Practice and Procedures for Termination of Employees in China Due to Financial Difficulties

By Wang Jun and Stephen Lou

 

In light of the financial downturn, many foreign invested and domestic companies in China have been laying off their employees in masses.  Although much of the focus has been in the manufacturing sector with stories of massive lay-offs and factory shutdowns, very few industries will be completely immune to the downturn – forcing many employers to consider downsizing as an option to weather the storm.  This, coupled with the new Labor Disputes Mediation and Arbitration Law (effective May 1, 2008), allowing employees to file labor arbitration cases free of charge, China has since reported a significant increase in applications for labor dispute arbitration filed.  Consequently, employers should be especially aware of proper procedures when considering the termination of employees during these times.

 Under current Chinese law, there are two options available for the employer to reduce its financial obligations to employees based on financial difficulties.  With respect to the first option, in lieu of dismissing the employee, the employer may negotiate with the employees to adjust the current employment agreement by significantly decreasing the employee’s work assignment and salary; in effect placing the employee on “holiday status”.  The second option would be to simply terminate the current employment contract with the employee.

 

 RENEGOTIATION DUE TO FINANCIAL DIFFICULTIES

 Under the first financial difficulties-based option, Article 35 of the PRC Employment Law (PEL) provides that the employer may negotiate with the employees to significantly decrease their work assignment and salary up to the minimum standard allowable by law.  In such severe cases, the employees could potentially be paid the minimum salary standard allowable by law (approximately USD120/per month in Beijing), and in essence, the employees would be placed on “holiday”.

 Note however that this arrangement may only be temporary and the employer would be required to specify the duration term of this arrangement.  However, in the “holiday arrangement” scenario the employment contract would remain in full force and effect, entitling the employer to end the “holiday” at anytime and ask the employees to return to work.

 The employer should be aware that the employees are not obligated to agree to the “holiday arrangement”, thus the minimum salary may not be feasible.  As such, if the employer wishes to utilize the “holiday arrangement”, the employer should consider providing a reasonable payment and duration of term that the employees are likely to accept.

 Once the employees agree to the “holiday arrangement” it is imperative that an agreement be signed between the employer and employee effectively modifying the employment agreement to reflect that such an arrangement was made with the consent of the employee.  Failure to do so may subject the employer to employees claiming the illegal termination of the employment agreement.  If successful, this could lead to certain damages and additional penalties.

 In any event, the “holiday arrangement”, if accepted by the employees, may be preferable to the employer, allowing more flexibility to the terms while maintaining goodwill with the employees.  This option would allow the employer to recall the employees once the financial difficulties period has ended.

 

 TERMINATION DUE TO FINANCIAL DIFFICULTIES

 Under the second financial difficulties option, Article 41 of the PEL provides that employer may terminate employees without their consent.  Under this option, employment may be terminated and, but for a one time severance compensation to be paid at the time of termination, the employer will no longer be required to continue to pay employee salaries.

 

Legal Requirements

 In order for the employer to utilize this termination option, the employer must satisfy two legal requirements.  First, the employer must show that it is in fact suffering financial difficulties.  Second the termination must apply to more than either 20 employees or 10% of the employees at one time.

 In regard to the first requirement, the law merely provides a broad provision with no strict and specific requirement to determine how the financial difficulties requirement is met.  However, in light of the present economic downturn, financial difficulties of the employer company may be presumed by the visible lack of work.  Nonetheless keeping financial reports and other necessary documents readily available as evidence to show financial difficulties to employees and relevant government departments is highly advisable.

 

Procedural Requirements Limitations

 Under the PEL, the employer would be required to prepare in writing a termination plan that would include, (1) a list of the employees to be terminated; (2) the dates and procedures of the implementation, and; (3) compensation of the employees.  Employer shall present the plan to all employees, 30 days in advance to solicit their opinions.  Based on employee opinions, the employer would make the necessary changes before filing the plan with the local government administration department.  Upon receipt of the plan from the local government department, the employer may make the necessary changes and improvements proposed by the government department (if any) and proceed to implement the plan.

 The employer should keep in mind that in compiling the termination plan, certain employees may not be terminated.  These include, (1) those confirmed to have totally or partially lost their labor ability due to occupational diseases or work-related injuries; (2) those who are in the process of receiving treatment for the said diseases; (3) women employees during pregnancy, perinatal, and nursing periods and; (4) other cases stipulated by laws and administrative decrees.

 

One-Time Severance Compensation

 Under Article 47 of the PEL, terminated employees are entitled to a “one time” compensation (severance) based on the number of years the employee has worked for the employer.  A month’s salary is available for each full year the employee has worked for the employer. If the period worked amounts to less than a full year but more than half a year, the period will be calculated as a full year; if the period worked amounts to less than half a year the employee is entitled to a half month’s salary.

 Based on the PEL, if the employee’s average salary in the previous year was three times or more than the median salary of the city for which the entity is registered (Beijing median salary: RMB3322), the employee’s compensation salary shall be limited to no more than three times that median salary.  In other words, even if the employee’s salary greatly exceeds the median salary by three times, the employee would only be entitled to the maximum three times the median salary limit.  This is a significant change in the PEL which allows for the significantly scaled down calculation of compensation, compared to the old law allowing for the compensation to be based on the employee’s full salary without regard to the median salary based calculation.

 

Additional Obligation of the Employer

 According to Article 41, the employer is obligated to give notice and priority to the terminated employee with the same terms, if the employer decides to employ new employees.  However, unlike the first option, where the employment contract specifies the time in which the employee will return to work, a terminated employee will have more difficulty in requiring the employer to reinstate the employee. To overcome the obligation, the employer would simply need to declare that the job description and skill set of the former employee do not match the job description and skill set of the new position.  Although this requirement can be easily handled, employers need to keep in mind of such an obligation when deciding to hire new employees.  

 In conclusion, employers seeking to terminate employees due to financial difficulties should be aware of the procedures involved in properly doing so.  Failure to follow the procedures can likely lead to costly and time-consuming labor disputes.  In light of the changes in the law which currently allow for free filing of labor arbitration, employers are further subject to labor disputes.  As such, employers should be especially aware of their options regarding dismissal procedures.  Regardless of whether the employer is preparing to downsize its operations it is wise for the employer to ensure that the current employment policies are properly protected and incompliance of the current labor laws.  In light of the financial downturn, if employers do plan to terminate or place employees on “holiday”, employers should take immediate action to resolve such issues to minimize loss during periods of financial difficulties.

China’s MOFCOM Announces Initiation of Polyamide 6 Anti-Dumping Investigation

April 29, 2009 – The Ministry of Commerce today issued a public notice announcing its initiation of the anti-dumping investigation on imports of Polyamide 6 (PA 6) (also known as Polycaprolactam or Nylon-6) from the US, EU, Russia and Taiwan. Date of initiation commences as of April 29, 2009.

 According to the Notice, the Ministry of Commerce (“MOFCOM”) received an application for initiation of antidumping investigation on Mar 2, 2009, and lists several domestic PA 6 manufacturers who submitted the application on behalf of the PRC Polyamide-6 industry.

 The Period of Investigation (“POI”) for dumping investigation is from October 1, 2007, to September 30, 2008, while the POI for injury investigation is from January 1, 2005, to September 30, 2008.

 Any interested party willing to participate in the dumping investigation shall file a Notice of Appearance with Bureau of Fair Trade for Import & Export (“BOFT”) of MOFCOM within twenty (20) days of this Public Notice. Meanwhile, the manufacturers and exporters concerned shall provide BOFT with their total quantity and value of the Product exported to China from October, 2007 to September, 2008.

 The Notice also warns that in cases where an interested party fails to register Notices of Appearance with MOFCOM within the period specified in this Public Notice, MOFCOM is entitled to reject any relevant materials submitted by it and may be required to base its findings on the facts available.

 The investigation commences on April 29, 2009, and normally will be concluded prior to April 29, 2010. Under special situations, the investigation may be extended to October 29, 2010.

MOF & SAT Regulates Implementation of Preferential Enterprise Income Tax Policies

China’s Ministry of Finance (MOF) and the State Administration of Taxation (SAT), issued a circular on April 24, 2009, regarding the implementation on preferential enterprise income tax policies.

Under the Circular, if enterprises entitled to the transitional preferential enterprise income tax policies combine, split or reconstruct, they shall comply with the Circular of the Ministry of Finance and the State Administration of Taxation on the Several Issues Concerning the Enterprise Income Tax Settlement of Enterprises’ Reconstruction (Cai Shui [2009] No. 59).

The Circular shall take effect as of January 1, 2008.

(Source: State Administration of Taxation)

China’s Ministry of Industry & IT Tightens Control over Reporting Internet Security Information

Beginning June 1, 2009, basic telecom operators and cross-provincial value-added business operators must report, within 2 hours, the specially-momentous and momentous internet security event information and A-class and B-class caution information to the relevant authorities.

Under the Implementing Measures for Reporting Internet Security Information (Measures) released by China’s Ministry of Industry & IT (MIIT) on May 5, 2009, the information reporting units must establish the information monitoring mechanisms, raise the monitoring capacities and monitor the information within their administration.

The Measures also stipulate that basic telecom operating groups must be responsible for collecting, verifying and reporting information of their provincial branches or subsidiaries, and send such information to the local telecom administration bureaus.

(Source: Ministry of Industry and Information Technology)

SAFE to Tighten Control over Domestic Foreign-exchange Accounts of Overseas Institutions

China’s State Administration of Foreign Exchange (SAFE) released on May 5, 2009, for public comment, the Circular on Issues Concerning the Administration of Domestic Foreign-exchange Accounts of Overseas Institutions (Circular). The Circular will regulate the establishment and use of domestic foreign-exchange accounts of overseas institutions.

Under the Circular, domestic banks must designate all foreign-exchange accounts with a “NRA” (NON-RESIDENT ACCOUNT) label when establishing foreign-exchange accounts for overseas institutions. The bank must also differentiate banks and non-bank institutions among the overseas institutions. The Circular further specifies that account holding institutions and individuals will not be permitted to deposit or withdraw foreign-currency cash from the NRA foreign-exchange accounts.

The Circular is open to public comment until May 19, 2009.

(Source: State Administration of Foreign Exchange)

China Revises the Administrative Measures for the Export of Prohibited and Restricted Technologies

China’s Ministry of Commerce (MOFCOM) and Ministry of Science and Technology (MOST) released on April 20, 2009 the revised Administrative Measures for the Export-prohibited and Export-restricted Technologies (Measures), which will take effect on May 20.

Under the Measures, the competent local commercial authorities will only issue the Letter of Intent of Technology Export License (Letter of Intent) after the technology exporters’ applications for exporting export-restricted technologies are approved. The period of validity of the Letter of Intent will be 3 years.

MOFCOM released on July 18, 2008, the draft revision of the Administrative Measures for the Export-prohibited and Export-restricted Technologies for public comments.

(Source: MOFCOM)

Foreign Institutions that Provide Financial Information Services in China Must Seek Approval

Beginning  June 1, 2009, foreign institutions which provide financial information services in China must receive approval by the State Council Information Office. This includes institutions that charge a fee to provide financial information. However, this does not include organizations that provide financial-related news.

The State Council Information Office, the Ministry of Commerce (MOFCOM) and the State Administration for Industry & Commerce (SAIC) jointly released on April 30, 2009 the Administrative Provisions for Foreign Institutions Which Provide Financial Information Service in China (Provisions), which will take effect on June 1, 2009.

Under the Provisions, foreign institutions which apply for providing financial information services in China must among other things, have the corresponding legitimate qualifications in regions where they are located, have sound credit standing in financial information service fields, and assured financial information service businesses.

(Source: MOFCOM, SAIC)