Laying off is hard to do

(a) the employer is to undergo restructuring in accordance with the Enterprise Bankruptcy Law (中华人民共和国企业破产法);

(b) the employer is experiencing serious difficulties in its production and operations;

(c) the employer is to switch production, undergo a material technological makeover or adjust its mode of operations and still needs to reduce personnel after amending some employment contracts; or

(d) any other material change occurs in the objective economic circumstances, relied on at the time of the conclusion of employment contracts, making their performance impossible.

Notably, the ECL also defines a mass lay-off by reference to the number of employees whose employment has been terminated. It provides that a mass lay-off refers to the termination of the employment of 20 or more employees or 10% or more of the total workforce in any of the above circumstances. However the law is unclear as to whether a mass lay-off only refers to the termination of the employment of such a number of employees in one batch or whether the numbers of employees terminated in several batches within a certain period can be added together for the purposes of deciding whether there has been a mass lay-off. If a mass lay-off only refers to termination in one batch, then laying off people in several batches over an extended period might mean that reporting requirements can be avoided. Such ambiguity needs to be clarified by the relevant labour authority.

In practice, many employers hire people through staffing firms (Fesco and CIIC are two popular examples). Such seconded workers should not be included when calculating the number of affected employees. While they may be entitled to the same benefits as regular employees, legally, they are employees of the staffing firms who have been seconded to work for companies according to secondment agreements concluded by staffing firms and such companies. If these companies reduce their workforces, they may return these seconded workers to the staffing firms instead of terminating their employment. This does not mean that employers should be encouraged to hire people through staffing firms in order to avoid a complex termination process. If a seconded worker is returned to a staffing firm, the liabilities of the companies carrying out lay-offs will depend on the secondment agreements concluded between them and the staffing firms.

Process for a mass lay-off
An employer that intends to conduct a mass lay-off in accordance with the ECL will, in practice, need to comply with the following process.

1. Make a lay-off plan

A lay-off plan should be formulated early on in the process. It may, among other things, state the reason for the proposed lay-offs and give details on the affected employees and the proposed economic compensation arrangements.

Who will be affected is always a key issue, and should be considered in advance. Generally employers can decide this on the basis of their commercial requirements. However, in order to protect the interests of certain groups of people who are in a weak position or have served the employer for a relatively long time, Chinese law requires that any employee with a relatively long-term fixed-term labour contract; or with a non-fixed term labour contract; or who is the only person supporting their family be retained with priority when a mass lay-off is conducted.

Chinese law also provides that employees in certain situations can not be laid off. For instance, an employee suffering from an illness or injury and still in the prescribed period of medical treatment; or a female employee during pregnancy, maternity leave or nursing period.

2. Follow the consultation procedure

The employer should give 30-days prior notice to its trade union of the proposed lay-offs. The trade union can require the employer to adjust the lay-off plan to the extent that it does not meet legal requirements. Opinions given by the trade union should be considered. If an employer does not have a trade union, the employer should notify all employees and consult the representatives designated by them.

The above is a summary of the consultation procedures required by the ECL. Some local governments, however, may provide more detailed and stringent requirements regarding consultation procedures. For instance, the Shanghai Labour and Social Security Bureau and the Shanghai Federation of Trade Unions recently issued a series of regulations governing so-called collective consultations in their city.

These regulations require trade unions to issue a written request for collective consultations to discuss employers' lay-off plans, which employers must accept pursuant to local laws. They also stipulate that relevant labour authorities should promptly intervene and mediate between the employer and the employees if disputes could not be resolved through collective consultations.

Collective consultations are intended to provide a mechanism for avoiding and resolving collective labour disputes through balanced consultations between the employer and its employees, or the employees' representatives; such consultations were originally optional but the recent regulations make them compulsory in practice. Although such collective consultations are consultations between the employer and employees, the regulations allow higher-level trade unions and the government to intervene in the process. This shows they can have more influence on the lay-offs.

Many detailed legal requirements relating to collective consultations are set out in the Shanghai municipal regulations. For instance, consultation representatives need to be nominated by the employees for the purpose of collective consultations, even if the employees have already established a trade union. The detailed lay-off plan (including the number and scope of affected employees and the compensation packages) need to be discussed during the collective consultations. These requirements make the consultation process more complex and time-consuming.

3. Follow the reporting procedure

After the consultation, the employer should report the proposed lay-off to its local labour authority. The ECL does not specify when such reporting is required to be done. Some local labour authorities, however, have issued specific requirements in this regard. In Shanghai, for example, the local regulations provide that the employer should submit a report to the appropriate labour authority after the consultation and in any event no earlier than 30 days after the notification of the proposed lay-offs to the trade union or all the employees.

Although the reporting procedure stipulated by the ECL does not involve the need to obtain any approval, the relevant labour authority can require that the employer rectify any lay-off plan that contravenes the law or regulations, and as a result it can influence the lay-off arrangements. In addition, some local labour authorities have recently made it mandatory for companies to obtain approval for lay-offs of a certain number of employees. For instance, Shanxi provincial labour authority now prescribes that lay-offs of 200 or more employees (100 or more employees for state-owned companies) can only be implemented with its approval.

4. Implement the plan

After reporting to the local labour authority, the employer can commence termination procedures, including arranging the execution of termination letters and release agreements, formulating take-over arrangements and dealing with termination payments.

Termination package
Under Chinese law, economic compensation must be paid upon termination of employment due to a mass lay-off. In addition to statutory requirements, the employer needs to check whether there are any contractual benefits that the employee is entitled to according to the company's labour contracts and policies, such as stock option benefits, or any housing allowance or annual bonus.

In practice, companies should formulate termination packages based on their own commercial circumstances in addition to legal requirements. For instance, some companies, in order to sustain normal operations before the proposed termination date, seek to encourage certain employees to stay and perform until the termination date by providing a retention bonus to such employees that meet certain performance and attendance criteria.

Some other companies, in order to ease employees' anxiety and facilitate the smooth running of the lay-off process, are willing to offer additional compensation in excess of the statutory economic compensation due under Chinese law. As such measures should be welcomed by the employees, this helps reduce the risk of labour disputes.

Conclusion
In practice, employers are likely to encounter many difficult issues when considering whether and how to conduct a mass lay-off in China. When making any decisions, they must take account of legal requirements and their own commercial strategies. An understanding of the issues mentioned above should assist employers to take their first steps in this hard-to-navigate area.

Is there another way?

Some companies in China and elsewhere are coming up with innovative ways to save money without laying off their staff, including:

• encouraging staff to take non-paid leave;

• instituting shorter working weeks;

• reducing benefit to which employees are entitled; and

• changing employees' positions after negotiation.

Companies should check the conditions of employment contracts and investigate other legal implications before deciding to implement any such measures.