What’s the significance of termination for ‘material change in objective circumstances’ to employers?
Employers’ unilateral termination of employment contracts is subject to strict requirements under China’s labour law. Employers are allowed to unilaterally terminate employment contracts only under the circumstances specified in the labour law. Among these circumstances, article 40 item (3) (ie material change in objective circumstances) and article 41 (ie mass layoff) of the PRC Labour Contract Law are the legal grounds for employers’ unilateral termination due to the change of their business or financial condition, while the other circumstances are attributable to employees, either because of the employees’ misconducts (such as material breach of employer’s rules or policies) or because of their failure to do the job (such as incompetence for work or becoming unable to do the job due to physical condition). Over the past few years, some employers went through organisational restructuring and cut personnel due to the Covid-19 pandemic, struggling economy, and scientific and technical innovation. Many of them have questions about how to terminate employment contracts for material change in objective circumstances.
What are the conditions for ‘termination for material change in objective circumstances’?
Article 40 item (3) of the Labour Contract Law provides that where the objective circumstances, relied on which an employment contract was concluded, changed so materially that the continued performance of the employment contract becomes impossible, and, after consultation, the employer and the employee failed to reach an agreement on the amendment of the employment contract, the employer may unilaterally terminate the employment contract.
According to this article, employers’ termination for ‘material change in objective circumstances’ is subject to the conditions that the continued performance of the employment contract was made impossible by the material change in objective circumstances and the employer and the employee failed to reach an agreement on the amendment of the employment contract after consultation.
If the above conditions are met, the employer may unilaterally terminate the employment contract through a 30-day’s prior notice to the employee and should pay the employee compensation for termination according to the law. Failing to send the 30-day’s prior notice to the employee, the employer has to pay the employee an additional month’s salary in lieu of the notice.
Any examples for ‘material change in objective circumstances’?
The Labour Contract Law doesn’t define ‘material change in objective circumstances’. According to the Explanation on Certain Clauses of the Labour Law released by the former Ministry of Labour, ‘objective circumstances’ should refer to force majeure events or other situation which makes the performance of all or any part of an employment contract impossible, such as relocation, merger, and assets transfer, excluding the objective circumstances where mass layoff under article 41 of the Labour Contract Law should apply.
The above provision gives definition and examples of ‘objective circumstances’ but doesn’t exhaust all possible objective circumstances. In judicial practice, courts’ interpretations on ‘material change in objective circumstances’ are different.
How do the interpretations on ‘material change in objective circumstances’ differ among cities?
We take the judicial practice in Beijing and in Shanghai as an example:
In Beijing, usually, employers’ voluntary adjustment of business can hardly be deemed as material change of objective circumstances, while employers’ relocation or asset transfer caused by the change of law or other changes beyond the control of employers are more likely to be deemed as material change of objective circumstances.
In Shanghai, ‘material change of objective circumstances’ is interpreted by courts in a way more friendly to employers. Employers’ voluntary adjustment of business and cancellation of departments and positions in response to the market and economy change is usually considered by courts as ‘material change of objective circumstances’.
How should employers consult with employees about the amendment of employment contracts?
When consulting with employees about the amendment of employment contracts, employers should prepare and send to employees a letter of intent on the mutual amendment of employment contract. This letter of intent should set forth the background for the material change of objective circumstances, the amended terms of the employment contract, which may include the place of work, position, and remuneration, and the deadline for the employees’ sending back their feedback on the letter of intent, etc.
It’s worth noting that the amended position and/or remuneration may be lower than the current position and/or remuneration of employees, however, in judicial practice, labour arbitration tribunals and courts tend to review whether the proposed amendment is appropriate.
If employees accept the proposed amendment of employment contracts, employers and employees may enter into agreements on such amendment and then follow the amended terms; if employees refuse the proposed amendment, employers have the right to unilaterally terminate employment contracts.
Is the offer of a ‘standby position’ considered consultation about the amendment of employment contracts?
In practice, employers may have no alternative positions for employees. Some of them consulted with employees about the amendment of employment contracts by offering the employees a ‘standby position’. Staying on a ‘standby position’ means the employees don’t need to work for the employers and the employers reduce the employees’ wage during the standby period. Some employers pay employees the minimum city wage during this period.
It’s worth noting that courts’ opinions on whether the offer of a ‘standby position’ is a way to consult about amendment of employment contracts differ among regions. Employers should be cautious about offering a ‘standby position’.