Navigating Workforce Reductions in China in a Difficult Time

Recent geopolitical shifts, economic volatility, and turbulent China-U.S. trade relations are prompting global companies in China to reconsider their operational strategies, including workforce reductions and market exits through voluntary liquidation.

HR Policy Global’s Take: Companies considering corporate restructuring or facing financial distress need to know how to navigate complex legal procedures for terminating employment contracts and dissolving corporate entities. A Chinese law firm, a member of L&E Global, provide some important considerations:

• Assess the Situation: Evaluate the need for workforce reduction and determine if voluntary liquidation is necessary.
• Legal Consultation: Engage legal departments to understand the implications of the Labor Contract Law and to ensure compliance with local laws and regulations.
• Develop a Termination Plan: Create a comprehensive plan that includes:
  1. Termination and compensation plans
  2. Preparing legal documents (e.g., termination notices, agreements)
• Negotiate with Employees:
  1. Seek mutual termination agreements where possible to minimize disputes.
  2. Be prepared to offer severance packages, typically one to two months' wages, to facilitate smooth terminations.
• Calculate Severance: Ensure severance is calculated based on the employee's length of service, including all cash income earned, but capped at three times the local average salary.
• Communicate Effectively: Facilitate clear communication with employees regarding termination plans and compensation amounts.
• Liaise with Labor Authorities: Coordinate with relevant authorities to comply with regulatory requirements.
• Implement Termination Processes: Provide on-site support to execute employment terminations smoothly.
• Address Special Cases: Consider special rules for employees with service before 2008 and those nearing retirement age, as different rules may apply.
• Manage Statutory Damages: Be aware of statutory damages implications for unlawful termination claims and prepare accordingly.

Consider Tax Implications: Inform employees about potential tax breaks on severance payments and ensure compliance with tax laws.