Employment issues and guidance for business restructuring in China

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With the continual development of new technology, rapid changes in the global economy, the constant threat of competition and a slowing local market, many companies are faced with the challenge of restructuring their business operations in China in order to cope with these new changes. Such restructurings may include: converting a Sino-foreign joint venture into a wholly foreign-owned enterprise; moving location to achieve expansion, be closer to clients, distributors and suppliers, or to take advantage of lower land leasing costs; or closing specific production lines with out-of-date technology.

Business restructuring projects almost inevitably result in labour force downsizing. The legal regime in China is very protective of employee rights and restrictive of an employer’s right to unilaterally terminate employment. Any project of this kind tends to be sensitive and is likely to meet significant resistance from employees concerned, in particular those who have been working with the employer for a long time and/or those for whom it may be difficult to find a new equivalent job after a termination.

It is increasingly common in China for tensions to escalate in these situations. In extreme situations, employees may: protest directly to government authorities; restrict or block access to company premises; engage in potentially damaging media campaigns; threaten or cause damage to company property; report alleged company non-compliance to regulatory authorities; or engage in other impulsive and potentially harmful actions.

Such situations can be difficult for companies to contain and handle, even if the company, technically, is complying with the law. To have the best chance of effecting a smooth restructuring process, it is essential to be aware of these risks and to have a clear overall strategy, including a contingency plan for dealing with employment issues. Accordingly, the authors recommend that companies consider the following issues when devising their strategy for business restructuring in China. This is particularly important for multinational companies (MNCs), which are often viewed as being sensitive to adverse publicity.

TIMING AND COMMUNICATION

Timing is critically important – when to make the announcement to employees, and how long to allow employees to consider a separation package in excess of legal requirements. In addition, clear and consistent communication with employees is vital to achieving company objectives.

Companies should seek to avoid possible leaks of information and rumours among the workforce. News spreads fast in China, and employees can become nervous and restless if they feel that significant changes are afoot, but they do not know the details. In addition, opinion leaders may organize opposition in advance of formal announcements and encourage unrealistic expectations regarding entitlements.

Before making an announcement, companies should consider whether to offer a more attractive separation package that is in excess of statutory requirements, in return for mutual terminations. It is important to check whether the company has set any precedents in terms of severance packages in previous employee exit situations. Employees may push for the same treatment as others.

Communication with affected employees should be clear and consistent so that employees understand the situation and there is limited scope for different interpretations or a perception of different treatment for different categories of employee. Communication should also make it clear that the changes are driven by the legitimate needs of the business. The timings for the process should also be made clear.

Companies should be aware that employees will expect to have time to communicate with their families regarding a proposed separation package. While the company should provide opportunities for employees to raise questions and provide feedback, there should be clear deadlines as to when decisions need to be made, and the impact of not agreeing to a proposed package.

Companies also need to consider whether they have any specific potential vulnerabilities, such as regulatory issues, which could come back to “bite” them if reported by employees as a protest or negotiating tactic. Furthermore, companies should anticipate possible interruption to ongoing business operations and take appropriate action to minimize any potential adverse impact during the process of dealing with affected employees.

CO-OPERATION WITH AUTHORITIES

By law, reporting obligations and approvals from the relevant PRC labour authorities in relation to employment terminations only apply in certain specific situations, such as when a company uses the legal ground of “mass lay-offs”, i.e., when a company decides to unilaterally terminate a minimum of 20 employees, or 10% of its workforce, as a result of major financial difficulties or technological changes. In this situation, there is a requirement for the company to submit a report to the authorities setting out the reasons for the lay-offs, any actions taken to avoid or mitigate the impact of the lay-offs, and details of the affected employees and the statutory severance packages provided to them.

In practice, many mass lay-offs are conducted through mutual termination, with separation packages in excess of the minimum statutory requirements, and for which government “approval” is not mandatory.

In the authors’ experience, however, even if the lay-offs are made through mutual termination, it is often still helpful to communicate with the local labour authority to give it a “heads up” just before commencing the communication with employees. This is for the following reasons:

  1. To avoid any surprise or potential embarrassment to the local authorities in case the situation becomes contentious or appears in the media. If the company provides advance notice to the authorities, they are also far more likely to provide security assistance if the situation gets heated or an accident occurs.
  2. To get assistance and support from government officials when negotiating with employees. In China, the employees tend to turn to the authorities to complain about, or protest against, terminations and major changes. This raises concerns with the authorities regarding potential instability if there is a large volume of complaints or if the situation escalates.

However, if the authorities are aware of the company’s situation, the reasons for the lay-offs, the approach taken and compensation package offered by the company, it is much easier for the officials to respond to employees. Officials will appear to be informed and on top of the situation. This is often effective in helping employees to come to terms with a situation and take a less emotional approach.

PROCEDURAL REQUIREMENTS

It is important to follow all the procedural requirements for laying off employees. Failure to do so may lead to a termination being challenged or determined unlawful.

For example, for companies that have established a labour union, it is a mandatory requirement for the company to communicate with the union regarding any unilateral termination, no matter how many employees are involved.

Similarly, in a situation where the company decides to use the legal ground of “objective change of circumstances” to effect terminations, for example if it cannot meet the threshold for a “mass lay-off”, it is essential that the company justify the change of circumstances and why this has made the existing contract incapable of completion. In particular, the company must be able to show that it has gone through a discussion process with the affected employees and that it has tried to find and offer alternative positions for the employees.

As with all termination situations in China, the company should keep written records of all processes and communications with employees, including records of discussions or consultations with employees and courier delivery receipts for items delivered to employees. It is important to have a paper trail to show clearly that the company has fulfilled the relevant procedural requirements.

In summary, restructuring in some shape or form is a reality faced by many companies operating in China. The employment aspects of such restructurings can be particularly sensitive and challenging. Companies should plan ahead and have a clear strategy before proceeding. In terms of implementation, companies should focus especially on timing and clarity of communication, keep the government authorities informed, and ensure a rigorous approach to procedural requirements.

Matthew Durham and May Lu are partners at Simmons & Simmons