China: Guidance on what a "major change in objective circumstances" means

A recent judicial interpretation (Interpretation) issued jointly by the Supreme People's Court and the Labour Dispute Arbitration Committee in Beijing provides timely clarification (among other things) of what is meant by the term "major change of objective circumstances" in the context of redundancy for corporations with operations in Beijing (and, potentially, other parts of China).

Background

PRC Labour Contract Law allows an employer to unilaterally terminate a labour contract where:

1. there has been a major change of objective circumstances which renders performance of the employment contract impossible; and
2. after consultation, the employer and employee have not been able to agree on how the contract could be amended to deal with those changed circumstances.

Implementing rules have sought to clarify that a "major change of objective circumstance" may include a force majeure, business relocation, a merger or acquisition or an asset transfer. However, the way that the courts and labour arbitration tribunals have interpreted this phrase has varied in practice from locality to locality. Accordingly, relying on this ground to terminate employment in China carries a relatively high litigation risk. This is compounded by the wide discretion that the courts and labour arbitration tribunals have in determining whether the termination was justified.

New Beijing Interpretation

The new Interpretation states that a "major change of objective circumstances" is an unforeseeable change which takes place after an employment contract has been entered into and which:

1. makes it impossible for all, or the main terms, of the employment contract to be performed; or
2. means that the continued performance of the employment contract would be costly and unfair, with the result that the purposes of the labour contract cannot be accomplished.

The Interpretation provides the following examples of situations that will generally be treated as a "major change of objective circumstances":

1. force majeure events caused by earthquakes, fire, flood and other natural disasters;
2. a change in law, regulation or government policy which results in a business relocation, an asset transfer, the cessation of production or conversion of production facilities, a change to the employer's business model or other major changes to the employer's business; and
3. a change in business scope of an employer who is engaged in a franchise business.

In our experience, local courts and labour arbitration tribunals in Beijing have taken a relatively strict and pro-employee approach in relation to employment terminations based on "major change of objective circumstances". In some cases, corporate internal restructuring aimed at reducing costs or achieving higher profits was held not to qualify as a "change of objective circumstances" because the restructuring was carried out at the employer's option (rather than, for example, as a direct result of a change in law, regulation or government policy).

Whether the Interpretation will soften this approach, and whether other localities will refer to the Interpretation when dealing with disputes arising from a redundancy, remains to be seen.

Key takeaways for employers

The current level of mergers and acquisitions, corporate restructuring and divestiture of businesses in China looks to continue as various factors have contributed to foreign investors reassessing their business operations in China. It is critical for the smooth completion of such transactions that the resulting employment issues are anticipated early and that steps are taken to lower the litigation risk of any resulting redundancies. In particular, employers should consider:

• the extent to which there exists objective evidence and documentation to support that there has been a "major change of objective circumstances", and to collect relevant statistics and figures to support their position where these are available;
• engaging with trade unions and/or consulting with employees early, in order that they are engaged throughout the process;
• how the employer will handle employee concerns and employment issues, in order that any problems which may give rise to employee unrest and potential employment claims can be effectively dealt with at an early stage; and
• seeking to negotiate a mutually agreed separation with impacted employees under which the employee would provide a release from any claims arising from their employment and its termination.

Written by Karen Ip (Partner) and Eunice Li (Associate)