When an employer intends to unilaterally terminate an employment contract, China’s employment laws and regulations strictly require it to be in keeping with one of the circumstances specified in law. Among such statutory circumstances provided by the Employment Contract Law, the only ones concerning changes in the production and operational circumstances of an enterprise are termination due to “a material change in the objective circumstances” in article 40.3, and termination as the result of “economic layoffs” in article 41, of the Employment Contract Law.
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Other circumstances concern statutory termination due to the employee, whether he/she is at fault – a serious breach of the employer’s rules and regulations – or unable to continue working due to health issues or underperformance.
In recent years, many enterprises, affected by the pandemic, changes in the macroeconomic situation, scientific and technological innovations and other factors, have encountered legal issues relating to “a material change in the objective circumstances” when carrying out organisational and personnel adjustments.
Q: What are the conditions necessary for termination due to changed circumstances?
A: Article 40.3 of the Employment Contract Law specifies that where “a material change takes place to the objective circumstances relied upon at the time of concluding the employment contract, rendering the performance of the contract no longer possible, and that the employer and employee have failed to negotiate an amendment to the employment”, the employer may terminate the employment contract.
Pursuant to this, a unilateral termination by an employer is required to satisfy the following conditions: (1) the employment contract cannot be performed specifically due to “a material change in the objective circumstances”; and (2) the employer and the employee fail to reach agreement on amending the employment contract through negotiations.
If the above-mentioned conditions are satisfied, the employer may unilaterally terminate the employment contract, provided that it gives the employee 30 days’ prior notice and pays economic compensation in accordance with the law. Failing to send the 30 days’ prior notice to the employee, the employer may pay an additional month’s wage in lieu of notice.
Q: What constitutes “a material change in the objective circumstances”?
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A: The Employment Contract Law is silent on this. The Notes on Certain Provisions of the Labour Law, released by the Ministry of Human Resources and Social Security, defines “objective circumstances” as force majeure or the occurrence of other scenarios that render the performance of the employment contract impossible in whole or in part, such as relocation, merger into another entity, or transfer of corporate assets. Economic layoff is excluded from this definition.
Please note that the above-mentioned provisions do not provide an exhaustive listing of all the circumstances. Various criteria for determining such circumstances exist in judicial practice.
Q: How different are the determination criteria in labour arbitration and courts of different regions?
A: In judicial practice in Beijing, the criteria for determination are generally stricter. A decision by an employer to make an adjustment in its business operations of its own accord from a commercial perspective is unlikely to be found to constitute “a material change in the objective circumstances”. On the other hand, a change in laws, regulations or policies causing an employer to relocate the premises or assets, or other such scenarios beyond the employer’s control, is more likely to be recognised by the court.
By comparison, the criteria for determination in Shanghai are more relaxed. Courts tend to recognise adjustments made by an employer in order to adapt to external economic and market changes or to exercise operational autonomy as being a “material change in the objective circumstances”.
Internal adjustments made to the corporate structure decided at the headquarters, or adjustments to corporate structure or business due to commercial considerations, resulting in the closure or merger of departments or elimination of positions, may also be met with approval from the court.
Q: How does an employer negotiate with the employee on amending the employment contract?
A: It is suggested that the employer produce a written Letter of Intent to Negotiate on Amending the Employment Contract and serve it to the employee. The letter needs to contain the following details: the background to the material change in the objective circumstances; the specific provisions of the employment contract to be amended, which could include the place of work, job position, remuneration and benefits, etc.; and a deadline for the employee to provide feedback.
It should be noted that although the job position, remuneration or benefits may be lowered compared to the employee’s current status, in practice, such downward amendments are often subject to review by the labour arbitration tribunals and courts for reasonableness.
If the employee consents with the content in the letter, the employer may execute an agreement to amend the employment contract with him/her and continue to perform the contract as amended. If the employee does not agree, the employer would then have the right to unilaterally terminate the employment contract.
Q: Does negotiation to place the employee on a waiting list constitute “negotiation to amend an employment contract”?
A: Sometimes, when there are no open positions or transfer opportunities available, the employer elects to negotiate with the employee on putting him/her on the waiting list for an opening, during which the employee is not required to work, and wages are paid at an irregular rate, such as the minimum wage rate. This is usually done as a form of “negotiating to amend the employment contract”, thus carrying out the required statutory procedure.
It should be noted that courts in different regions hold varying opinions on this issue, and the employer faces certain legal risks if choosing to proceed in this manner.
Liu Zhenghe is a partner and He Xiaochen is a senior associate at AnJie Broad Law Firm
AnJie Broad Law Firm
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E-mail: liuzhenghe@anjielaw.com
