In China, the termination of labor contracts by employers due to significant changes in objective circumstances is a vague and controversial issue.
The Labor Contract Law of China has two relevant provisions on the termination of labor contracts due to significant changes in objective circumstances. The first is Article 40, Paragraph 3, which allows for termination by the employer when significant changes occur, but attempts at negotiation fail. The second is under the clause for economic layoffs (Article 41), which allows for termination when other significant changes in objective circumstances occur. Currently, difficulties in legal practice surrounding significant changes in objective circumstances involves the determination of the scope of objective circumstances in Article 41, and the differences in rules for significant changes in objective circumstances under both provisions.
Firstly, in the case of significant changes in objective circumstances under the first situation, there are two approaches in judicial practice: lenient and strict. The strict approach, according to the interpretation of the Ministry of Human Resources and Social Security, refers to situations where the labor contract cannot be fulfilled due to force majeure or other circumstances, including enterprise relocation, mergers, or the transfer of enterprise assets, excluding cases of economic layoffs. Under this standard, the court does not recognize general or non-significant changes in operating conditions as constituting significant changes in objective circumstances. For example, in the 2016 Beijing Top 10 Typical Labor Dispute Cases, the court ruled that the general production and operation requirements for job rotation did not constitute a significant change in objective circumstances. In the Qiu Lihong case in 2017, the Higher People’s Court of Jilin Province summarized that significant changes in objective circumstances are limited to major changes in the external environment of the enterprise that cannot be changed or controlled by the enterprise, and do not include situations of general poor operating conditions and institutional adjustments for improving operations. Significant changes in the equity of a company do not necessarily constitute significant changes in objective circumstances (as in the 2021 case of Ying Sinkang Information Technology (Shenzhen) Co., Ltd. of Guangdong Province Guangzhou Intermediate People’s Court). Department or business outsourcing does not necessarily constitute significant changes in objective circumstances (as in the 2020 case of Zhou Mou Su online information company in the Third Intermediate People’s Court of Beijing). Corporate strategic adjustments are also not considered significant changes in objective circumstances (as in the 2018 Xiamen ABB Switchgear Co., Ltd. case in the Fujian Xiamen Intermediate People’s Court).
On the other hand, many courts have adopted a lenient approach to significant changes in objective circumstances, especially those involving government-led or mandated restructuring. For example, in the 2018 Zhao Benfa case of the Higher People’s Court of Guangdong Province, both the first and second instance courts in Guangzhou believed that the need to lay off employees due to changes in business strategy constituted significant changes in objective circumstances. In the 2016 case of Feng Moumou v. Bei Moumou Electronics Co., Ltd. in the Hangzhou Intermediate People’s Court of Zhejiang Province, the court believed that the fact that the employee’s department had already laid off some staff members demonstrated the existence of significant changes in objective circumstances. However, in the 2019 case of Chen Fading in the Taizhou Intermediate People’s Court of Zhejiang Province, the court believed that the change in the business structure of the employee’s department due to government supervision led to the loss of some employees’ jobs, which constituted significant changes in objective circumstances. In the 2019 case of Zhang Wei v. Fushun Natural Resources Bureau in the Fushun Intermediate People’s Court of Liaoning Province, the court believed that government-led reform of official vehicles constituted significant changes in objective circumstances.
Next, judicial precedents show that the court’s distinction between Article 40 and Article 41 is not clear when it comes to objectively significant changes leading to termination. For example, in the 2014 Liaoning Provincial High Court Cheng Lizhuo case, due to the restructuring of equity, employees from multiple departments were placed in other companies, which clearly met the characteristics of economically motivated layoffs. The Liaoning Provincial Prosecutor’s Office appealed, arguing that this was an economically motivated layoff, but the Liaoning High Court ultimately rejected the appeal, concluding that the transfer of assets of this type of unit caused significant changes in the objective situation of the employees.
Another case that was appealed had a different outcome. In the 2019 Shandong Provincial High Court Xin Deshan case, a large number of employees were laid off and terminated due to policy reforms, and the notice of termination given to the employees did not specify the legal basis, but indicated that it was due to the elimination of the least competent employees under the policy reform requirements, and that the employees had performed poorly and remained incompetent even after training. The court’s decision tended to believe that even if the number of employees and other factors met the characteristics of economically motivated layoffs, Article 40’s significant change in the objective situation should still be applied. The case was appealed by the Shandong Provincial Prosecutor’s Office and was finally decided in the Shandong Provincial High Court Xin Deshan case of 2022, which agreed with the prosecutor’s opinion on economically motivated layoffs, and the termination was deemed illegal for failing to comply with procedural requirements.
These differences in understanding between these cases illustrate that there are deficiencies in the theoretical basis and practical summary of the legislative, administrative, and judicial application of these two situations. There are many hard and fast legal provisions for terminations, but there are no feasible implementation details or principles for interpreting lawful terminations. This principle should balance the interests of employee labor rights and the development of business operations. The termination should be fair and reasonable in specific circumstances. The significant changes in the objective situation defined by Article 40 belong to significant events, such as business relocation, mergers, asset transfers, etc. Ignoring the specific needs of technology upgrading and innovation under special circumstances of the enterprise (although Article 41 includes technological innovation, it is still limited by the number of employees required for economically motivated layoffs) and disregarding employee performance may likely result in excessive restrictions on the development rights of enterprises or disregard the special difficulties faced by employees. Labor law is a humane law, and judges should have discretionary power based on fairness.
Under the current legal system and judicial practice framework, to distinguish between the two significant changes in Article 40 and Article 41, lawmakers and judicial institutions seem to need to emphasize that the basis of Article 40 is the occurrence of special circumstances that are not conducive to the continued performance of the labor contract, while Article 41 emphasizes that this change is a significant change with business losses and operating difficulties to differentiate the two.
Finally, according to Article 40 of the Labor Law, the termination due to significant changes in the objective situation requires negotiation and contract modification between the employer and the employee. In addition, the law stipulates mandatory prohibitions on layoffs in economically motivated situations, and prohibits the dismissal of female workers in the third trimester of pregnancy, those with more than 15 years of service (not yet eligible for retirement within five years), occupational disease or work-related injury, and suspected occupational diseases. In addition, a pre-layoff occupational health check must be conducted for personnel in hazardous positions. Employers must also provide evidence of the legitimacy of layoffs of long-term contract workers and those with special family needs. Violations of these procedural rules will be deemed illegal dismissals for these individuals.