Employee placement in early dissolution of enterprises

By Tracy Liu, Jingtian & Gongcheng
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Some enterprises that have become seriously overstaffed, or sunk into crisis amid the COVID-19 pandemic, may eventually have to be dissolved ahead of schedule. In this article, the author answers questions regarding key legal issues related to employee placement in the case of early dissolution.

Legal basis

According to article 44(5) of the Employment Contract Law, where an employer decides to dissolve itself ahead of schedule, its employment contract with employees can be terminated immediately.

Employee
Tracy Liu
Partner
Jingtian & Gongcheng

Although the law clearly grants an enterprise, as employer, the right to terminate the employment contract in the case of early dissolution, the enterprise should try terminating the employment contract through negotiation, and settling all potential claims of employees via the waiver or exemption clauses in the agreement, so as to minimize the litigation risks.

In addition, to reduce the number of employees to be negotiated with, and cut down the severance cost, enterprises may consider dealing with some employees in special circumstances (such as employees with misconduct, retiring employees and employees whose contracts are expiring) in advance.

The timing

When an employer decides to dissolve early, the timing of employment contract termination varies across local jurisdictions, so the employer should accurately understand the local laws, regulations and judicial practice. As shown in practice in recent years, many local administrations on labour and social security have consistently accepted the date when the notice is given to the employees – which should be after the highest authority of the employer has made the decision to dissolve – as the termination date of the employment contract.

In addition, it should be noted that, according to relevant provisions of the Company Law, a company shall set up a liquidation team to carry out liquidation within 15 days from the date when the highest authority of the company makes the decision, or adopts the resolution on early dissolution.

Therefore, the author suggests that, to ensure the smooth progress of the severance and liquidation plans and their proper linkage, the above-mentioned time limit should be fully factored in determining when the company’s highest authority resolves to dissolve, so as to ensure that relevant preparation (such as the selection of liquidation team members) will be completed within the 15-day statutory time limit.

Compensation consideration

Pursuant to PRC laws, where the employment contract is automatically terminated due to early dissolution of the employer, the financial compensation for employees should start to accrue from 1 January 2008. The employer shall comply with the local regulations as to whether it is obligated to pay financial compensation for the years its employees had worked before 1 January 2008 and, if it is obligated, the local standards shall be followed.

According to the local and national regulations, if the employer is dissolved ahead of schedule, the employees entitled to special protections under the law (e.g., female employees in pregnancy, maternity leave or breastfeeding, employees on sick leave, and employees with work-related injuries) may receive extra compensation or subsidies.

With regard to the payment of financial compensation and other expenses, the author suggests that the employer consider solving the issue within the 15-day period between deciding on early dissolution and setting up the liquidation team (rather than after the liquidation has started). This is because, theoretically, once a company enters the liquidation proceedings, the employees’ wages and financial compensation will not be paid pursuant to the liquidation plan until the liquidation team finishes inventorying of assets. However, this may not be conducive to the timely and proper placement of employees.

Prior notice

Despite the absence of explicit statutory requirements, it is better for the employer to notify the employees in advance, and fully communicate with them about its dissolution and severance plans. There is no uniform national rule as to whether the employer’s decision on early dissolution should be reported in writing, in advance, to the local human resources and social security authority, the local trade union and other government agencies (e.g., the public security authority).

The answer mainly depends on local regulations and standard practices. However, even if the local regulations do not require early notification, the author suggests that the employer communicate with relevant government agencies in advance to ensure availability of their timely help and support when labour disputes occur.

Employee issues

The author provides the following suggestions on the employee issues that may arise from early dissolution of an employer:

(1) Listen to the trade union and employees. According to relevant laws, when deciding on major business issues, a company should listen to the opinions of the trade union and employees. The author suggests that the employer that has made the early dissolution decision make adequate communication with its employees to show the management’s respect for employees, and reduce the risk of disputes.

(2) Prepare a communication plan and answers to FAQs. In the dissolution project, it is also important to formulate a sound plan for employer-employees communication. The plan should elaborate on the steps, main points and details of communication. In addition, some frequently asked questions regarding employee issues and their answers should be prepared in advance.

(3) Prepare for potential employee protests. The author suggests that the employer choose the appropriate time and place for the announcement of early dissolution, so as to protect its premises and assets from being impaired by employee protests triggered by the announcement.

The company may consider prior filing with the local public security authority, and requesting its intervention in the employee protest in case of violence. The employer may also consider hiring a company to provide security guard services.

(4) Develop a media/public relations strategy. To avoid damage to corporate image, the author suggests that the employer develop a media and public relations strategy in advance, designate staff to deal with the media outlets, and script the answers to questions related to employee severance.

Tracy Liu is a partner at Jingtian & Gongcheng

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