Main points on effective staff arrangement in distressed enterprises in China

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2018-05-11 | 来源:本站原创

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1. Background


1.1 Basic situation of staff arrangement in different types of distressed enterprises

In a country as massive as China, enterprises everywhere can often find themselves in a position of managerial and financial distress. In the most severe cases, this can lead to their untimely demise. These enterprises fall into three categories: (1) under the "supply-side structural reform", enterprises in various industries, most of which are stated-owned, begin to rearrange their staff together with capital mergers, asset transfer, corporate relocation, debt restructuring and even dissolution; (2) enterprises featuring the concept of "internet plus" are stimulated by capital fervency and black-out later due to illicit competition, financial chain fractures or other reasons; (3) foreign capitals evacuate from China, mostly due to the higher business costs and lower comparative advantages against other countries.


1.2 Ignorance of the insolvency procedure 

Distressed enterprises wishing to undertake insolvency procedures are a rare phenomenon in China. According to a report from Legal Daily, millions of enterprises die every year in China but only thousands of them chose to declare bankruptcy. The reasons behind are complicated. SOEs are commonly saved by local governments while foreign-owned enterprises might be strategically transferred in order to maintain their reputation. Some owners of private enterprises, on the other hand, might simply choose to run away, abandoning their employees and leaving them without a means of claiming remuneration. This phenomenon is contrary to China's bankruptcy law, which makes the wage claims of employees a high priority.


1.3 Large numbers of collective actions in the staff arrangement process

Collective actions in the staff arrangement process have been increasing in China during recent years. These collective actions arise for a variety of reasons; as a vestige of China's history, as a result of employee dissatisfaction when they compare themselves with others, from special circumstances involving all employees, several employees or individuals or from disputes over statutory rights or interests without clear a legal basis. Since 2008, collective actions have showed the following traits: (a) after a brief decline in 2011-2013, the number of collective actions have continued to rise since 2014; (b) the geographical distribution of collective actions have spread from the economically-developed coastal areas to inland areas; (c) the participants of collective actions include, not only blue-collar workers, but also white-collar workers; (d) in addition to substantive appeals over salary, compensation, overtime pay and social insurance, employees have recently requested a representative trade union, democratic management, collective bargaining and other procedural rights in collective actions. As was recorded by an NGO located in HK, from August 2017 to February 2018, more than 1000 collective actions occurred across China and were published on the internet.


2. Main legal ways 


According to Employment Contract Law of PRC (hereinafter referred to as ECL), the legal methods in which to arrange employees in distressed companies can be categorized as 1) termination of employment and 2) change of employment.


2.1 Termination of employment

There are four kinds of 'termination of employment' that can be used in the staff arrangement process. 

A. Termination by mutual agreement (initiated by the employer)

The ECL provides that an employer and an employee can terminate their employment contract if they reach a consensus through consultation. The employer and employee are permitted to terminate employment through this method, without the need for any justification, under all circumstances. 


B. Termination due to considerable change of the objective situation

An employer can terminate an employment contract where there are material changes in the objective circumstances that have rendered the employment contract no longer performable, and the parties have failed to reach an agreement on a modification of the contract's terms. These "objective circumstances" include force majeure, war, major asset transfer and corporate relocation etc.


C. Mass lay off

Mass lay off is defined as "economic layoff" by the ECL. This occurs where an employer undertakes a corporate restructuring in case of bankruptcy or serious difficulties in the company's operation, resulting in the need to cut employment in order to improve the situation. By following the proper procedures - including but not limited to consulting the trade union (employees' representative) and reporting to the local government - the employer is entitled to lay-off employees.


D. Termination due to the loss of employer's eligibility

If an employer is declared bankrupt, or if the employer makes a decision to liquidate the business, the employment contract may be terminated as a result of the employer's loss of eligibility, according to the ECL.


The employer is required to pay severance compensation in all the termination methods mentioned above. The compensation is calculated at the rate of one month's salary for each full year of service. The salary refers to the average monthly income over the 12 months preceding the termination which includes the base salary, bonuses, allowances, and other amounts paid in monetary terms. If the monthly salary of an employee is more than three times the average monthly salary of all employees in the local region where the employer is located as declared by the local government every year, the compensation payable shall be capped at three times the average monthly salary of all employees in the relevant region, and shall be limited to a maximum of 12 years of service.


2.2 Change of employment

 In addition to termination of employment, change of employment is widely used in the staff arrangement process. Generally,there four legal ways in which to effect a change of employment.


A. Continuous performance of an employment contract by a successor employer due to merger and split

To protect employment stability, the ECL emphasizes that in the case of a merger or split, the original employment contracts remain valid, and shall be performed by the new employer, who succeeds in the rights and obligations of the original employer. An employer's change of name, legal representative, key person-in-charge, or investor will not affect its performance of the employment contracts.


B. Wage adjustment in downtime

The Interim Provisions on Payment of Wages provides that, if an employer suspends operations or production in the first wage payment period for reasons other than employee's fault, the employer shall pay the wages of employees in accordance with the rates stipulated in the employment contracts; and if the suspension continues for more than one wage payment-period, the employer can negotiate with the employees about their new wage rates, which shall not be lower than the local minimum wage rate (or 70% of the local minimum wage rate in some areas ). 


C.  Change of the post, salary and workplace

The ECL states that an employer and an employee may modify the contents stipulated in the employment contract if they agree by negotiation. In practice, an employer can unilaterally change the post, salary and workplace of an employee. A consensus must be reached by the employer and the employee in advance if the employer wishes to change or modify the employment contract in a number of circumstances, some of these being; business necessities, business difficulties and employees' performances. Meanwhile, when unilaterally modifying an employment contract, the employer must bear in mind the rationality of the modification, taking the boundaries of the management prerogative and the rational expectations of the employees into account.


D. Change of the employer 

In China, where an employer outsources some of its businesses or transfers some of its assets, the relevant employees are not transferred automatically. A new employment contract between the employees and the new employer needs to be established by reaching an agreement among the employees, the predecessor employer and the successor employer.



3. Three real challenges


Three real challenges are usually faced in the staff arrangement process. These are the collective claims from employees, the pressure from local governments and the legal requirements for democratic management.


3.1 Collective claims from employees

Besides the basic statutory severance compensation "N", as stipulated by law, extra compensation usually needs to be prepared in order to prevent so-called "interest-related" disputes. On January 7, 2018, a Japanese-invested company based in Suzhou, Jiangsu province, was accused of transferring assets secretly and, as a result, the HQ was blockaded by hundreds of its employees. On January 8, its CEO was besieged in his office. The employees requested a "2N+1" compensation plan due to the fact that that the company gained profits but deceived that the company would remain open for the next two years. Later the local police intervened and collective bargaining began. However, in the course of the bargaining, it was proved that a number of employees who belonged to an irrelevant affiliated company, also joined-in the blockade and besiegement. The irrelevant employees were persuaded to return to work in their position while the compensation standards for those laid off is still an ongoing negotiation. All in all,  a large number of employees spontaneous but disciplined organization, various but escalating strike/protest methods (such as waving banners, refusal to work, suicide/self-injury threats, media exploitation, besieging & blockading, and even intimidation and physical violence), and excessive compensation requests, more often than not, lead to the employer's decision to provide extra compensation.


3.2 Pressure from local governments

Maintaining the social stability within the region has been the inherent responsibility of local governments over China's long history. "Mishandling of group incidents" is one of the accountability affairs for local government leaders, and the accountable leading cadres shall lose the qualifications for annual performance appraisal. As such, the intervention and control of any collective disputes is a common practice of local governments. Through the intervention and control, the pressure exerted from local governments will be felt by the employers, leading them to be likely to make compromises. 


3.3 Legal requirements for democratic management

The participation of trade union and employee's representatives in staff arrangement matters is a mandatory requirement. According to the Company Law of PRC, "when a company is deciding on material issues in its reorganization and operation, and formulating major work rules, the company should hear the opinions of its trade union, and  through the employees' congress or other means, hear the opinions and suggestions of its employees." The ECL has the similar provisions. Moreover, it is also worth mentioning that, on November 23, 2017, the Shanghai Municipal People's Congress passed the amended draft of the Regulations of the Shanghai Municipality on Employees' Congress. It highlights the functions and powers of employee's congress, which is the main method of democratic management in the enterprises of China. The amendment has reinforced and optimized this particular provision in Company Law by refining the scope of "material issues in its reorganization and operation" into "material issues such as reorganization, merger, separation, relocation, suspension of production, dissolution and bankruptcy, etc." The new Regulations extend the same treatment to all kinds of ownership. Article 10(1) of the amendment states that each of the above-mentioned "material issues" should be deliberated by the employees' congress or by other means so that the opinions and suggestions of employees could be heard. The amendment also stipulates that the draft of collective contract formed by collective bargaining arising from labor disputes on the change of employment relationships should be deliberated and approved by the employees' congress. Although it is important to note that the new Regulations are local laws in Shanghai and only binding at the local level, they can still serve as a reference at the national level.


4 Lawyer's roles


4.1 Two kinds of roles

As an independent third-party in the staff arrangement process, our lawyers usually play two kinds of roles: "designing the staff arrangement plan" or 'designing & implementing the staff arrangement plan". "Designing the staff arrangement plan" generally has four steps; collecting detailed information on both employer and employees, selecting available legal routes, contacting and communicating with governments and trade unions (or employee's representatives) and designing detailed staff arrangement implementation methods. "Designing & implementing the staff arrangement plan" not only requires our lawyers to design the plan, they must also carry out the plan through internal training, on-site support, arrange fact-to-face negotiation with employees and consults with trade unions and local government etc.


4.2 Composition of a staff arrangement plan

According to our experience, a staff arrangement plan usually contains at least the following six major parts:


A. Collection of detailed information 

Gathering and clarifying involute information provides grounds for the subsequent parts. This requires lawyers to distinguish and establish the main legal risks by reference to an abundance of materials concerning both the employer and the employees. High-risk employees shall be identified through a background investigation. Historical events of the employer will also provide information as to how to avoid possible sensitive points in the staff arrangement process. The business information of the employer such as their current financial situation, future plans, budget for the staff arrangement is also indispensable.


B. Selection of legal routes

This part is about the legal analysis work based on part A and in accordance with relevant laws. Through a legal analysis about the risks and costs of various legal routes, our lawyers will provide legal advice on the selection of the most appropriate methods for the staff arrangement. This part is the core of the whole plan, and plays a fundamental role for part E, the most important part of the staff arrangement plan.


C. Communication with governments and trade unions

The coordination of the interests of all parties involved, including the different government departments and the local federation of trade unions at different levels, is the most valuable use of the lawyers. It is critical for employers, with the help of lawyers, to contact and have good communication with the local government and the federation of trade unions, in order to find out the common points among them in order to gain a general understanding of the issues and support as many of them as possible.  For example, as I mentioned above, extra compensation is usually paid in such arrangements. However, it is also often highly recommended by the local government that, the compensation shall be in accordance with the financial endurance capacity of the employer, and most importantly, of the community where the employer is located. An overly-high compensation standard in a single case may be not beneficial to the stability in that region. 


D. Building a project team

It is necessary to build a project team for the purposes of implementing the whole plan. The team usually consists of lawyers, HR professionals, in-house legal counsel, line-managers and a high-level officer of the employer. If necessary PR, security, EAP and career guidance counselors could also be part of the team. Major duties such as internal communication, internal training, the drafting of instruments, communication with local government and the federation of trade unions, the arrangement of negotiations with employees and media affairs should be performed by the team and a specific team member should be designated to be responsible for each of the functions.

 

E. Combination of practical ways of arrangement

In practice, it is rare for an arrangement to be settled by just one way. Instead, it usually requires a combination of several different ways including but not limited to; mutual or unilateral termination of employment, mutual or unilateral change of salary, post and workplace. The case mentioned below (4.3) exemplifies the effectiveness of a combination of several practical ways. 


F. Preparing a contingency plan

A contingency plan's main purpose is to readily deal with urgent issues occurring in the staff arrangement process that should not be ignored. The plan may be drafted independently or form a part of the whole staff arrangement plan as a supplement to an 'early warning system' which is for discovering risks from surface clues. The main contents of a contingency plan usually contains the conditions and procedures for the application of the plan, the formation and functions of emergency organization, and the working procedure and methods, etc.


4.3 A case regarding combination of means of arrangement

One staff arrangement project we have handled recently concerned a large-scale state-owned iron and steel group enterprise. Pursuant to a change of the objective economic situation, the enterprise was required to produce less iron and steel, and one of the constituent companies was scheduled to cease accordingly. The demands from about 500 employees had to be settled. As part of the plan RDL lawyers compiled, five channels were designed in order to facilitate an employee transfer. It proved to be very effective. The first channel is "self-employment", where the company gives the employees an extra business-starting subsidy and terminates the employment by mutual agreement; the second is "internal move", where the affiliated companies of the enterprise absorb the  employees through an internal recruitment procedure, together with a job transformation incentive; the third is "external transfer", where a social organization such as an 'occupation exchange agency' participates in and introduces potential vacant posts to the  employees; the fourth is "early retirement", also called "internal retirement", where the employees who are close to statutory retirement age "retire" early with the basic allowance and social insurance fees being paid until their real retirement; the fifth is called "pending management", where in a limited period, e.g., 1 year, the employees have the right to attend a centralized and intensive training program with basic salaries continuing to be paid with the possibility of being transferred after the training if they meet the new job requirements. For those who do not accept the training and all the other arrangements mentioned above, the company will unilaterally terminate their employments with statutory compensation. 

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