The Chinese employment and labour law has always been driven by the public policy to maintain social stability, which is the country’s top priority. During the COVID-19 pandemic, the employment relationship became a topic full of controversy since the previous commonly adopted law enforcement practice has not been ready in response to such acute situation. In this connection, the judicial interpretation from the State Supreme Court and local high courts will be playing a very important role in guiding law enforcement by issuing leading analyses on law application aimed at issues or concerns arising during this special period.
Near the end of April, the State Supreme Court and the high courts from Shanghai, Beijing and Guangdong all have produced their guidelines on coping with labor issues arising in relation to COVID-19. In this article, we would like to share some key takeaways from a lawyer’s perspective.
I Summary of Most Updated Judicial Interpretations
- State Supreme Court’s comments on potential unilateral terminations due to COVID-19
In accordance with Article 4 of the Guideline I on Civil Trials due to NPC (最高人民法院关于依法妥善审理涉新冠肺炎疫情民事案件若干问题的指导意见（一）), in reviewing labor disputes arising from COVID 19, Article 26 of the PRC Labor Law and Article 40 of the PRC Employment Contract Law shall be correctly applied. In addition, it is prohibited that an employer terminates an employee solely because he/she is confirmed to contract or suspect of contracting COVID-19, without symptoms, is isolated/quarantined, or is from the areas with a severe epidemic situation.
As you may understand, the termination due to a major change is under Article 26 of the PRC Labor Law and Article 40 of the PRC Employment Contract Law, reading as follows: an employer may terminate an employment contract by giving an employee 30 days’ prior written notice, or one month’s salary in lieu of notice, if a major change in the objective circumstances relied upon at the time of conclusion of the employment contract renders it unperformable and, after consultations, the employer and the employee are unable to reach an agreement on modification of the employment contract.
The application of termination upon occurrence of a major change remains disputable for years for its definition and application standards is being so arcane. Now, based upon the Supreme Court’s comments, the judicial examination on the same would be more tightened.
As Article 26 of the Interpretations regarding Some Articles in Labor Law issued by the Ministry of Labor (劳动部办公厅关于印发《关于<劳动法>若干条文的说明》的通知) in 1995 specifies, the “objective circumstances” stipulated in the PRC Labor Law refer to the force majeure events or other situations that render all or part of the terms and conditions of an employment contract unperformable, such as relocation, merger, transfer of major assets.
The COVID-19 outbreak can be accepted as a force majeure event in prevailing practice. However, the causation between a termination and COVID-19 still needs to be justified. In addition, before termination, it is required to conduct a sincere consultation to amend the original contract to make it performable on a continuous basis. Yet, how it should be undertaken is always in dispute, and each locality may have its own understandings, which we will discuss below.
Based on our experience in handling similar cases, the elimination of a position or a line of positions due to business needs may be construed as a subjective decision rather than an objective circumstance and therefore cannot be deemed as a major change; however, the elimination of an entire team/department, if supported by proven severe financial losses, is more probable to be accepted as a major change in current judicial practice.
- Key points of labor dispute trials abstracted from the opinions of the high courts of Shanghai, Beijing and Guangdong
For the sake of prudence and alignment, local high courts would like to produce and publish local guidelines together with local labor authorities: Shanghai produced 9 provisions, while Beijing and Guangdong 22 respectively, in each of their Judicial Opinions in Response to COVID-19. Strictly legally speaking, we cannot say that the PRC employment and labor law tends to be pro-employer over the period of time while its nature is whatever to protect employees. A more practical and realistic comprehension towards it is that each locality is trying to provide flexibility to employers in line with its law enforcement tradition and culture; meanwhile, the local governments are also trying to give employers more leeway to balance reasonable protection for impacted employees.
Shanghai was fiercely criticized by the local employers due to its quite aggressive interpretation of OT treatments during the delayed operation period from 3 Feb 2020 to 9 Feb 2020 previously (however, it is very interesting such interpretation made by a senior official from the labor authority in a press conference was not reflected in the latest guideline at all). As such, the Shanghai court and labor authority have been crafting their guidelines very carefully. In this connection, except for the rules explicitly expressed, the untold/implied parts should also be considered for interpretation.
- None of the provisions of the Shanghai Guideline touches upon major change-based termination under Article 40(3) of ECL. In this connection, we believe that this reason for termination is actually not encouraged to be applied under the background of COVID-19 and, therefore, would make employers face greater risks these days.
- Article 1 says, considering the COVID-19 is a special circumstance, if the employment can be fulfilled continuously upon examination, the termination decision may not be supported. This would be implying that: (i) the criteria proving an employment contract is unperformable under Article 40(3) of ECL would be tightened; and (ii) reinstatement would more likely be supported under wrongful termination than ever.
- Article 1 further says, for performance of an employment contract impacted by COVID-19, the parties may negotiate the timeslot, working location and delivery methodology to amend the original employment contract to facilitate the performance of the employment. As you may have noticed, the salary is not among the said items (which may be construed as an option for amendment of the employment contract where a major change arises), which, in conformity with Shanghai’s practice, means the employer cannot recite Article 40(3) of ECL to terminate an employee upon failure of salary renegotiation. In this connection, if the employer can neither reach an agreement on a salary cut nor afford the payroll any longer, liquidation or suspension of operation for local entity would be a legal option more suitable than direct termination.
- Article 4 confirms that different from other operational reasons, the treatment under suspension of operation caused by COVID-19 is negotiable; the living allowance rule will be applied after the first salary payment cycle if no agreement can be achieved. Per our understanding, by the name of living allowance, it would not be higher than the local minimal wage conditioned employee failed to render service as normal.
- Article 6 says that salary cut during COVID-19 shall undergo democratic procedure as required by law. Such interpretation actually compromises the previous rule – the salary cut should be made with the consent of an individual employee on a case by case basis as the majority’s will, obviously, cannot prevail over each individual’s freewill. As such, even the minority disagrees, the salary reduction may still apply to them if due process has been followed.
In the Beijing Guidelines containing 22 provisions, as most of its provisions have been known or enforced previously, we will highlight some latest updates for your information.
- In Article 1, it is the first time that Beijing has officially recognized the electronic employment contract expressly. However, as to how to make sure the legal effect of e-signature, it may still be subject to detailed explanation. Per what we hitherto know, the e-signature via a third-party platform would be more acceptable than an employer’s own system.
- In Article 10, for an employee who is a confirmed COVID-19 patient, a suspect patient, a patient without symptoms or a close contact, his/her salary during the period of quarantine or medical observation/treatment can exclude (i) flexible components (such as performance-based rewards, bonuses, commissions) and (ii) subsidies in close association with attendance (such as transportation allowance and meal allowance).
- In Article 13, for an employee who returns to Beijing from other places and thus should be quarantined for 14 days but cannot work from home, his/her salary can be paid in line with Article 10; however, if the employee left Beijing for personal reasons after 14 Feb and then returns to Beijing, the absence from work during his/her quarantine period can be handled as personal leave.
In Article 14, for the unique children care leave in Beijing, it does not mention the legal liability for failing to provide such leave to an employee. Instead, it says that the salary during children care leave is negotiable. If an employee actually has taken leave, but no agreement on salary is reached between both parties, the salary can be paid in line with Article 10. - In Article 15, for the suspension of operation caused by COVID-19, an employer can announce the same unilaterally.
- In Article 16, during the delayed operation period, an employer has the right to arrange for an employee to take annual leave (including statutory leave and company leave) at its discretion.
- In Article 19, for any positions other than special ones in relation to medical care, disease prevention or sanitization, if an employer fails to provide masks or disinfectant, an employee cannot terminate the contract in accordance with Article 38 of ECL – constructive termination – and thereby claiming for compensation.
Guangdong has also restated its previous known or enforced rules in latest guidelines. However, compared with those of Shanghai and Beijing, Guangdong’s implications seem more pro-employer as more termination possibilities have been discussed therein.
- In Article 11, if an employee involved refuses to cooperate with disease control measures promulgated by the local government, thereby affecting his/her employer’s operation or in violation of the employer’s policy, the employer may recite summary dismissal under Article 39 of ECL.
- Article 13 says that, if (i) impacted by COVID-19, an employer’s business operation is on the verge of/undergoing hardship; and (ii) it fails to reach consensus on taking self-help remedies like salary cuts, shifts, standing-by but no work, the employer may terminate the employee by reciting major change-based termination under Article 40(3) of ECL, which makes a great difference, between Guangdong and Shanghai, Beijing.
- In Article 14, for the suspension of operation caused by COVID-19, within the first salary payment cycle, the salary should be paid normally; when it enters into the second cycle and onwards, the parties can negotiate a new salary level that solely applies to the period. If fails to reach an agreement, the employer may terminate the employee by reciting major change-based termination under Article 40(3) of ECL, affording employers an important termination possibility.
II Employer’s Actions and Options
- Salary cut negotiations
In previous practice, for the salary cut under acute situations, it should undergo one-by-one communication and an employee will be the decision maker if he/she disagrees with the salary cut.
However, during this COVID-19 outbreak, employers are afforded some extra convenience in termination via democratic process in Shanghai, or the leverage of negotiation to make use of major change-based termination in Guangdong.
Here are some best practices we recommend for your reference:
- A board resolution regarding salary cut and potential position elimination should be duly made. If possible, a financial report that can tangibly display the adverse impact of COVID-19 to the business and pertinent job positions should be attached;
- This board resolution will be circulated and deliberated in line with democratic process stipulated in Article 4 of ECL;
- Via face-to-face meeting or sending emails, employees’ acknowledgement and consents on their employer’s decision can be collected in a writing form.
This combination strategy would be suitable for practice in many local jurisdictions as it absorbed the best practice in the past and current guidelines in a streamlined way.
- Redundancy
Based on our experience, the economic retrenchment stipulated in Article 41 of the ECL is less likely to be approved, which thus is not the mainstream approach in prevailing practice. Instead, one-on-one mutual termination by batches in combination with major change-based termination is widely adopted.
During the negotiation, it is a commonplace for employees to demand more money beyond the scope as stipulated in the law. It is advisable to plan proactively and prepare countermeasures in advance. Unless the budget is unlimited, the possibility of failure to reach a consensus does exist. Therefore, in contrast to taking an all-or-nothing bet, it is necessary to prepare a Plan B as an alternative option. The communication concerning ER matters are always procedure-orientated and need to be implemented with structures or designs clearly, and that is why legal elements shall always be considered.
In the case that no agreement can be reached through negotiation, the potential unilateral termination will become a leverage for Plan B. In the event of a termination due to major change, the following procedures or evidence shall be properly fixed:
- The employee is aware that a major change has occurred;
- The employee knows that his/her position or the department concerned has been eliminated (or other facts that lead to the failure to continue to perform the original employment contract);
- The employee knows that the employer has provided alternative opportunities, however failed.
Please again note that, if the number of impacted employees is substantial subject to the internal guideline of the local labor authority, though it might not the economic retrenchment defined by law, it is still highly recommended to undertake proper communication with the local labor administrative department in advance.
Potential employer liabilities
According to a Q&A from the Ministry of Human Resources and Social Security in February, except (i) as otherwise stipulated in local work-related injury rules and (ii) for special positions of medical care, disease prevention or sanitization, the infection of COVID 19 can hardly be confirmed as a work-related injury.
However, we would be a little reluctant to conclude that our assertion is solely from an employment and labor law perspective and cannot prevent potential cause of action from tort law on the grounds of employer liability. Therefore, to avoid this, necessary proactive protection measures for and travel restrictions upon employees are still highly advisable.
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