Strategies for Multinationals to Mitigate Risk in China’s Uncertain Business Climate

The economic effects of the COVID-19 pandemic and the change in geopolitical landscape have forced employers globally to reassess and re-evaluate their business priorities. Many are looking to stabilize or reduce their operations and headcount in various jurisdictions, including China, and are asking questions about layoff strategies and requirements.

To help you get on a jump start on such thought exercises, here are four key tips for approaching business change in China right now.

1. Remember that cost-cutting is not a valid ground for termination in China. Employment laws in China set strict limitations on employment terminations and there is no such concept of “termination at will” for full-time employees. Employers must have a statutory grounds to terminate employment, which includes termination upon mutual agreement (no collective consultation process is required). Two options for terminations that are effectively mass dismissals include: 1) showing a “major change” in objective circumstances affecting the company (again, cost-cutting does     not count) and 2) using the “mass layoff” grounds that has specific headcount triggers and requires adhering to a prescribed process.
2. Your company’s termination strategy may need to vary by city. Courts in different cities interpret the grounds discussed above differently (e.g. Beijing tends to have a high threshold for what qualifies as a “major change,” Shanghai courts tend to disfavor mass layoff filings). Thus, it is not uncommon to use different grounds for termination in different locations based on counsel’s recommendations.
3. Maintain communication with the local government. It is a best practice to keep the local government agencies and labor authorities—and even labor unions—apprised at a high level of any plans for major layoffs. They are incentivized to maintain labor stability and will appreciate being kept in the loop even when not specifically required.
4.  Plan execution and implementation details carefully with counsel. For the announcement of any significant or substantial change, it is important to have someone sufficiently senior and trusted by the employees to deliver the news. This not only shows respect to the impacted employees but underscores that the announcement is a firm and final decision. Depending on the circumstances, counsel may advise you to consider engaging a PR company and/or private security to support the communications process.

Also, be certain to secure company chops, business licenses and confidential information in advance.

Caroline Burnett and Joseph W. Deng are attorneys with Baker McKenzie in San Francisco. Susan Eandi is an attorney with Baker McKenzie in Palo Alto, Calif. © 2024 Baker McKenzie. All rights reserved. Reposted with permission of Lexology.

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