Author: Peng Bo (James Peng), Lawyer
【Summary】Article 41 of ECL provides both substantial elements and procedural elements in certain circumstances, which are required for an employer to carry out redundancy In P. R. China. This article analyzes main questions concerning redundancy based on the nature of legislation purpose and the criterions on substantial and procedure elements as a guide to companies who plan to carry out redundancy.
Raise of Questions by a Case
Case: In May 2013, an electronic company in Dongguan planned to dismiss eight employees on the ground of rapid reduce of product orders and serious business loss. On May 15, the company submitted the Redundancy Plan attached Settlement Plan and Severance Payment Standard for laid off Employees, and report to Labor and Social security Authority of Dongguan. On May 16 and 17, the Redundancy Plan was approved respectively by the local Foreign Business Trade Union and the Authority. On June 17, the company terminated the eight employment contracts and paid off severance payments accordingly. On June 18, the company also communicated with the employee representatives. Since no settlement was achieved after negotiation, the laid off employees asserted that the redundancy was illegal, and filed an arbitration application to the Labor Dispute Arbitration Commission to request the employer to undertake the penalty compensation for illegal termination.
Analysis and Some Thoughts
1. Nature of Legislation Purpose of Article 41 of Employment Contract Law
The legal ground of redundancy is Article 41 of Employment Contract Law (abbreviate into ECL hereinafter), which provides that the employer which plans to dismiss employees of 20 persons or more, or less than 20 persons but accounts for more than 10% of the total number of the employees may carry out the redundancy after communicating with the Trade Union or all employees 30 days in advance, reporting the Redundancy Plan to the local Labor and Social Security Authority under the following circumstances: (1)restructuring pursuant to the Enterprise Bankruptcy Law; (2) serious operation difficulties; (3) still be necessary to carry out redundancy even after changing the employment contracts due to the reason of production transformation, significant technological innovation or business transformation; or (4) impossibility to continue the performance of the labor contract signed because of the significant changes in terms of the economic situation. In comparison to the provision under Article 27 of Employment Law (abbreviate into EL hereinafter), the changes may be found as follows:
(1) Substantial elements of redundancy are added and specified, i.e., two statutory conditions of which circumstances are expressed: (a) When enterprise switch to other products, or have a major technical innovation, or operating procedure adjustment, it still be necessary to carry out redundancy after altering the labor contract. (b) When other economic conditions which was the labor contract based on with drastic change lead to the labor contract cannot be fulfilled.
(2) Procedural requirements for redundancy are loosened up. EL provides that the employer which plans to carry out redundancy shall communicate with the Trade Union or all employees 30 days in advance before reporting the redundancy plan to the local Labor and Social Security Authority. ECL adjusts the above provisions, in which it clarifies that the employer which plans to dismiss employees of 20 persons or more, or less than 20 persons but accounts for more than 10% of the total of the employees shall carry out the redundancy according to the above procedures, but the procedure is not necessary in terms of 20 laid off employees, or accounts for no less than 10% of total employees.
(3) The social responsibility of the employer carrying out redundancy is supplemented in ECL. First, ECL adds the restrictions for the redundancy, i.e., giving priority of retaining to the specific situations such as the employee who has concluded a fixed and long term employment contract with the employer. Second, more details is specified for recruitment in the six months after the redundancy, i.e., the employer which plans to recruit during such time shall notify the laid off employees, and give priority to such persons under the same conditions.
The author considers that the changes shows the legislation purpose of Article 41 of ECL, which the company shall be entitled to saving itself when encountering serious operation difficulties in fierce market competition by means of carrying out redundancy with loosened-up procedure and less government’s inference. Furthermore, companies are encouraged to reform and innovate so as to reduce labor costs and improve market competitiveness, which it may leads the occurrence of the layoffs . Meanwhile, regarding social responsibility of an employer are added in ECL to protect the following persons from being dismissed: the employee who has worked for a long time for the employer, the employee who is with poor living conditions, and the employee who is old, weak, sick, disabled or pregnant, which prevents employers from abusing their rights of redundancy so as to ensure fairness and social stability.
2. The Identification of Substantial Elements of Serious Operation Difficulties
There are mainly two questions regarding substantial elements of the redundancy in the name of serious operation difficulties, one of which is that shall the redundancy be identified and approved by relevant authorities, and the other is that what the detail criterion on identifying serious operation difficulties is.
(1) Shall the redundancy in the name of serious operation difficulties be identified and approved by the authorities?
The nature legislation purpose of Article 41 of ECL is that a company shall be entitled to saving itself by means of carrying out redundancy to avoid deterioration in operations. As regards of abusing the right of redundancy, the restriction of the range of dismissed employee instead of direct interference by the approval authority is set. Article 41 of ECL doesn’t require the identification of serious operation difficulties to be approved based on above reasons, which is reasonable and practical. Thus, so far as I thought, the company is entitled to launch the redundancy procedure without identifying serious operation difficulties by competent authorities.
(2) Criterions on serious operation difficulties
Even though serious operation difficulties are not required to be identified by competent authorities, it should have the basic characteristics and indicators. Before the enforcement of ECL, some regulations on redundancy in details in Beijing, Shanghai, Tianjin, Qingdao stipulate some specific indicators. After the enforcement of ECL, though these criterions have certain reference value, they are not completely reasonable by one reason which illegally reducing or not paying off employees’ wages randomly cost highly penalty compensation. As regards writer’s thoughts, identification can be conducted based on the following indicators: (a) huge deficit in consecutive years, which has serious influence on the company’s normal operation; (b) continuous sharp reduce of production orders in an manufacturing company, and no signs of recovery; (c) reducing numbers of employees gradually without recruiting basically; (d) obvious reduce of overtime and overtime pay; (e) reasons that everyone knows may leads to the deterioration of the operation, etc..
Looking into the case mentioned above again, the electronics factory mainly produces electronic components, most of the products are exported and its main customers are NOKIA, SONY, PANASONIC and other companies of which have a large decline in operation incomes. In arbitration or litigation caused by the redundancy, the company shall at least submit documents of recent years includes the financial audit reports, financial statements, tax payment receipts and other financial data; illustration of comparison of quantities of orders; illustration of situation and comparison of recruitment; employee roll; recording situation of employment contracts; illustration of situation and comparison of employees’ salary payments; illustration of comparison of overtime payments; the background information and news reports on deterioration of the company’s operation situation; and other evidences of the present situation and reasons of the company’s serious operation difficulties.
3. Procedural Element of Redundancy
There is a question that only 8 employees (under 10% of the total number of employees) were dismissed in the redundancy, is the company entitled to carrying out the redundancy without reporting the authorities?
How to understand the number or proportion requirement of the Article 41 is the substantial element or the procedure element in the application of redundancy. In practice, the mainstream perspective and popular employment law theory is that ‘redundancy’ is the behavior of terminating employment contracts with employees during a certain time on the ground of statutory circumstances, in which the number of dismissing employees meets or exceeds that provided in the law.
However, the author would not agree with the above perspective. As mentioned before in this article, Article 41 of ECL is meant to loosen up the procedural requirements, which means, only the number of which meets a certain number or proportion provided shall be required to notify and report to the local labor and social security authority in advance. The number does not up to the range under Article 41 of ECL, shall not be denied or prohibited, i.e., in such circumstance, the company may carry out the redundancy as long as it meets the corresponding substantial elements. It’s worth noting that Propaganda Outline of ECL of the People’s Republic of China issued by the Ministry of Labor and Social Security in 2007 holds the same view.
To sum up, a company could base on its own judge in identifying serious operation difficulties so as to carry out redundancy. Meanwhile, in a labor arbitration or litigation, the company shall bear the burden of proof on such fact completely. Further, even though the number of dismissed employees doesn’t meet the standard number as provided in Article 41 of the ECL, a company may start the procedures of redundancy legally.
 See the No. 25 Document issued by the Ministry of Labor and Social Security , i.e., Notice on Printing the Propaganda Outline of ECL of the People's Republic of China.
 See Article 3 of Measures on Redundancy of Enterprises in Beijing.
 See Article 2 of Measures on Redundancy of Enterprises in Shanghai.
 See Article 6 of Interim Measures on Redundancy of Enterprises in Tianjin.
 See Article 4 of Measures on Redundancy of Enterprises in Qingdao.
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