Compliance Guide and Legal Risk Alert for Enterprise Layoffs
Companies may need to reduce staff due to operational challenges or business adjustments. Layoffs directly affect employees' interests, and the law imposes strict requirements on the layoff process. This article outlines key compliance considerations for employers conducting layoffs.
I. Statutory Grounds for Layoffs
Pursuant to Article 41 of the Labor Contract Law, an enterprise may carry out economic layoffs if any of the following conditions are met: undergoing reorganization under the Enterprise Bankruptcy Law; experiencing severe difficulties in production or operations; adjusting its production line, implementing major technological innovation, or changing its business model, yet still needing to reduce staff after contract modifications; or facing other significant changes in objective economic circumstances that render the contracts impossible to fulfill.
II. Requirements for Layoff Procedures
Layoffs must follow these legal procedures: notify the trade union or all employees 30 days in advance; solicit feedback from the union or employees; and report the layoff plan to the labor administration. Failure to comply may result in the termination being deemed illegal.
III. Economic Compensation Standards
Legal layoffs require severance pay, calculated as one month's wage for each full year of service. "Monthly wage" refers to the employee's average earnings over the 12 months preceding termination. If this amount exceeds three times the local average monthly wage of the previous year, the cap applies at three times that average, with a maximum tenure count of 12 years.
IV. Special Protection Personnel
The following employees shall not be laid off: female employees who are pregnant, on maternity leave, or breastfeeding; those suffering from illness or non-work-related injury during the statutory medical treatment period; those with occupational diseases or work-related injuries confirmed as having lost or partially lost labor capacity; and those who have completed 15 consecutive years of service with the company and are within five years of reaching the statutory retirement age.
V. Practical Recommendations
Companies should conduct thorough legal risk assessments before layoffs, develop detailed layoff plans, calculate compensation for each employee individually, create separate arrangements for protected employees, and prioritize mutual termination agreements to minimize legal risks.