Labor Issues for Foreign Investors Divesting from China

Summary

• An exit from China will have a number of legal implications, including under labor law
• When dissolving a PRC legal entity, investors must consider whether and how employment contracts may be terminated, and allow for required payments to be made
• During dissolution, certain employees may have protected status
• Issues can also arise when making an equity acquisition as a means of exit, and investors must consider points such as establishing cause for termination and dealing with length of service

As a result of recent international developments, some foreign enterprises are considering shutting down their businesses, dissolving local entities in China, or selling their business to third parties. This process will lead to labor law issues that need special attention, in particular relating to the termination or transfer of employees.

Any unilateral termination by the employer must be based on one of the statutory grounds stipulated in law.

I. Labor Issues arising from the Dissolution of a Legal Entity

1. Can Employment Be Terminated when Dissolving a Legal Entity?

PRC law features specific rules and requirements relating to the termination of employment, as set out in the PRC Employment Contract Law ("ECL") (中华人民共和国劳动合同法). In general, unilateral termination of employment by the employer without cause (i.e. 'at will' termination by the employer) is not permitted. Any unilateral termination by the employer must be based on one of the statutory grounds stipulated in law.