Under the framework of the Labour Contract Law, harsh requirements are imposed on restructuring enterprises that lay off staff, and there are restrictions on manpower management autonomy of enterprises. In the Response to Questions Concerning Application of Laws in Trial of Labour Dispute Cases, issued in April 2017 by the Higher People’s Court of Beijing and the Beijing Labour Dispute Arbitration Commission, many open issues under the existing labour regulations system of Beijing are clarified. Provisions of the response regarding layoffs by restructuring enterprises are friendly to employers. Although the Labour Contract Law will not be revised in 2017, legislation and practice in Beijing usually signals the tendency of future legislative activities.
On what conditions are unilateral adjustment of position allowed? According to the Labour Contract Law, in effect, unilateral adjustment of position by the employer is allowed only when the employee is incompetent for his or her position, or is unable to resume original work after the expiration of a prescribed medical treatment period; when adjusting the employee’s position unilaterally under statutory prescribed circumstances, generally the employer must not lower the wages of the employee. In practice, however, an employer may cancel, rename or adjust the function of a position due to changes in production or operation, for instance, business restructuring or reorganization. In the past, employers who needed to adjust any position for this reason were in a passive position, given a requirement of consent from the employee being transferred.
Now, the employer’s right to adjust positions unilaterally is recognized conditionally by the response. The following principles apply depending on provisions of the labour contract between the employer and employee: (1) adjustment of position is allowed in the case where there is agreement with the employee that the employer may adjust position in line with production and operational activities, provided that the employer can prove that change has occurred to its production and operational activities, and that the adjustment is reasonable; (2) if agreement on the position to be taken by the employee is absent or unclear in the labour contract of the employee, the reasonableness of position adjustment is determined by taking into account whether the adjustment is justifiable and necessary for the operations of the employer, whether the employee is competent for the new position, and whether there is any adverse change in labour conditions, such as wages and benefits.; and (3) if the labour contract specifies the position to be taken by the employee but does not specify how the position should be adjusted, adjustment of the position beyond statutory prescribed circumstances must be deemed a breach of the labour contract. If the adjustment causes any loss to the employee, the gap in wages for the original and new positions must be paid to the employee as compensation.
The authorities’ attitude towards downward wages adjustment is also revealed in the response, which says that the employee must have the right to reject wages adjustment on all the above-mentioned occasions of position adjustment. If the employer adjusts wages unilaterally, the arbitration or judicial body may determine whether it is an infringement upon the legitimate rights and interests of the employee by taking into consideration factors that include the actual circumstances of the employer, the nature of the new position assigned to the employee, and agreement between the employer and employee.
Material change in the objective circumstances. Item (3), article 40 of the Labour Contract Law grants the employer a right to terminate the labour contract unilaterally by citing “material change in the objective circumstances”. This provision is frequently mentioned by human resources officers but rarely works, because termination according to this provision requires failure of the employer and employee to reach consensus on amending the labour contract upon consultation, and more importantly, ability of the employer to prove material changes in the objective circumstances on which conclusion of the labour contract is based.
So, what is “a material change in the objective circumstances”? According to the Explanations of the Ministry of Labour Concerning Several Stipulations of the PRC Labour Law, issued in 1994, a material change in objective circumstances means force majeure or any other change that renders all or some provisions of the labour contract unenforceable, for instance, relocation, merger or asset transfer of the employer. In practice, generally no changes other than those described above are considered material changes in the objective circumstances.
However, is it possible that these rigid standards may be loosened to reflect changes in market conditions? The response makes it clear at the outset that a material change in the objective circumstances on which conclusion of the labour contract is based means a change after conclusion of the labour contract, unforeseeable by the employer and employee at the time of conclusion of the contract, which renders all or key provisions of the labour contract unenforceable, or with which continued performance would result in an unfair situation (e.g., excessive cost) that makes it difficult to realize the purpose of the labour contract.
The response cites examples of “material change in the objective circumstances”, including: (1) force majeure; (2) significant change in the employer due to change of laws, regulations or policies, including relocation, asset transfer, cessation of production, change of industry, or transformation; and (3) change of business scope of an employer that operates as a franchisee.
This reflects several changes to the previous interpretations. First, “merger”, a catch-all term, no longer applies. “Merger” is generally achieved through acquisition of an equity or asset. Merger through acquisition of equity will not result in change of the employer or affect continued performance of labour contracts, as reflected in the Labour Contract Law and historical cases. A merger through acquisition of an asset, on the contrary, is still deemed “a material change in the objective circumstances” in law and in practice, given the possibility of transferring manpower together with the acquired asset.
Second, the response adds circumstances deemed material changes: change of business scope of an employer that operates as a franchisee, and cessation of production; and change of industry or transformation resulting from changes to laws, regulations and policies. In order to prove “a material change in the objective circumstances”, the employer may provide documents evidencing the above circumstances. If it does not fall within these circumstances, it may terminate the labour contract by proving unforeseeable change to the conditions under which the labour contract is concluded, or the potential excessive cost with which continued performance would result in.
Patrick Gu is a partner at DaHui Lawyers