China - New Rulings In Beijing - Will They Make Restructuring More Difficult?
Legal News & Analysis - Asia Pacific - China - Insolvency & Restructuring
7 October, 2017
On 24 April, the Notice on Answers of Several Issues on the Application of Law in the Trial of Labor Dispute Cases (the New Rulings) was issued by Beijing High People’s Court and Beijing Municipal Labor Arbitration Commission jointly. The New Rulings, came into force on 24 April 2017, are intended to unify the standard of law enforcement in contentious employment issues in Beijing.
One of the matters dealt with by the New Rulings are the circumstances under which an employer can dismiss an employee the Article 40 (3) of Employment Contract Law (ECL) on the basis of a "major change".
Under Article 40 (3), an employer can terminate an employee unilaterally by giving 30-day's notice in advance, or after it pays the employee an extra month's wages, if there is a "major change" in the objective circumstances on which the conclusion of the employment contract is based. Article 40 (3) can be invoked where the "major change" results in the contract becoming incapable of performance and no agreement can be reached on changing the contents of the employment contract. Up until the publication of the New Rulings, according to Explanation of Several Provisions of the PRC Labor Law (Explanation) issued by the Ministry of Labor, a "major change" refers to a force majeure event or any other circumstances rendering some or all the terms and conditions of employment contract unenforceable, such as relocation of the business, merger with another entity, transfer of the assets of the employer and so on. As these grounds were quite broad, the "major change" exception was frequently used by employers wishing to restructure their operations.
However, the New Rulings restrict the "major change" exception to three circumstances:
- force majeure caused by natural disasters, such as earthquakes, flood, etc.;
- relocation, asset transfer or change of the line of production and cessation of production etc. caused by a change of laws, regulations and policies; and
- change of business scope of companies which are subject to special approval.
With reference to item (ii) above, under the New Rulings, the "major change" exception can only be used in a restructuring situation where the restructuring is made necessary by a change of laws, regulations or policies. This is a much narrower ground than was stipulated under the ECL and the Explanation as the restructuring must now be tied to a change in the law. As a result, it is likely going to be more difficult for employers to use the "major change" exception as a ground for termination when restructuring their operations.
Having said that, the New Rulings only apply to companies registered in Beijing. Accordingly, employers in other parts of the country may still be able to rely on the ECL and the Explanation with its wider definition of a "major change".
The links to the full China newsletter (September 2017 edition) and other articles in this newsletter can be found below:
Time limit for the application of enforcement of a foreign arbitral award in the China
Exploring the frontier in securities litigation in China - Key factors in ascertaining mis-representation in the Chinese security market
Punitive damages in contract and tort - The position in Singapore
For further information, please contact:
Richard Bell, Partner, Clyde & Co