Li Qiang is the owner of a company. Due to the poor market environment and economic downturn, many projects have been shut down, and he has no choice but to lay off employees. Li Qiang is very worried about how to carry out layoffs in a legal and compliant manner so that the company can avoid compensation or minimize it as much as possible.
I. Legal Basis
According to Article 41 of the Labor Contract Law: “In any of the following circumstances, where it is necessary to lay off more than twenty employees, or fewer than twenty employees but accounting for more than ten percent of the total number of employees of the enterprise, the employer shall explain the situation to the trade union or all employees thirty days in advance, listen to the opinions of the trade union or employees, and after reporting the layoff plan to the labor administrative department, the employees may be laid off:……(2) The production and operation have encountered serious difficulties;……”
II. Determination of “Serious Difficulties in Production and Operation”
The Labor Contract Law itself does not provide a clear definition of what constitutes “serious difficulties in production and operation.” It is necessary to refer to local regulations and judicial precedents. In specific cases, one can consult Abby Lawyer to confirm whether the enterprise meets the local standards for “seriously troubled enterprises.”
According to Article 2 of the Regulations on Economic Layoffs of Employees by Enterprises (Labor Department Document [1994] No. 447): “Where the employer is on the verge of bankruptcy and has been declared by the People’s Court to enter the statutory reorganization period, or the production and operation have encountered serious difficulties and have reached the standards for seriously troubled enterprises set by the local government, and it is indeed necessary to lay off employees, layoffs may be carried out.” Some localities have made local regulations on this matter and have made judgments on related disputes in judicial practice. These local regulations and court rulings can be used as references.
For example, according to Article 1 of the Notice of the Zhejiang Provincial Department of Labor on the Implementation of the Regulations on Economic Layoffs of Employees by Enterprises (Zhejiang Labor [1995] No. 2): “Due to market reasons, if the production tasks are insufficient for six months in two consecutive years, resulting in semi-suspension of production and no hope of turning around, the specific determination shall be made by the municipal (prefectural) government.” Another example is Article 3 of the Measures for the Implementation of Economic Layoffs of Employees by Enterprises in Hainan Province (Hainan Provincial Government Office [1995] No. 94): “If the enterprise has suffered continuous operating losses for four years (for newly established enterprises, after making up for losses in accordance with national regulations, continuous operating losses for three years), more than 80% of the employees are idle, and the enterprise is unable to pay the living expenses of the employees at the minimum living standard for 12 consecutive months,” these all fall under the circumstances of “serious difficulties in production and operation” as stipulated in Article 41 of the Labor Contract Law.
In addition, in the civil ruling (2021) Lu Min Shen No. 11408 issued by the Shandong High Court, the respondent submitted evidence such as notices of termination of distribution contracts by upstream customers, tax arrears notices, and statistics of personnel to be laid off, proving that due to serious difficulties in production and operation, and significant changes in the objective economic situation upon which the labor contract was based, making it impossible to fulfill the labor contract, the respondent’s termination of the labor contract with the applicant was not illegal. In the civil ruling (2020) Yue Min Shen No. 7788 issued by the Guangdong High Court, the respondent submitted evidence such as balance sheets, profit and loss statements, tax payment certificates, and audit reports, proving that the enterprise had been in continuous losses for three years and the number of employees had been decreasing, which was a situation of business difficulties. Therefore, it was determined that the respondent did not violate the law in terminating the labor contract.
III. Targets of Legal Layoffs
(1) Employees Who Cannot Be Laid Off
According to Article 42 of the Labor Contract Law: “Where the employee falls under any of the following circumstances, the employer may not terminate the labor contract in accordance with Articles 40 and 41 of this Law:
(1) The employee engaged in work involving occupational disease hazards has not undergone a pre-departure occupational health examination, or the employee suspected of having an occupational disease is in the period of diagnosis or medical observation;
(2) The employee has contracted an occupational disease or suffered a work-related injury in the unit and has been confirmed to have lost or partially lost the ability to work;
(3) The employee is ill or injured not due to work and is within the prescribed medical treatment period;
(4) Female employees who are pregnant, on maternity leave, or breastfeeding;
(5) Employees who have worked continuously in the unit for fifteen years and are less than five years away from the statutory retirement age;
(6) Other circumstances stipulated by laws and administrative regulations.“
If the enterprise violates the law by laying off the above-mentioned personnel, it shall bear legal responsibilities such as continuing to perform the labor contract or paying double the economic compensation as stipulated in Article 48 of the Labor Contract Law.
(2) Priority Retention of Employees
According to the second paragraph of Article 41 of the Labor Contract Law: “When laying off employees, priority should be given to retaining the following personnel:
(1) Employees who have signed fixed-term labor contracts with longer terms with the unit;
(2) Employees who have signed open-ended labor contracts with the unit;
(3) Employees whose families have no other employed members and have elderly people or minors to support.
If the employer lays off employees in accordance with the provisions of the first paragraph of this article and re-employs personnel within six months, they shall notify the laid-off personnel and give priority to re-employing them under equal conditions.“
It should be noted that in the cases handled by the author previously, if the original position of the proposed laid-off personnel no longer exists, there is no situation of priority retention.
Relevant Case: In the civil judgment (2024) Yun 06 Min Zhong No. 462 issued by the Intermediate People’s Court of Zhaotong Region (City) in Yunnan Province, it was pointed out that the defendant concrete company, due to business difficulties, no longer carried out concrete mixer truck transportation and pumping services, and there were no corresponding positions, so there was no situation of priority retention.
“Priority Retention” Does Not Equal “Prohibition of Layoff”
The employer has certain autonomous management rights to determine whether the proposed laid-off personnel belong to the “priority retention” category. During the layoff process, even if the employee meets the “priority retention” conditions stipulated in the second paragraph of Article 41 of the Labor Contract Law, the enterprise may still exercise its autonomous management rights based on the employee’s actual work performance. For example, if an employee significantly lags behind other colleagues in work experience, professional skills, and performance assessment, even if they fall within the scope of priority retention, the enterprise may still make a layoff decision based on overall operational needs.
Relevant Case: In the civil judgment (2024) Liaoning 14 Min Zhong No. 346 issued by the Intermediate People’s Court of Huludao City in Liaoning Province, it was pointed out that Article 41 of the Labor Contract Law stipulates that three types of people should be “preferentially retained” when laying off personnel, but compared with the prohibited layoff situations in Article 42, “priority retention” and “prohibition of layoff” are different concepts. Under equal conditions, if there are differences among workers in work experience, work content, qualifications, skills, performance assessment, and education, the employer needs to exercise autonomous management rights based on the actual situation. That is to say, if a proposed laid-off employee meets the “priority retention” conditions stipulated in the second paragraph of Article 41 of the Labor Contract Law, but has significant shortcomings compared with other employees in the above aspects, the enterprise may very likely exercise its autonomous management rights and consider that the employee should not be “preferentially retained.”
IV. Procedural Requirements for Legal Layoffs
According to Article 41 of the Labor Contract Law: “…where it is necessary to lay off more than twenty employees, or fewer than twenty employees but accounting for more than ten percent of the total number of employees of the enterprise, the employer shall explain the situation to the trade union or all employees thirty days in advance, listen to the opinions of the trade union or employees, and after reporting the layoff plan to the labor administrative department, the employees may be laid off…”
According to Article 4 of the Regulations on Economic Layoffs of Employees by Enterprises (Labor Department Document [1994] No. 447): “Where the employer indeed needs to lay off employees, the following procedures shall be followed:
(1) Explain the situation to the trade union or all employees thirty days in advance and provide relevant information on the production and operation status;
(2) Propose a layoff plan, which includes: the list of employees to be laid off, the timing and implementation steps of the layoffs, and the economic compensation methods for the laid-off employees in accordance with laws, regulations, and collective contract provisions;
(3) Solicit opinions from the trade union or all employees on the layoff plan and revise and improve the plan accordingly;
(4) Report the layoff plan and the opinions of the trade union or all employees to the local labor administrative department, and listen to the opinions of the labor administrative department;
(5) Officially announce the layoff plan by the employer, handle the procedures for terminating labor contracts with the laid-off employees, pay the economic compensation to the laid-off employees in accordance with relevant regulations, and issue a layoff certificate.“
In addition, some local governments have made more detailed regulations on the layoff procedures for employers. For example, the Shanghai Human Resources and Social Security Bureau’s Notice on the Reporting of Layoff Plans by Employers in Accordance with the Law (Shanghai HRSS [2009] No. 3) stipulates different reporting targets for layoff plans based on the nature of the employer, namely:
(1) The scope of acceptance by the Municipal Human Resources and Social Security Bureau includes:
(2) The scope of acceptance by district and county labor administrative departments includes all enterprises within their administrative regions that are not covered by the municipal labor administrative department. In the Pudong New Area, layoff reports from all enterprises other than central government-affiliated enterprises are accepted by the Pudong New Area labor administrative department.
For example, the Chongqing Labor and Social Security Bureau’s Notice on Strengthening the Supervision of Mass Layoffs by Enterprises in Our City (Labor and Social Security Office [2008] No. 292) stipulates that enterprises must “report the layoff plan to the labor and social security bureau of the district or county (autonomous county) fifteen days in advance.”
V. Calculation of Economic Compensation
When an enterprise legally lays off employees, it shall pay a certain amount of economic compensation. The compensation is calculated based on the employee’s length of service in the company: one month’s salary for each full year of service; if the service period is more than six months but less than one year, it is calculated as one year; if less than six months, half a month’s salary is paid.
According to Article 46 of the Labor Contract Law: “In any of the following circumstances, the employer shall pay economic compensation to the employee:……(4) The employer terminates the labor contract in accordance with the first paragraph of Article 41 of this Law;……” (Article 41 of the Labor Contract Law: “In any of the following circumstances……employees may be laid off:……(2) The production and operation have encountered serious difficulties;……”)
The method of calculating economic compensation: According to Article 47 of the Labor Contract Law: “Economic compensation is paid to the employee based on the length of service in the company, at the standard of one month’s salary for each full year of service. If the service period is more than six months but less than one year, it is calculated as one year; if less than six months, half a month’s salary is paid as economic compensation. If the employee’s monthly salary exceeds three times the average monthly salary of employees in the region published by the municipal government of the municipality directly under the central government or the city divided into districts where the employer is located, the standard for paying economic compensation shall be three times the average monthly salary of employees, and the maximum number of years for which compensation is paid shall not exceed twelve years. The monthly salary referred to in this article means the average monthly salary of the employee in the twelve months prior to the termination or expiration of the labor contract.“
VI. Legal Consequences of Illegal Termination or Dissolution of Labor Contracts
If an enterprise violates the Labor Contract Law and carries out layoffs without authorization, it shall pay double the amount of economic compensation as compensation to the laid-off employees.
According to Article 48 of the Labor Contract Law: “If the employer violates the provisions of this Law to terminate or dissolve the labor contract, and the employee requests to continue the labor contract, the employer shall continue to perform it; if the employee does not request to continue the labor contract, or the labor contract cannot be continued, the employer shall pay compensation in accordance with Article 87 of this Law.”
According to Article 87 of the Labor Contract Law: “If the employer violates the provisions of this Law to terminate or dissolve the labor contract, it shall pay compensation to the employee at twice the standard of economic compensation stipulated in Article 47 of this Law.”
As the person in charge of the enterprise, when facing the dilemma of a deteriorating market environment and the shutdown of projects, Li Qiang must recognize that legal layoffs are not only a necessary means to reduce costs but also a key to avoiding legal risks and maintaining the long-term credibility of the enterprise. Although the cold winter has arrived, those who comply with the law will survive. Only by making the legal bottom line the cornerstone of decision-making can the enterprise stabilize its foundation in a crisis and accumulate strength for future recovery.
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