Surviving until Next Spring – Staff Downsizing

China is facing an economic slowdown. Some companies have to downsize their workforce to cut down the operation cost while waiting for the next round of economic resurgence. However, since the Chinese Labor Law was created to protect the workers’ interests, it is not easy to lay off staff, even if a company is facing economic problems such as lacking purchase orders. For most foreign companies, it is better for them to downsize their staff and survive in winter while hoping for a warm, profitable spring..

There are several ways for an employer to downsize their workforce, namely through Economic Lay Off according to Article 41 of the Labor Contract Law, Lay Off by Significant Change of Objective Condition according to Article 40 and Lay Off by Enterprise Termination according to Article 44. Employers need to carefully choose the method and reason for downsizing as they all have different conditions and legal consequences. A careless downsizing, especially if done under the conditions provided in Article 40 and 41, may result in damages. This means that the employer is liable to pay double compensation according to the staff’s working years, or even worse, a deadlock in operation due to a labor dispute.

Careful planning is strongly advised when an employer feels that he must downsize. The employer must consider: What is the reason for downsizing? Which employees (such as those who are pregnant or those on medical leave) are not allowed to be laid off? What is each employee’s working years, their average salary for the last 12 months and position in the company. Furthermore, the company should consider its Plan B in case of an emergency or when the layoff is not possible. A planned compensation for every staff that will be laid off should be calculated before any action is taken.

Different methods of downsizing are treated differently. Economic Lay Off is appropriate when the company downsizes its workforce by 10-20%.This type of layoff requires the employer to report the news to the company’s labor union or all of its staff. After their opinions are heard and a report is submitted to government, the employer has the right to layoff the staff. Lay off by significant change of objective condition requires a very important “negotiation of labor contract change”. Without it, the layoff is likely to be considered an illegal termination, which can result in damages.

Many foreign companies in China do not understand certain cases of disputes such as a deadlock in operation. Some members of staff simply intend to make trouble for the company, even if all procedures and compensations are lawful. They think the deadlock, not a labor arbitration or litigation, is the best way to get more compensation. In these cases, the company must remain calm, be patient and cooperate with local governmental authorities to solve the problem. Even if your company is under pressure by the government to promptly resolve the dispute, you may still insist on your rights to lawful settlement via the proper legal channels.