wages and benefits are to be paid after an enterprise suspends work or production, and implements a unilateral furlough, has yet to be conclusively resolved, e.g., how to construe, among other things, the “first wage payment period”, at what rate are wages to be paid for the second wage payment period, and how are statutory benefits to be handled for the furlough period, etc.

The latest similar case search regulations and typical cases issued by the SPC addressed these issues. First, the author argues that the “first wage payment period” should be the 30-day period from the date on which the enterprise suspends work or production and implements the unilateral furlough, not a calendar month, or the actual wage payment period implemented by the enterprise.

Second, if an employee does not provide labour during the second wage payment period, he or she can be paid basic cost of living expenses in accordance with the local wage payment regulations. Third, pursuant to local regulations, the enterprise may have to bear all of the social insurance and housing reserve contributions during the basic cost of living expense payment period.

Conclusion

Although there is a lack of clarity in legislative provisions on unilateral furloughing, the SPC’s new similar case regulations clearly show guidance, and typical cases have reference value for judgments and rulings. The cases of local competent courts have reference value for judgments and rulings, but the adjudication approaches vary, which places higher compliance requirements on enterprises that implement unilateral furloughs. Whether and how unilateral furloughs can be implemented require an enterprise to conduct a careful evaluation on the basis of balancing its own interests with the lawful rights and interests of its employees.

Leo Yu is a partner at Jingtian & Gongcheng

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