Dealing with a Chinese Workforce - The "Soft Layoff"

A US company starts a Chinese manufacturing subsidiary and quickly takes on 50 or more employees. Then growth turns to decline. How to cut back the workforce in China? This must be handled very differently than in the US.

China’s Labor Code provides a series of employment periods, leading eventually to what is known in the US as university “tenure” – a form of lifetime employment guarantee. Although this is rare in the US, most Chinese employees who work long enough for an employer can achieve quasi-permanent status, and then the employer cannot simply give a pink slip to 20% of the workforce, without incurring serious problems and costs. Employers faced with revenue decline thus think creatively how to meet the letter of Chinese law but avoid bankruptcy. The “Soft Layoff” is a phrase used to describe a variety of measures used by companies to shed workers without need to pay large severance amounts.

Lehman, Lee & Xu, an excellent Chinese domestic law firm, described in its June 2009 China Labor Insights newsletter “the top three methods” employers are using. (See www.lehmanlaw.com).

1. Salary reduction – An employer informs the employee that the relationship continues but the rate of pay or number of hours is reduced.
2. Change of duties – An administrative manager, for example, is assigned to a factory line job.
3. Change of work location – A worker in the Pudong area of Shanghai is told to move to Wuhan, where a job awaits (at lower compensation, given cost of living and wage rate differences).

An employer intending to take these or other actions short of termination cannot assume that a Soft Layoff will not be challenged in the Chinese Labor Courts. Advice from a strong Chinese law firm in the specific jurisdiction of the workforce is well advised.