Legal Risk of Layoff and Prevention of the Risk

馬亮

Abstract: The primary goal of business management is to create economic profit, so its a major study seeking the ways of making good profit with low cost. Among such ways, layoff is a key measure for the enterprise to cut down cost and expense. The writer, from legal point of view, studies the layoff risk and its prevention, approaches the relevant problems by the discussion on the two major topics—“Can enterprise terminate labor contracts when workers refuse layoff” and “Is there any legal risk if the enterprises conduct layoff in conformity with laws”, and tries to work out a best legal prevention.

Key words: layoff, legal risk, law of contract, legal risk aversion

一、Foreword

Reducing staff for higher efficiency has become one of measures for many enterprises, but it is also a double-edged sword. Meanwhile, because of interests of the enterprise and the employees which would be impacted by staff reduction, and reduction conditions and procedures which are strictly stipulated by laws, serious breach may occur if employers have carelessness in the reduction. Therefore, employers have to find out a right way to correctly reduce staff according to relevant laws so as to cut down legal risk and negative impact.

二、 Can enterprise terminate labor contracts when workers refuse layoff?

In a word, an enterprise shall not kick off staff reduction without the conditions for it, or it would be punished by the laws, including paying indemnity for the illegal reduction and salary loss, as well as receiving administrative punishment. So identification of the conditions for layoff is an important legal proposition.

1. Conditions for Layoff

In Article 41 of Law of Labor Contract specifies economic layoffs lawful conditions, among which is the stipulation that the employer shall be an enterprise conducting reorganization according to Law of Enterprise Bankruptcy. Because Law of Enterprise Bankruptcy has been modified and implemented, the enterprise has to submit bankruptcy application to the court before the formal process, and the reorganization process for bankruptcy shall be judged by the court. After the creditors meeting and relevant processes are finished, the enterprise can start economic layoff. Therefore, there is little controversy for such stipulation and few labor arbitration and lawsuit occur in relation to it.

The second condition stipulated by the Law of Labor Contract is that the enterprise has serious operational difficulty. The law and related regulations dont explain “serious operational difficulty”, so many enterprises take advantage of the loophole. Of course, whether its a “loophole” is debatable and open for discussion. Anyhow, often enterprises reduce staff relying on the condition without any written document about “serious operational difficulty” sent to the workers to be laid off. So dispute rises against such situation. In the relevant judicial proceedings, according to the allocation of burden of proof, the enterprise shall provide proof for “serious operational difficulty”. How many enterprises can do that? In fact, financial reasons and data from operation management are needed to prove “serious operational difficulty”, and these things are hard to get in practice. Few enterprises have their accounts audited by an accounting firm before layoff. Therefore, relevant legal risks occur. There is a high possibility for enterprises to lose in labor arbitration and labor lawsuit for such cause, and these enterprises would suffer a serious loss.

The third condition is that a layoff is still needed after modification of the labor contract caused by change of production line, major technical innovation or operation adjustment. Compared with the second one, there are few difficulties in indentifying the third condition, so disputes relating to it rarely occur. After all, there is a low possibility for common enterprises to conduct production line change, introduce major technical innovation or adjust operation, so such cases are not frequently seen. The layoff reported not long before which was conducted by Motorola who sold its cell phone unit is supported by the third condition. However, there is a prerequisite for conducting layoff based on the condition, that is, the two parties shall have a negotiation before the staff reduction which shall not start if agreement is reached. If the enterprise fails to prove that it has had negotiation with workers, it may be punished by the laws due to the defect in legal process. Therefore its another reason for the legal risk.

The last condition is that labor contract cant be implemented because the objective economic conditions for its conclusion have changed materially. To explain the third condition the law adopts enumeration. Its impossible to enumerate all situations tally with the condition because some situations occur in practice after the condition is stipulated, and law makers cant predict them. So for the sake of legal preciseness, a recapitulative clause is stipulated. In fact its not practical for preventing legal risk, because there are various presentations for “material change of objective economic conditions”, impossible for the law makers to provide a concrete stipulation for it, and practical way is to providing explanation proving that its a material change according to actual cases. Due to the uncertainty of the judgment of the arbitrator and judge on the explanation, we cant measure the legal risk.

After the condition for economic is got, the layoff is conducted according to the processes stipulated. There are some principled stipulations in Law of Labor Contract.

2. The Processes of Layoff

“If the number of employees to be reduced is more than 20, or less than 20 but takes account over 10% in total amount of the employees, the enterprise shall provide information note to the labor union or all employees 30 days priority to the layoff. After taking advice of the labor union or all employees and submission of the layoff plan to administrative department of labor, the layoff is allowed to start.” This clause stipulates the number restriction and processes. In practical cases, the enterprises usually hold a mobilization meeting for the layoff or an explanation meeting, and ask all employees to attend. At least they would ask the employees to be laid off to attend and sign in, and send the related documents to the attendees. Similar to the layoff, it shall be conducted 30 days in advance. If not, what is the legal result? According to current laws, there are not stipulations about invalid layoff. Nevertheless, actual processes shall be in conformity with those stipulated because negative social impact must be avoided. Material justice also requires process justice, which shall be attached importance to by the enterprises. Additionally, there are controversies about the plan submitted to the labor administration. Is it for approval or registration? What type shall the submitted report be? What if the administrative departments of labor refuse to receive? All of these need explanations given by labor administration, and the enterprises have to be act discreetly before clear explanations are provide.

3. Layoff Prohibition

The layoff prohibition means the legal provision made for prohibiting the enterprise to lay off certain people. Such provision in Law of Labor Contract is made to maintain social stability and protect disadvantage labors. The content for it is the same with that for dismissal prohibition, that is, the employees who work on the job exposed to occupational disease and has not had occupational health examination before leaving, suspect occupational disease sufferers who are still in the diagnostic stage or medical observation period, the employees who acquired occupational disease when working for the enterprise, the employees who were injured for work and confirmed total or partial lack of labor capacity, employees who are receiving medical treatment for his/her sickness or injury which was not caused for work, female employees who are in pregnancy, perinatal period or suckling period, and employees who has been working in the enterprise for 15 years with their statutory retirement age less than 5 years off are not allowed to be laid off for reduction.

However, as an organization seeking economic profit, the enterprise has conflict with the goal of such provisions. An enterprise always tries to keep employees creating profit while lay off those with low efficiency for downsizing. The protected employees usually are the workers the enterprise wants to lay off, so conflict raises and the workers have to try everything to resist the layoff. The news reported not long before that female employees got pregnant to avoid being laid off is an example explains it well. Against such condition, women usually suffer more serious discrimination when looking for a job, which is a negative impact directly caused by the laws.

4. Preferential Kept Employees

According to Law of Labor Contract, following workers shall be preferentially kept when the enterprise conduct the layoff: the employees who concluded a long-term and fixed term labor contract, the employees who concluded a non-fixed term labor contract, the employees who is the only one employed in his or her family which includes old-age person or juvenile person. Besides, after layoff, the enterprise, in case of recruitment within 6 months after the layoff, shall inform its employees laid off and give priority to them when they have the same conditions with other candidates. Similarly, its also a cause resulting in conflict between goal of law and the enterprise. Such provision accounts for that the enterprise is not willing to conclude a non-fixed term labor contract. But in practice, the possibility of winning an arbitration relying on such provision is low, because not all labor contracts are investigated for the case. But the enterprise shall still pay attention to preventing such legal risk.

5. Can an enterprise lay off employees on probation?

In practice an enterprise usually firstly reduce probationary employees for layoff, because the enterprise holds that a trust relations between it and probationary employees has not been built and the capacity of the probationary employees are still not certain. But its also a legal risk. According to Law of Labor Contract, there is no provision supporting dismissal of probationary employees for layoff. Of course its controversial for its justification, but risk is apparent when explaining the law by literal meaning. Its a provision needing improvement, but at present, the enterprises shall act prudently.

三、Is there any legal risk if the enterprises conduct layoff in conformity with laws?

Due to excessively strict limitation on the conditions and processes for layoff, HR department has many concerns during practice. With their traditional boldness and exploring spirit, enterprises have figured out some alternative approaches which are well known through report made by media. The writer also provides some explanations for them from a legal point of view.

1. Salary Decrease

There are two kinds of salary decrease; one is unilaterally received salary decrease and the other agreed decrease. Because agreed salary decrease doesnt violate laws, discussion is not needed. The salary decrease mentioned in following part is actually unilaterally received salary decrease, which means that the enterprise decrease salary without an agreement and sighed written document through negotiation with the employees. According to the laws, salary decrease is one of modifications of labor contract, and requires agreement made by the two parties together with relevant concluded written document. So salary decrease is a downright unlawful act which directly damages lawful interests of the employees. So the enterprise shall bear the legal responsibilities. But in practice the agreement on salary in the labor contract usually is in favor of the employers and most part of salary of the employee comes from bonus and subsidy not included in the contract. Against such situation, salary decrease made by the enterprise is not a simply illegal practice, instead, an action of exploiting loopholes of laws, because its normal for an enterprise not to pay all or part of the bonus when enterprise profit is reducing. In fact, when the labor contract is concluded the agreement made on about salary directly decides whether salary decrease is lawful or not.

2. Providing Leave

There are two kinds of leave provided by the enterprises; one is leave without salary, and the other paid leave. Paid leave is a sort of wealth for employees or the implementation of social obligation of the enterprise; its not illegal, so discussion for it is not provided in the article. The leave mentioned below means leave without salary. Many enterprises want to indirectly reach the goal of layoff by providing leave without salary which may force the employees to resign. But its a statutory obligation and also right for employees to work for the employer. Therefore, providing leave without salary not based on any reasonable cause is in fact a downright offence against law. Furthermore, it also violates the agreement on labor time in the labor contract, so the employees are allowed to claim compensation or indemnity. Of course, its another story in case of sound reason for such leave. However, the enterprises shall still pay salary not under minimum salary standard. Obviously, unpaid leave is unlawful and the enterprises shall bear relevant legal responsibilities. Leave without salary is one of the reasons for legal risk and enterprises shall pay attention to it.

3. Other Approaches

The enterprise shall act based on fact and laws. Terminating contract would impact on interest of the employees, so when making decision which damages interests of the workers, the enterprise shall act on a basis of law and fact.

The enterprises shall act according to the requirements of the process and keep in mind that haste makes wastes. They shall act prudently. Adequate negotiation and communication are needed. Negotiation shall not be replaced by notification, and evidence for the process should be kept.

The enterprise shall classify the employees. Analysis on each worker is needed if conditions permit. Information about the employees work, family shall be known and employer shall be a considerate person who takes workers difficulties into consideration, respecting them, persuading them by sound reason and kindness.

Legal risk and other risk shall be fully predicted. Before taking measures, the enterprises shall have lawyers or other professional persons make risk analysis according to facts, prepare solution plan, and provide prediction to prevent emergency.

The enterprise must build good relations with the government. The pressure from the government is not factor concerned about when conditions for layoff exist, but sometimes initiative communication is better than the monitoring and investigation after serious disputes.

The enterprises shall pay attention to controlling risk caused by public opinions. Media usually sympathize with employees and don't take an unbiased stance. The enterprises who intend to conduct layoff must pay attention to controlling the risk and negative influence possibly caused by public opinions at the beginning of the staff reduction.

Training for the layoff team shall be provided. The layoff is conducted mostly by the HR team of the enterprise. So at its beginning, relevant training programs shall be offered to avoid risk resulted from inadequate abilities of the HR team.

四、 Conclusion

Now every enterprise is suffering recession. Against such economic environment, the enterprises trying to decrease cost are recognized. But any action of the enterprises shall be in conformity with laws, which is also a way for the enterprises to survive and develop. If an enterprise, for its economic profit, violates the laws unscrupulously, not performing its social obligation, the writer assures that the enterprise would have difficulties in development. When difficulties occur, its employees would not stand with it to overcome them, so the enterprise would go bankruptcy soon or later. Providing good treatment for employees is helpful for the long-term development of an enterprise. Please remember, employees are the most significant treasure of the enterprise.

馬亮，男，(1988.03—）.河南信陽人，河南大學法學院2012級民商法碩士研究生，研究方向：民法、商法、法哲學

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