Managing Your Labour Costs

China

The outbreak of COVID-19 has a significant impact on the world economy. Companies are encountering economic pressure and looking for possibilities to control and reduce labour costs. According to PRC labour law and currently applicable labour policies, the following measures can be taken into consideration for managing labour costs:

1. Reduction of salary and benefits

When encountering economic difficulties, reducing the remuneration of employees is one of the most efficient ways of cutting down labour costs. Unfortunately, reduction of the remuneration of an employee in China is not that easy because under PRC labour law, the consent of the employee is always needed except if certain statutory reasons exist, such as the employee’s work position is adjusted if he or she is proved to be incompetent to work or due to his or her heath situation, and according to the company’s remuneration system the employee shall receive a lower salary and/or less benefits according to his or her new work position. These two situations usually do not apply to many employees.  

During the COVID-19 outbreaks, according to the Opinions on Better Supporting the Stabilization of Employment Relationships and Resumption of Operation and Production of Enterprises during the Period of Prevention and Control of Coronavirus issued by the PRC Ministry of Human Resources and Social Security and other government authorities on 7 February 2020, the Chinese government allows companies suffering operational difficulties to reduce salaries by consulting with the employees in a collective way. This means companies do not need to get the consent from each individual employee about the salary reduction as normally required by statutory law but can do so upon discussing with the employees' representatives' congress or all staff, asking for their proposals and consulting with the trade union or the employees' representatives. This policy also applies to the reduction of benefits provided in the individual employment contracts, the Employee Handbook or company policies.

As to other benefits which are not provided in the individual employment contracts, the Employee Handbook or company policies, or which, according to the Employee Handbook or company policies, can be changed or cancelled by companies at their discretion, companies can change or cancel them without getting consent from the individual employees or making collective consultation with the employees, but companies must notify the employees.   

2. Avoiding overtime payments by arranging leave or adjusting the working time system

Under PRC labour law, employees are entitled to 5 to 15 days of statutory annual leave or additional annual leave as provided in the individual employment contracts, the Employee Handbook or company policies. Employees who are subject to a standard working time system normally work five days and rest two days per week. A company is obliged to pay compensation to the employees, if they fail to take annual leave due to reasons attributable to the company or to pay overtime payments to the employees who are subject to a standard working time system and did overtime work beyond the normal working hours.

According to PRC labour law, a company can arrange the employees to take annual leave by taking consideration of its operation needs. This policy is reiterated during the COVID-19 pandemic, i.e., a company can arrange the employees to take annual leave when the company does not have sufficient work load due to the impact of the coronavirus. As a result, the company can save labour costs since the company does not need to pay compensation for untaken annual leave or overtime payments if the company needs the employees to work more after the outbreak ends and the operations recover.

According to the Shanghai’s local policies, during the COVID-19 pandemic, a company can even comprehensively arrange the rest days of the entire year for the employees upon consulting with them, i.e., arranging employees to take more rest days, for example three days per week when the business is not busy, and then to take fewer rest days when the business fully resumes. As a result, the company can save labour costs by arranging the employees to work more in the future without paying overtime payments. Although other locations did not announce similar policies, however, legally speaking, companies located in places other than Shanghai can also adopt this measure upon consulting with their employees.

In some places such as Beijing and Suzhou, during the COVID-19 pandemic, companies being affected by the COVID-19 pandemic are allowed to adopt the comprehensively calculated working time system for employees. Such special working time system in the past was only applicable to some special industries requiring employees to work constantly or being impacted by seasons. By adopting this special working time system, a company may arrange the employees to take rest for a certain period of time when the company does not have sufficient work load and arrange the employees to constantly work for a certain period of time when the operation needs. As long as the employees' average working hours during a period such as one quarter or one year do not surpass eight hours per day, companies do not need to pay overtime payments. But according to the law, the adoption of such special working time system is subject to the approval of the competent labour administration authority.

3. Arrangement of stop of production

If the production of a company is not sustainable, a company may consider stopping its production for a while and ceasing the employees’ work. In such a case, according to PRC labour law, the company must pay full salaries to its employees in the first salary payment cycle, normally one month. Starting from the second salary payment cycle, the company may pay the employees who do not work only the living allowance arranging from 70% to 100% of the statutory minimum wage which is subject to the regulations of the local governments.

Such policies are applicable not only during but also after the pandemic. As to the stop of the production, a company can make its decision according to its Articles of Association at its discretion. 

4. Control of headcount

A company is entitled to decide its headcount at its discretion. To control labour costs, the company may consider limiting any new increase of its headcount. This can be achieved either by keeping a lid on new recruitments or by not renewing fixed-term employment contracts which are going to expire.

However, during the pandemic, except for the circumstances stipulated under Article 42 of the PRC Labour Contract Law such as an employee suffers from illness and is during the statutory medical treatment period or a female employee is pregnant or during the maternity leave or nursing period, if the fixed term contracts of employees who are coronavirus patients, suspected patients, close contacts or employees on lockdown expire during the quarantine or lockdown period, the company shall also not terminate the employment contracts of such employees due to expiration until the end of such period.

Further, in all locations other than Shanghai, under PRC labour law, except if any statutory termination reason is fulfilled, a company must conclude an indefinite term employment contract with the employee whose contract expires as required, if he or she has continuously worked for the company for a period of 10 years, or he or she has consecutively concluded a fixed term contract with the company twice after 1 January 2008. In such a case, the contract can only be terminated if the employee agrees or fulfils any other termination reasons. 

5. Reduction of workforce

Reduction of workforce is the most direct way of cutting down redundant employees and reducing labour costs. If a company cuts down 20 employees or 10% of its employees or more due to economic difficulties or change of business, this shall be deemed as mass lay-off and can only be done by following statutory procedures. The procedures include explaining the mass lay-off plan to the trade union or all staff, consulting with the trade union or the employees, filing the mass lay-off plan at the competent labour authority and notifying the employees 30 days in advance as well as paying the employees statutory severance payments. In practice, if the competent authority does not agree with the mass lay-off, it will not accept the filing of the plan. Therefore, the filing amounts to an approval process. During the pandemic, as required by the government, a company will get approval from the government on mass lay-off only, if the company proves that the mass lay-off is truly unavoidable after the company has taken various other measures such as shortening the working hours or reducing the salaries of the employees.   

Another statutory termination reason which may become relevant due to the pandemic is the termination of an employment contract due to the change of objective circumstances. I.e., if there is an objective reason causing the original employment contract unable to be continuously performed, and no agreement is reached on the amendment of the contract following negotiations with the employee, the company can unilaterally terminate the employment contract with the employee. In this case. the company should give the employee a 30 days’ prior notice or a one-month salary in lieu and pay statutory severance payments. Under PRC law, such facts as the relocation of the company or business restructuring, etc. qualify as an objective reason. During the outbreak, the objective reason should also not be a general one (such as the pandemic itself) but must be a specific one (for example a particular project the employee works for has been cancelled due to the pandemic).  

But please note that the employment contracts of patients, suspected patients, close contacts and employees on lockdown shall not be terminated due to the reasons of illness, incompetence, change of objective circumstances or mass lay-off during the quarantined or lockdown periods.  Such special protection also applies to employees fulfilling the circumstances under Article 42 of the PRC Labour Contract Law, i.e. employees who are sick or pregnant, etc.

Of course, a company can always terminate the employment contract with employees for other statutory termination reasons such as termination by agreement or termination due to the employee’s serious breach of company rules.

In summary, both during the COVID-19 pandemic and afterward, companies can adopt several measures in their daily work to control and reduce their labour costs. As to which detailed actions to take, companies will need to check their specific situations.