Home / Publications / Reduction of Labour Costs

Reduction of Labour Costs

Chna Insight - Employment & Pensions


The Chinese economy, at least certain industry sectors, seems to be facing a downturn. Some enterprises in the PRC are also encountering economic pressure and looking for possibilities to reduce labour costs. Under PRC labour law, the following measures may be taken into consideration:

1. Control of headcount

An enterprise is entitled to decide its headcount at its discretion. To control labour costs, an enterprise 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 those employment contracts which are going to expire.

Unfortunately, the effects of not renewing the expiring contracts are limited. According to PRC labour law, an enterprise must conclude an indefinite term employment contract with an employee whose contract expires if he or she has continuously worked for the enterprise for a period of 10 years, or he or she has consecutively concluded a fixed term contract with the enterprise twice after 1 January 2008 except if any statutory termination reason is fulfilled. Please note that, as required by PRC labour law, if an enterprise does not renew the employment contract with an employee and terminates the contract due to expiration, the enterprise has to pay statutory severance payments to the employee.

2. Adjustment of remuneration

When encountering economic difficulties, reducing the remuneration of the employees is one of the most efficient ways of cutting down labour costs. Unfortunately, change of the remuneration of an employee in China is not that easy because in most cases, the consent of the employee is necessary.

According to PRC labour law, any amendment of an employment contract must be agreed by the parties in writing. Accordingly, the salary of the employee stipulated in the employment contract can only be adjusted upon the consent of the employee. The enterprise may propose to reduce the salary while shortening the working hours of the employees. But this needs the consent of the employees. Under PRC labour law, there are only two exceptions which allow an enterprise to unilaterally adjust the salary of an employee. One is in case the employee’s work position is adjusted due to his or her incompetence to work, and the other is in case the employee’s work position has to be adjusted due to his or her heath situation. These two situations usually do not apply to many employees.

The above mentioned principle also applies to the adjustment of benefits provided in the employment contract. Without the prior consent of the employee, benefits provided in the employment contract cannot be reduced.

As to benefits which are not provided in the individual employment contracts but in the company policies or the employee handbook, if an enterprise wants to change them, the consent of the employees are not needed, but the enterprise has to amend the company policies or the employee handbook by conducting democratic proceedings, i.e. discussing the amendments with the employee representatives’ congress or all staff, obtaining their opinions and consulting with the trade union or the employee representatives and making a public announcement to all employees.

3. Avoiding overtime payments by adjusting the working time system

An enterprise is obliged to pay overtime payments to the employees who are subject to a standard working time system and do overtime work beyond the normal working hours. However, employees who are subject to a flexible working time system are not entitled to overtime payments even if they did overtime work. Further, if the employees are subject to a comprehensively calculated working time system, they are only entitled to overtime payments in case their average working hours during a certain period of time such as a week, a month or a season surpass the normal working hours. Adopting a proper working time system to the employees will help an enterprise to avoid overtime payments.

Under PRC labour law, the employees whose working time generally needs to be flexible such as management, sales staff, drivers, etc. can be subject to a flexible working time system. In special industries such as transportation, maritime fishing, construction, salt-making etc. in which employees need to work constantly due to seasons, natural conditions or market factors, a comprehensively calculated working time system can be adopted. To adopt these special working time systems, an enterprise must obtain the approval of the competent labour authority.

4. Arrangement of staff leave or stop of production

According to PRC labour law, employees are entitled to 5 to 15 days of annual paid leave subject to their working period with all employers. An enterprise may arrange the employees take annual leave at its discretion. If an employee fails to take annual leave due to the reason attributable to the enterprise, the enterprise shall pay the employee compensation for the untaken annual leave at the rate 300% of the daily salary of the employee. If an enterprise arranges the employees to take annual leave during the period when the business is not good, this can help the enterprise to avoid paying compensation for untaken annual leave in the future.

If the production of an enterprise is not sustainable, the enterprise may consider to stop its production for a while and to arrange the employees to take leave. In such a case, according to PRC labour law, the enterprise must pay full salaries to its employees in the first salary payment cycle. Starting from the second salary payment cycle, the enterprise may only pay the employees the statutory minimum monthly salary or living subsidies (usually lower than the statutory minimum monthly salary), which is subject to the regulations of the local governments.

Subject to different requirements of the local government, the statutory minimum monthly salary or living subsidies to be paid to the employees may or may not include the part of the social insurance contributions and housing fund payable by the employees. If the above mentioned social insurance premiums are not included, the enterprise has to additionally pay such costs. However, the total costs are much lower than the normal payroll.

5. Reduction of workforce

Reduction of workforce is the most direct way of cutting down redundant employees and reducing labour costs. According to PRC labour law, the employment contract of an employee can only be terminated by the employer in case one of the statutory termination reasons is fulfilled. Under PRC labour law, if an enterprise has to cut down 25 employees or 10% of its employees or more due to economic difficulties or change of business, it can do so by following the statutory procedures. The procedures include explaining the workforce reduction plan to the trade union or all staff, consulting with the trade union or the employees, making a report to competent labour authority and notifying the employees 30 days in advance and paying the employees statutory severance payments.

As required by PRC labour law, when choosing the employees for mass lay-off, the enterprise shall retain with priority those employees with a longer service period or an indefinite contract term or those who are the only breadwinner of the family. In case of any recruitment within 6 months, the enterprise shall, under equal conditions, with priority hire those who have been laid-off. Further, the enterprise shall not dismiss the employees who suffer from a work-related injury or non-work-related illness, or who are pregnant or in the nursing period or have been worked for the enterprise continuously for not less than 15 years and is less than 5 years away from his or her legal retirement age.

If an enterprise wants to cut down no more than 25 employees or 10% of its employees due to business reasons, instead of the above mentioned mass lay-off, the enterprise may consider to terminate the contract with the employees due to the statutory reason of change of the objective circumstances. However, such termination reason requests that a business reason causes the original employment contract being unable to be continuously performed. In such case, the enterprise has to first consult with the employee about the change of the employment contract and can conduct the termination only in case the parties fail to reach agreement. For such termination, the enterprise must give the employee a 30 days’ prior notice or pay the employee one monthly salary in lieu of the prior notice period and notify the trade union. Further, the enterprise shall pay statutory severance payments to the employee.

Currently except for “relocation”, “merger” and “transfer of the enterprise’s assets” which have been expressly defined by PRC labour law as “a change of the objective circumstance”, whether other circumstances of business change shall be deemed as “a change of the objective circumstance” is fully subject to the decision of the labour arbitration commission or the People’s Court at its discretion. The results may differ in different locations. Enterprises might have to face legal risks when laying-off employees due to the reason of change of the objective circumstances. In order to avoid labour disputes, in practice, many enterprises choose to terminate the employment contracts with the employees by reaching mutual agreement.

China Insight - Employment & Pensions Update: Reduction of Labour...
Read more


Jeanette Yu