In case foreign invested enterprises (FIEs) decide to contract or even shut down their business in China due to various reasons, inevitably, they have to consider how to dismiss employees and make staff redundant legitimately and economically. This article discusses briefly some legal options available according to Chinese labor law & regulations.

a.       Dismissing the staff through friendly negotiation

FIEs may propose and terminate the employment contracts with the employees through friendly negotiation. In case the termination agreement is concluded, FIEs (the employer) should pay the employee severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked ( Any period of not less than six months but less than one year shall be counted as one year. The severance pay payable to an employee for any period of less than six months shall be one-half of his monthly wages. The same below).

Obviously, it could be reasonably anticipated that it is much time-consuming and difficult to terminate the employment contracts with the employees through friendly negotiation.

b.      Dismissing the staff when the employment contracts expire

FIEs may refuse to renew the employment contract when its term expire, while FIEs should pay the employee severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked.

However, please note that the employment contracts with the employees who have worked for FIEs more than 10 years will never expire.

c.       Dismissing the staff by unilaterally rescinding the employment contracts

In accordance with Chinese labor law, only with legitimate reasons can an employer unilaterally rescind the employment contract. Otherwise, the employer should pay damages to the employee at twice the rate of the severance pay, i.e. based on the number of years worked with the employer at the rate of two month’s wage for each full year worked. Generally speaking, it is far from easy for FIEs to argue any legal grounds which justify the unilateral rescission.

d.   Dismissing the staff by making staff redundant

 Article 41 of Labor Contract Law of the People's Republic of China states, “If any of the following circumstances makes it necessary to reduce the workforce by 20 persons or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the enterprise’s employees, the Employer may reduce the workforce after it has explained the circumstances to its Trade union or to all of its employees 30 days in advance, has considered the opinions of the Trade union or the employees and has subsequently reported the workforce reduction plan to the labor administration department:

(1) Restructuring pursuant to the Enterprise Bankruptcy Law;

(2) Serious difficulties in production and/or business operations;

(3) The enterprise switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce; or

(4) Another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them unperformable…”

FIEs could make staff redundant by reason of “Another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them unperformable” (section (4)). However, the redundancy procedure is much complex and time-consuming. In addition, FIEs should pay the employee severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked.

e.       Dismissing staff by reason of company dissolution and liquidation

According to Article 44 Labor Contract Law of the People's Republic of China, an employment contract shall be terminated if:…(5) The Employer has its business license revoked, is ordered to close or is closed down, or the Employer decides on early dissolution.

The shareholder of FIEs may make a resolution to dissolve and liquidate the company incorporated in China. Logically, all the staff have to be dismissed during the dissolution and liquidation process, while FIEs should pay the employee severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked.

By Mr. Linchang SHEN,Partner & Attorney at Law of Shanghai Sun Hold Law Firm

For further clarification or explanation, you may contact Mr. SHEN via charles@sunhold.com.cn