How to cut labour costs without being sued

Deng added that in some cases people had told him that the implementation of a rotating work week had helped them achieve a better work-life balance.

Only 11% of respondents in the online survey said that their company had explored this idea, however. And other specialists in PRC employment law issues say they have not seen many cases in which companies use pay cuts combined with reductions in hours.

“It tends to be reduced wages rather than both,” says Elizabeth Cole, Orrick's administrative partner-in-charge in Shanghai. “Many clients have reduced salaries on a worldwide basis. The discussions with employees have been: 'We need to do this or the alternative may be job losses.'”

Lesli Ligorner, a partner in the employment department of Paul Hastings Janofsky & Walker in Shanghai, says her team has seen terminations and also “the full array of cost-cutting measures,” including wage decreases with hours remaining the same, combined hour and wage decreases, reductions in bonus payments and reductions in expat packages with staff being moved on to local contracts more quickly.

“It's really been the full range, short of termination, for a number of clients,” she says.

Consensual change
Why avoid terminations at all? Apart from business and, perhaps, political reasons, terminating employees can legally be quite challenging in mainland China. As Stephenson Harwood & Lo partner Richard Grams explained in an earlier China Law & Practice article (CLP February 2009, page 9), and as Deng reiterated during the web-seminar, employees almost always win at employment tribunals. It would be sensible, then, for employers to try to avoid being taken to court.

Complicating matters further is the fact that under Chinese law there are some classes of workers who have complete protection from termination. Pregnant women or those in the nursing period (one year after the birth of the child), those on statutory sick leave and workers who have served for more than 15 years with the company and who are now within five years of retirement all have immunity.

“These individuals have to be handled very sensitively. Termination is not an issue unless there is absolutely no choice,” says Ligorner.

Some other workers, such as a family's sole breadwinner, may have priority rights. If they are terminated, a company must prove that it was because they have lower qualifications than employees who are kept on.

There are many other ways for companies to save staff costs if they decide that terminations are too risky. But importantly, none of these can be carried out by the employer alone because they all affect the material conditions of an employment contract.

“All employment in China is based on a contract. Because contracts are signed by two parties, you can not unilaterally vary the terms of a contract or cut an employee's salary or benefits without some sort of express, or in some cases implied, consent,” said Deng during the web-seminar

This applies even where a company is carrying out a global review of employment conditions.

Consulting changes
Article 4 of the Employment Contract Law (ECL) (中华人民共和国劳动合同法) states clearly that the employer must use a consultation procedure whenever it makes changes that affect the “immediate interests” of employees:

When an Employer formulates, amends or decides on rules and regulations or material matters that have a direct bearing on the immediate interests of workers, such as labour compensation, working hours, rest, leave, work safety and hygiene, insurance and benefits, employee training, work discipline and labour quota management, etc., the same shall be subject to deliberation by the meeting of representatives of staff and workers or all of the staff and workers, which or whom shall propose solutions and comments, and which shall be determined through bargaining on an equal footing with the labour union or representatives of staff and workers. [CLP's own translation]

“It's not sufficient just to have an employee sign something saying they've read the employee handbook – you must have an actual consultation with representatives,” says Deng (although the situation is further complicated by some differing regional rules – see box below: Guangdong departs from Article 4).

Ligorner agrees. “It's unclear what you must and must not do. The safest approach is to get individual consent,” she says.

In some companies, there will be an employee representative congress, labour union or other representative body which can be used to assist in negotiating collective agreements to cover groups of employees. But Deng stresses also that simply holding an employee meeting with time for questions is not enough. While the process does not need to be as formalised as those required in Europe, it may still seem intrusive to some companies. It can however result in other benefits for the employers. As an example, Deng related during the web-seminar the story of a factory in Tianjin which ran a consultation proceeding. During the process, the company uncovered the desire for a set of workers to be issued with gloves. This was easily remedied and resulted in happier workers; without the consultation process, the workers would not have had the chance to raise their concern and might well have become more difficult to deal with when it came to bigger issues.

Don't fear the union
No consultation process will work well without a good relationship with the labour union or employee representative congress, and many employers may be worried about the consequences of interacting with unions: the image of chanting unionised workers picketing factories is one which many would prefer to see on television rather than happening in front of their factory or office. But comments made during the CLP web-seminar by Shawn Zhao, Google's senior corporate counsel for China, will provide some comfort.

“There is no law giving the legal power to the union to strike,” he said; Deng later clarified that, although unions are now not prohibited by law from striking, the explicit power to strike was removed a few years ago.

Zhao went on to say that if a strike should happen, the union's role is usually to mediate with, rather than confront, the employer or company involved.

“That's the nature of the union and the role that has been seen as appropriate by the public, by the government, and by the Party,” he said.

A balancing act
In the end it is a matter of weighing up the alternatives. Employers in bigger cities may have more flexibility to consider lay-offs, while those in more rural areas may find more opposition from unions and local government. “There will then be other incentives to look at more creative ways of doing things,” says one PRC employment lawyer.

One thing is clear – the harsh realities of a tough economy will not go away quickly, and employers need to budget carefully. The results of another poll conducted during CLP's web-seminar show that a significant number of employers have taken, or plan to take, some fairly drastic measures. When asked “Have you instituted workforce reductions in order to cut labour costs in China?” 30% of those responding said they had, while 11% said they had not yet, but planned to do so.

“This means that a large number of companies in China have either done or are planning to do some kind of workforce reduction,” Deng said.

Cole says that some companies may be reluctant to spend time on a consultation process for alternatives to lay-offs. She explains that even if money has been saved by negotiating a lower salary or period of suspended leave, just keeping an employee on payroll can be expensive because of mandatory social security payments.

“In Shanghai and Beijing, maximum payments are getting up to between Rmb6,000 and Rmb7,000 a month,” she says.

A period of lower pay will still count towards an employee's total term of service, meaning their severance package may increase if they eventually have to be terminated.

“A lot of employers would rather just deal with it now,” she says.

After examining the other options available, and given the difficulties of terminating employment contracts, perhaps some of those employers will be thinking again.

Guangdong departs from Article 4

Some courts might not strictly follow the requirements in Article 4 of the Employment Contract Law, says Deng.

In Guangdong, company rules may still be enforceable if the rules (a) do not violate the PRC law; (b) are not “obviously unreasonable”; (c) have been publicised or communicated to the employees; and (d) have not been objected to by employees. See Guangdong Province, Guiding Opinion on Several Issues Concerning the Application of the and the (广东省高级人民法院、广东省劳动争议仲裁委员会、关于适用《劳动争议调解仲裁法》、《劳动合同法》若干问题的指导意见), issued by the Guangdong Provincial High People's Court and the Guangdong Labour Dispute Arbitration Commission, effective June 23 2008.

“The Guangdong opinion appears to be the exception to the rule,” says Deng, “and it is our understanding that the courts in other jurisdictions (such as Beijing and Shanghai), will still require the Article 4 consultation procedures for company rules formulated or revised after January 1 2008.”

The lack of an explicit grandfather clause for pre-ECL company rules means a strict reading of the Article 4 rule will require consultation procedures for all company rules, even those that were issued before January 1 2008, since there is nothing to exempt them from the requirement.