With news of imminent mass layoffs in China, it is important for business managers to keep in mind the fragility of these proceedings. There are big challenges ahead for HR managers from affected industries in China. Knowledge of redundancy and restructuring options – and their consequences – is crucial.

As China transitions from an export-driven hub for cheap manufacturing to a domestic base of value-added consumerism, while at the same time experiencing a multi-year economic slowdown, companies are being forced to make difficult choices.

On February 29, Yin Weimin, the minister for human resources and social security, announced that China expects to lay off 1.8 million workers in the coal and steel industries, which employ a total of 12 million people.

Other sectors, however, are feeling the strain as well. According to the 2016 China Business Climate Survey by the American Chamber of Commerce in Shanghai, 20% of American manufacturers presently operating in China are planning to let go of employees in 2016. Other developments in the last 12 months included Tesla announcing that it would cut nearly a third of its 600-strong workforce in China after a year of weak sales in mainland China; Yahoo cutting between 200 and 300 of its mainland staff; and Lenovo pledging to reduce 10% of its non-manufacturing workforce – roughly 3,200 people.

The Chinese government has significant influence on the process of firing workers through its numerous rules and regulations, and employees themselves are highly protected by Chinese labour laws. Therefore, the wrong approach by HR managers can lead to costly problems, such as workplace disruptions, labour disputes, and refusals from government officials to support a company in its hour of need.

Labour Contract Law of the PRC

Article 41 of the Chinese Labour Contract Law (amended 2012) details the laws around redundancy of employees for economic reasons. Employers can use this ground as long as they terminate either 10% or more of the total workforce, or at least 20 employees. In order to be eligible, the law requires employers to meet one of the following specific conditions, which are meant to protect employees:

• The company must have serious problems restricting its production or business;
• the economic circumstances on which the finalisation of a labour contract was based have undergone significant changes and, as a result thereof, the labour contract can no longer be performed;
• the company undergoes restructuring according to the requirements of the Enterprise Bankruptcy Law of the PRC;
• or the company undergoes a change of production, significant technological reform, or change of mode of operation and, upon variation of labour contracts, there is still a need for cost-cutting.

Qualification for Economic Redundancy

When downsizing on a large scale in China, it is important for companies to follow a strict schedule as outlined below:

1. Announce the situation to the relevant labour union, or all staff, 30 days in advance of the planned downsizing;
2. seek out the opinions of the labour union or the employees;
3. implement a schedule for enacting the redundancy;
4. communicate the redundancy schedule to government labour administrative authorities;
5. and announce the formal schedule of economic redundancy to all staff, terminate labour contracts with laid-off staff, and settle their severance payments.

The conditions of eligibility for executing an economic redundancy are very general. To minimise the risk that a redundancy programme will be challenged by individual employees in labour arbitration, it is key to obtain support in advance from the supervising labour administrative authorities at a local level. In practice, many companies start with step four (above), and get an informal green-light to proceed. Also important to note are the regional differences in the local officials’ willingness to support mass layoffs; for example, Shanghai is unofficially known to be much more lenient and expeditious than Beijing.

Alternatives to Economic Redundancy

Where support is not forthcoming, an alternative approach may be considered. Companies may terminate not for economic redundancy but on other legal grounds, such as with mutual consent (subject to higher payments). The biggest practical disadvantage to economic redundancy is that employees must be notified well in advance, which means that they have more opportunities to be disruptive to the business. Therefore, some companies choose to bypass the economic redundancy altogether, and directly negotiate a termination of the employment contract with employees – as a group or individually.

In any case, companies should expect heightened emotions involved in the process of terminating 20 or more people from the payroll. Security should be prepared (physical security along with digital and cyber-related) and precautions taken well in advance of any announcement as upset employees may seize assets. A plan to approach key employees beforehand can lead to a smoother process.

What it means for HR professionals

Close coordination with staff – both the ones who will remain employed and those being terminated – will produce the smoothest-possible transition for restructuring. HR professionals should be sensitive to the following:

• When terminated, employee livelihood is under threat. Before any steps are taken, employees should be categorised by job title, salary, and time spent with the company, so that correct calculations can be made on possible costs to the termination, especially with regards to severance packages.
• The HR department is the first to employees and the last to see them on their way out. HR professionals should be prepared with the key message and important questions that need to be addressed.
• Terminations should be done swiftly and be tightly managed, in a way that aligns with the urgency of change as well as the focus of the company.
• Timing is essential in large terminations. Often, companies give notice on a Friday, late in the day or before a holiday, believing that the staff will be in good spirits, and hence, less upset with the news. This is not always true. Moreover, disruptions during the weekend are less likely and not as intrusive.

Handling the remaining workforce

Seeing a large number of colleagues suddenly disappear may well affect the morale of the employees who still have jobs. Moreover, these employees may start to doubt their own job security, fearing that the next round of terminations is just around the corner. The following are few more ideas for managing the sentiment of those left standing:

• Provide training that will fill the skills gaps left by those now gone;
• minimise the risk of burnout, so no one feels overwhelmed;
• boost morale, by proactively fielding questions and concerns;
• and set a solemn, respectful tone in the workplace immediately after the termination by not making any superfluous expenditures, such as having a party or redesigning the office.

Conclusions

Companies need to prepare for the courses of action that proceed economic redundancy and implement plans and strategies that ensure smooth transitions from both a legal and a practical standpoint.

Article by Maarten Roos and Michael Wilder of R&P China Lawyers