China: Interpretation And Application Of The Allowed Dismissal Due To Great Changes In Objective Situation

Due to the impact of COVID-19, great amounts of companies struggle in the crisis for up to one or two months after the Chinese Spring Festival vacation. The dilemma happens when they pursue to keep balance between the governments' restriction and the normal operation and labor. Some enterprises endeavor to reducing the labor cost by laying off employees. Based on this situation, this article will analyze the main legal rule of dismissal due to great changes in objective situation in accordance with Article 40(3) of the PRC Labor Contract Law. Guideline for implementing this rule will be provided.

1. What are the "great changes in objective situation"?

Article 40 of the PRC Labor Contract Law:

"In one of the following circumstances, an employer may revoke the labor contract, if it notifies in writing the employer of its intention 30 days in advance or after paying him an extra one-month salary: ... (3) The objective situation taken as the basis for conclusion of the contract have greatly changed, so that the original labor contract cannot be performed and, after consultation between the employing unit and the worker, no agreement is reached on modification of the contents of the labor contract."

This clause grants a unilateral dismissal right to the employer that the dismissal decision could be made by the employer without consensus by the employee. The requirements for the unilateral dismissal include:

1. The great changes in objective situation occur and lead to the failure of the performance of the labor contract;
2. The employer shall follow the procedural requirement for negotiating with the employees about altering the labor contract. Generally, employers shall offer a new position for the employees, or, if the employers are planning for relocation, negotiation about altering working location would also be considered.
3. The employee shall not be in any special circumstance stipulated in Art.42 of the Labor Contract Law, e.g. having occupational diseases (also includes the suspected circumstance as being diagnosed or under medical observation), or work-related injury or disability at or above the level X, during medical treatment period, female employees in pregnancy, maternity or lactation period, old employees working in the company for 15 years and less than 5 years away from the statutory retirement, employees working with a position in the labor union, etc.
4. Before making the dismissal decision, the employer shall give notice to the labor union about the dismissal reason. If there is no labor union in the company, a labor union at a higher level shall be noticed.
5. The employee dismissed shall be given written notice of dismissal 30 days in advance or be paid with extra salary for one month (i.e. payment in lieu of notice). The severance compensation shall be paid in accordance with the Art.47 of the Labor Contract Law.

When judging on the first requirement, i.e. the occurrence of great changes in the objective situation and the failure of performance of the labor contract, there is only one official interpretation by the state: the Explanation of the Ministry of Labor on Several Provisions of the Labor Law in 1994. According to the Explanation, "objective situation" is defined as "There arises force majeure events or other situations which prevent all or partial terms and conditions of the labor contract from being performed, such as the employer's relocation, merger and acquisition, assets transfer. In addition, the objective situations listed in Article 27 of this Law shall be excluded."

Generally, taking in account the principle of "Changes in Circumstances" under the civil law, "great changes in the objective situation" may be interpreted to have the following requirements: A. The great changes have occurred objectively. B. The great changes are unforeseeable by the parties at the time of signing a labor contract. There are no faults in intention. C. The changes happen during the performance of the labor contract, so the labor contract is not yet terminated. D. The changes cause failure in performance of the whole or partial of the labor contract, or the performance of labor contract would bring unfair consequences, i.e. excessively high costs, so the object of the labor contract could not be achieved.

1. Application discrepancy in different regions.

so far, there are no official written interpretations, e.g. local regulations or interpretation by the courts, in most regions to give a clear definition on "great changes in the objective situation". It results in different attitude by the courts in different regions, and thus increases difficulty of managing cross-region employment. This article would not dip into the listed circumstances in the Explanation, as well as the obvious objective circumstances, e.g. changes of laws and regulations, policies or decisions by the government or supervising departments. It will mainly focus on the material discrepancy in application in Shanghai and Beijing jurisdiction, i.e. whether employers' management autonomy measures may be considered within the scope of "great changes in the objective situation"?

1. Opinions supporting that employer's management measures shall be considered within the scope.

Courts in Shanghai generally agree that the term "great changes in the objective situation" shall be interpreted broadly. Except for the listed conditions in the Explanation, the management measures taken by the companies to use autonomy in meeting the economic and market challenges are also accepted by the labor arbitration committees and courts in Shanghai. As there are no specific official written documents in Shanghai, we summarize the commonly supported measures of the companies and relevant judgments.

• Company adjusts operation strategy and targeted business due to operation difficulties or great financing loss, for which the company needs to cancel some departments and positions.

In Liu Yi vs. Juki (China) Investment Co., Ltd (No.8633 Judgment by No.2 Intermediate People's Court of Shanghai Municipality in 2017), the court held that the company adjusted its organizational structure and cancelled some departments and positions due to continuous financing loss and decrease of sales volume, which was the company's autonomy in operation and management, and therefore, not in violation of Art.40(3) of the Labor Contract Law.

• Company decides to outsource business due to operation demands or to perfect management mode, for which the company decides to cancel some departments or positions.

In Yu Pingping vs. Bobst Shanghai Co., Ltd (No.13811 Judgment by No.1 Intermediate People's Court of Shanghai Municipality in 2017), the court believed that employers had management autonomy. With the economic development and market changes, employers should have the right to adjust operation goals and strategy according to the situation and actual demands, which includes the right to decide on outsourcing business. As the employer signed the outsourcing agreements with external party legally and the performance of the agreements was valid, the employee's position has been cancelled legally. Thus, the objective situation at the time of signing the employment contract has been changed and the employment contract could not be fulfilled anymore.

• The equity transfer among enterprises leads to assimilation or merger of departments or positions.

In Wang Suyun and Meishang Hongying International Freight (Shanghai) Co., Ltd (No.2853 Judgment by No.2 Intermediate People's Court of Shanghai Municipality in 2018), the court stated that the performance of a labor contract is a long and dynamic progress. During the performance, the objective and subjective factors of the employer and employee would change from time to time. Based on this, the employer is granted the right to dismiss employees based on the cooperation demands and competition requirements. As the equity transfer is legally registered and the related departments shall be transferred necessarily, the employee's labor contract could not be fulfilled. This shall be viewed as a great change in the objective situation.

• To meet the operation demands, the company reorganizes the structure based on the decision by the group or by the headquarters.

In Zhang Yingying vs. TE Connectivity Shanghai Co., Ltd (No.4577 Judgment by No.1 Intermediate People's Court of Shanghai Municipality in 2016), TE Connectivity claimed that the global headquarters of the enterprise announced to merge the consuming digital department and the data communication department as a new department "data and terminal device department". To improve the operation efficiency, the new department decided to reorganize the structure and cancel some positions. The court stated that the merger of departments would certainly cause the changes or cancelation of employee's position. Therefore, TE Connectivity's dismissal by reason of great changes in objective situation was legitimate.

• Company losses or transfers major business, which leads to direct impact on the relevant employee's position.

In Sun Xi vs Technology and Engineering (Shanghai) Co., Ltd (No. 269 Judgment by No.1 Intermediate People's Court of Shanghai Municipality in 2016), the court stated that the relevant business occupied 80% of the total business of the company in 2013 and 2014. As the company separated from the enterprise group and the business decreased dramatically after the separation, the circumstance could be deemed as great changes in the objective situation of the labor contract. Also, the changes would cause failure in performance of the labor contract with relevant employees.

The above conditions could generally be recognized as meeting the requirements for "great changes in the objective situation leading to failure in fulfillment of the labor contract" in Shanghai. Due to the complex judicial practice and judges' discretion, even though there are also some negative attitudes in some cases, these conditions could still give reference and advices for enterprises management in Shanghai.

1. Negative attitudes that companies' autonomy shall not fall into the scope of Art.40(3).

Taking Beijing as example. the Answers of Beijing Superior People's Court and the Beijing Labor Dispute Arbitration Committee about Certain Questions concerning the Application of Law in the Trial of Labor Disputes in 2017 defines the following circumstances as great changes in the objective situation, depending on which the employment contract was concluded: "(1) force majeure due to the natural disasters, e.g. earthquake, fire, flood, (2) relocation, asset transfer or change of line of production and cessation of production, etc., caused by change of laws, regulations and policies, and (3) change of business scope of companies engaging in franchising."

The judgments in Beijing after 2017 basically follow the interpretation in the Answers and preclude the circumstance where company use management autonomy to meet the changes of economy and markets. The labor arbitration committee and courts in Beijing consider that employers, as operator participating in the business activity, shall foresee the fluctuation of the markets and potential changes due to its operation strategy when it signed labor contracts with employees. Therefore, company's internal profit-driven management adjustment based on the autonomy shall not be considered as "great changes in the objective situation". The following judgments support such opinions.

• In Jiekai Communication Technology (Shanghai) Co., Ltd vs Xia Xin (No.971 Judgment of No.1 Intermediate People's Court of Beijing Municipality in 2019), the company claimed that it negotiated with Xia Xin about the changes of working location because it intended to adjust the business and improve organization due to its operation difficulties. However, the court held that operation difficulties were foreseeable risk for the employer, so it could not be deemed as great changes in the objective situation.
• In Beijing Hualian vs Jin Xiang (No.3443 Judgment of No.1 Intermediate People's Court of Beijing Municipality in 2019), the court also stated that company's outsourcing of security business for operation development should not be recognized as great changes in the objective situation.
• In Beijing Huiqing Technology Co., Ltd vs Jiang Zhuo (No.4487 Judgment of No.1 Intermediate People's Court of Beijing Municipality in 2019), the court held that company's adjustment was not caused by the changes in the objective circumstances, but for improving management efficiency and adapting with future strategy. Therefore, the adjustment could not be recognized as the great changes in the objective situation.

Based on the above judgments, companies in Beijing using management autonomy to make business adjustment or reorganization could only choose to negotiate with employees about changing to another new position, or dismiss employees based on the layoff rules in the Art.41 of the Labor Contract Law.

• Burden of proof and Evidence Collection

According to Art.13 of Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, "With respect to a labor dispute arising due to a decision of an employer on expulsion, removal, dismissal, rescission of labor contract, reduction of labor remuneration, or calculation of the number of working years, the employer shall assume the burden of proof." Therefore, when company dismisses employees based on the Art.40(3), it shall prove that it meets all of the legal requirements. Here is the summary form for evidence collection advices at different stages.

The dismissal due to great changes in the objective situation is one of the types of dismissal where employees have no faults. Employer's legal implementation of this rule could achieve the goals of reducing labor cost and reduce dismissal cost compared to mutual termination. However, if company fails to offer enough evidences in any stages, or just makes wording changes and pretends the existence of significant changes, the way of utilizing the rule to cover its illegal actions would be considered as illegal dismissal, which would lead to the liability of payment for 200% of severance compensation or to resume the employment with employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.