Massive Terminations: A 2015 Key Issue for China Labor

“Massive terminations” occur in China when an employer terminates more than 20 employees or more than 10 percent of its total employees at one time. This includes official layoffs with advance approval from local government, unilateral terminations in certain legal situations (ex., bankruptcy or liquidation of a company) and terminations through mutual and individual employee negotiations. Even though there are no official statistics on massive terminations of employees in China, recent news reports indicates an increase based on overseas investment leaving China. The following provides an overview of some of the characteristics of massive terminations, and the issues companies with Chinese employees should consider in implementing a massive termination.

Massive Terminations Are Occurring In Different Industries

During the 2008 financial crisis most massive terminations in China took place within companies in export-orientated industries. Due to shrinking demand for exports in 2008 many export-related companies lost their orders from overseas purchasers and were forced to lay off employees. In 2015, however, more industries are involved and the reasons for massive terminations appear to be more complicated.

First, a number of different industries appear to be interested in cutting labor costs in 2015 due to the slowdown of the Chinese economy and the overall global economy. These industries include oil-related industries and finance industries.

Second, many believe that China’s 2008 Labor Contract Law has increased labor costs. Manufacturing companies, especially labor-intense manufacturing companies, have chosen to move from China to other countries with lower labor costs like India or countries in Southeast Asia. Some well-known foreign manufacturing companies have moved their factories back to their home countries in the United States, Korea and Japan. These moves have resulted in massive terminations.

Third, some companies have chosen to lay off employees as part of changing their business model in China for compliance-related reasons. This is a new reason, but very common in 2015, particularly for overseas investors in pharmaceutical industries.

Collective Labor Disputes in Massive Terminations

Collective labor disputes often occur in connection with massive terminations. These disputes can involve strikes and the destruction of company assets.

For historical reasons, Chinese workers do not easily accept the concept that cutting costs for the long-term survival of the company is a valid reason for layoffs. Traditional Chinese workers are proud of treating their factories as “their homes.” Though this concept is less popular among younger workers, it still has certain influence among employees when dealing with massive terminations, particularly if the employees have worked in one factory for a relatively long period of time.

Most overseas investors provide the legal minimum severance pay to employees when conducting a massive termination. However, the process is usually time-consuming. An official layoff procedure with advance government approval can require at least three–six months from the beginning to end. For massive terminations that involve individual negotiations with each employee, the average time is at least three months.

Cooperation by Local Government

One of the tricky parts in dealing with massive termination issues is the local government’s attitude. If the local government is supportive and willing to provide necessary onsite assistance, the negotiation with the employees may be easier. However, local government officials sometimes complicate the termination process. For example, local officials may not be happy to see the employer providing higher severance packages to employees during a massive termination. The concern is that other employers in the area may complain about the local officials setting a bad precedent by approving a higher severance package to the employees, which may increase the expected severance package levels in that area. In addition, most local government officials are reluctant to officially approve a layoff plan during a sensitive time period (ex., before the national holidays or Spring Festival), even if the employer has sufficient reasons to implement the massive termination. Thus, the local government’s attitude is an important factor to consider when deciding the timing and options for a massive termination.

Conclusion

Massive terminations are a key issue for companies with Chinese operations in 2015. There are numerous issues employers must consider before commencing a massive termination. For more information on these issues, please contact the author or any of the attorneys in McDermott’s China Law offices.