Mass Layoffs and Labor Cost Reductions in China
By Andreas Lauffs and Joseph Deng
Baker & McKenzie LLP
In response to the global economic downturn, many companies in China have begun to implement reductions in force to cut their labor costs, or have taken other measures to reduce their labor costs. According to the All-China Federation of Trade Unions (ACFTU) nearly twenty million migrant workers alone have lost their jobs since the second half of 2008. According to the Ministry of Human Resources and Social Security (MOHRSS), the official urban unemployment rate in the fourth quarter of 2008 increased by 560,000, to 4.2% at the end of 2008.
Although the official numbers are relatively low by international standards, the sharp rise in urban and rural unemployment has created concern among some government officials. As a result, several authorities have recently issued guidelines and opinions to restate the statutory requirements on implementing mass layoffs, and encourage companies to avoid or reduce mass layoffs by adopting alternative measures to reduce labor costs.
In a joint opinion issued by MOHRSS, ACFTU and the China Enterprise Association on January 23, 2009, employers are encouraged to avoid mass layoffs by adopting alternative cost cutting measures, such as wage reductions, work adjustments, holiday and annual leave rotations, and other flexible working arrangements.
In the January 23 opinion, MOHRSS and ACFTU urge their local counterparts to implement the “Rainbow Plan” designed to expand the use of collective contracts. The “Rainbow Plan” encourages enterprises with “operational difficulties” to use collective contracts to adopt measures to cope with the economic difficulties such as arranging for flexible working hours and related wage reductions.
In a Shanghai guideline dated January 12, 2009, employers are required to conduct “collective consultations” with employees when reducing salaries or headcount. A week later, the Shanghai branch of the ACFTU issued guidelines to urge district level unions to pursue collective consultations when they are aware that company management may suspend operations, reduce wages, adjust employee benefits, reduce workforce, etc.
Thus, companies in China may now have greater flexibility in implementing cost reduction measures because these guidelines explicitly permit employers to use collective contracts with unions or employees to adopt cost reduction measures. Many local labor authorities have been supportive of companies that take alternative measures to avoid mass layoffs. In addition, some non-salary benefits can be reduced without individual employee consent, such as a change in a bonus plan, incentive plan or other benefits policies. However, such changes will normally require consultations with a labor union, works council, or similar employee representative body in accordance with the PRC Employment Contract Law.
 Law of the People's Republic of China on Employment Contracts (中华人民共和国劳动合同法), adopted by the Standing Committee of the National People's Congress, effective January 1, 2008.