China is not an employment-at-will jurisdiction and terminating China employees is nearly always difficult. To make things even more challenging, many foreign companies doing business in China manage their China affairs from afar. To prevent employment (and especially termination)-related problems, you need enforceable employment contracts and employer rules and regulations, and a good understanding of your China employees.
Let’s take a look at two China employment scenarios.
Scenario 1. The foreign parent company decides to close its China office due to lack of profits. Without consulting with its China employment lawyer, it sends a notice to its China employees about the imminent closure, saying it will pay statutory severance to all employees. Several employees immediately bring a labor arbitration claim against the company.
In this scenario, what the employer is attempting to do is a mass layoff. Before a China employer can initiate such a process, it should analyze whether its situation qualifies for a mass layoff under Chinese law. It must, among other things, review each employee’s situation to confirm whether it can terminate all employees as part of a mass layoff. For example, Chinese law prohibits an employer from laying off a pregnant employee. Employee mass layoffs are a big deal in China, and employers looking to do a mass layoff should have a solid plan in place before proceeding.
Scenario 2. The employer asks a long-term employee to resign so it can save the costs of retaining her as a full-time employee. The plan is to then hire her as an independent contractor right after her resignation.
This plan comes with major flaws. First, asking a long-term employee to resign is a no-go because China employees know that if they resign, they will not be legally entitled to statutory severance. Because of this, virtually no China employee will resign unless they have already found another employment opportunity or they plan to bring a claim against the employer for statutory severance, plus damages. Except for those circumstances, no China employee will be amenable to a forced resignation. Second, China dislikes independent contractors and misclassifying an employee as an independent contractor will get the employer into trouble. See Dangerous China Employee Hiring Myths.
Chinese authorities, arbitrators and judges usually consider terminating and then rehiring an employee as an independent contractor to be an effort to circumvent Chinese employment laws and they will rule against the employer. It does not matter whether the employee is happy with this new arrangement or not. Though it is understandable the employer wants to reduce its HR costs, certain costs cannot be cut (such as mandatory social benefit contributions) and the costs of violating the mandatory law is invariably much higher than any costs saved.
Acting in accordance with what is considered customary or acceptable in the locale of the parent company is not enough to keep you out of trouble in terms of China’s employment laws. Nor is just paying employees a good salary. To do well with your China employees, you need to be in full compliance with China’s national AND local employment laws and you should also seek to treat your employees per Chinese national and local employee culture.
