After restructuring, the company increased Mr. Tian’s workload in order to cut costs, but the new responsibilities were beyond his abilities. Thus, Mr. Tian was informed by the company that he would be forcibly laid off due to the restructuring. The two parties resorted to arbitration. Lawyers in favor of Mr. Tian held the view that the layoff of Mr. Tian conformed neither to the conditions of labor contract dissolution due to employee incompetence nor to the condition of dissolution due a major change in objective circumstances. Therefore, the lay off was illegal. Lawyers in favor of the unit held that, in the context of market competition, it was reasonable for the unit to lay off Mr. Tian who proved himself incompetent for his job.   

I. Case Playback

Mr. Tian was a 53-year-old employee in an electronics factory for several decades, whose plan for a comfortable life during retirement was shattered by the unexpected notice that he was laid off.
In the 1970s when Mr. Tian began to work in the electronics factory (called ‘the unit’ hereinafter), he concluded a non-fixed term labor contract with the unit. During the 1990s, the unit restructured into a Sino-Japanese joint venture and was eventually completely taken over by the original Japanese company after several leadership turnovers. Since then, the labor contract between Mr. Tian was signed annually, and the last contract was effective from July 1, 2006 to June 30, 2007. Mr. Tian took on a heavy workload which was originally handled by two employees. Finally, Mr. Tian failed to complete his job due to the large amount of work, and it was arranged that he wait for a new job position at home. Finally, he was informed one month in advance that he would be laid off.       
Mr. Tian claimed that it was illegal for the unit to lay him off because, currently, the layoff system has been abolished by the relevant government authorities.   Furthermore, the unit’s lay-off notice was illegal because it claimed that Mr. Tian’s lay-off was due to a series of major changes in shareholders rights, production operations and product structure. The so-called production operation and production structure changes were just investment structure changes that were not legal circumstances under which the unit could legally dissolve the labor contract. Moreover, his original position was not changed or cancelled. His failure to fulfill his job was due to the doubled workload rather than his incompetence in the job. Thus, the labor contract should be continued. In addition, the salary he received while waiting for a new job post was less than his original salary amount, which violated relevant rules and regulations. He should be compensated for the lost wages.  
The unit argued that in order to adapt to the changing competitive market, the unit had to lay him off in order to recruit more competent employees. Also, changes in unit operations were, in fact, ‘major changes in the objective circumstances’ which is the legal circumstance under which the unit can dissolve the labor contract.
Then, is the unit justified in asking Mr. Tian to wait for a new post and later inform him that he is laid off?

II. Legal Background

Strictly, “forced lay-off” is not a legal concept but a unique social phenomenon in China. It refers to state-owned enterprises that pay certain economic compensation to some employees while they find other jobs in order to survive while maintaining the original labor relationship. The laid off employees are equivalent to unemployed workers; the concept of “forced lay off” is, therefore, equivalent to unemployment.
Forced lay offs are a by-product that evolved out of the transformation from a highly planned national economy to a market economy. In the period of the planned economy, when enterprises did not solely own the profits and losses of the business operation, the labor force was arranged by means of state administrative order without enough consideration taken of the market supply and demand for a certain position. Thus, employment was a kind of welfare arrangement rather than representing the enterprise’s real demand for labor. Recently, China’s economy has been transferring into a market economy system where all enterprises bear their own profits and losses and have the right to implement streamlined staff management in accordance with the market economy. In this situation, many surplus employees have been identified. Unable to sustain the great economic pressure exerted by the excess laborers, enterprises deal with those surplus laborers by means of forced lay-off.

III. Lawyer Debate

Change in product structure shall not affect operation of the position.
Professor Xu Minglang from Legal Service Center of East China University of Political Science and Law in support of Mr. Tian

The unit unlawfully laid off Mr. Tian.   
First, the unit cannot immediately lay-off Mr. Tian even if he is incompetent for the job without offering proof of his incompetence for other positions or after a certain period of job retraining.
Second, I think it is wrong for the unit to argue that changes in shareholder rights are “major changes in objective circumstances” under which the unit could legally dissolve the labor contract. The “major changes in objective circumstances” necessary for legal dissolution of a labor contract are an act of god, enterprise relocation and asset transference, etc. However, in this case, the unit’s economic condition was quite good.
Change in product structure differs from asset transference. The change in product structure is just an alteration in investment structure, which does not affect the operation of laborers’ positions. Asset transference refers to acquisition, merger and separation etc., which involve changes in enterprise ownership and consequent changes in the positions of laborers. As for this case, the central point of argument is about the “major change in the objective circumstances” which would indicate that the overall objective circumstances of the enterprise have greatly changed. Obviously, the unit in this case only had several production lines changed; it was not an overall transference of the unit’s assets. So, this was not a legal circumstance under which the unit could dissolve the labor contract.
Third, even if the unit had to assign Mr. Tian to wait for a new job post at home due to various reasons, the unit shall first reach an agreement with Mr. Tian rather than making the unilateral decision. The unit’s arrangement for Mr. Tian to wait for a new job post at home is a modification of the labor contract. Therefore, it is reasonable and lawful for Mr. Tian to reject the unit’s decision to assign him to wait for a new job post at home.

The pressure of competition requires employees to be competent for more work.
Lawyer Luyin from Shanghai M&A Law Firm in support of the unit

 A company is an economic entity which pursues maximum profits. Pursuant to the Labor Law, it is necessary for the unit to adapt to brutal competition by sacrificing the rights and interests of certain employees. Thus, we can not judge that the unit was wrong at that time because it was acting in response to the demands of the market economy. In order to enhance its competitive advantages, the unit has to increase labor productivity which requires more competent employees who possess a higher working capability and can assume increased workloads. The changes in the market are objective, inevitable competition pressures are faced by the unit. Under this circumstance, the unit must adapt to the demands for higher efficiency.
In this case, facing operational changes, the unit adopted some positive coping tactics which included increasing Mr. Tian’s workload. I think this is a reasonable distribution of work responsibilities in the natural process of unit operation and management and does not involve the modification of the labor contract. Actually, this kind of adjustment is permitted according to the Labor Law. Apparently, Mr. Tian could not adapt to the changes in the unit’s operation, which, according to the Labor Contract Law, is ‘a major change in the objective circumstances at the time of conclusion of the labor contract that hinders the fulfillment of the original contract.’ Under such circumstances, after consultation, it was legal for the unit to assign Mr. Tian to wait for a new job post at home.  
 The phrases ‘waiting for a new job post at home’ and ‘forced lay off’ proposed by the unit are not legal terms. However, the meanings are clear because these are common sense concepts and practices recognized by the whole society. From a legal perspective, the unit modified the way the two parties performed the labor relationship rather than dissolve the relationship entirely. Of course, whether Mr. Tian is waiting for a new job post or has been forcibly laid off, the unit is obligated to pay his expenses at a rate higher than the minimum standard. Suppose that Mr. Tian is not willing to accept the unit’s plan to modify the labor relationship, and then the labor relationship is dissolved; based on either the Labor Law or common sense, the relationship will not be maintained. The unit should implement an optimal allocation of its labor resources for all positions. Otherwise, it will waste the resources of the unit as well as Mr. Tian’s ability. 

IV. Final Judgment

Through mediation in the Labor Arbitration Committee, the two parties reached an agreement. Mr. Tian proactively withdrew his lawsuit petition while the unit agreed to pay Mr. Tian his regular salary for the remaining eleven months of his final labor contract from August 2006 to June 2007.

V. Expert Evaluation 

The labor law should broaden the scope of the labor contract dissolution system, and narrow the scope of labor contract termination system.
Professor Dong Baohua from East China University of Political Science and Law

Forced lay-off is a unique practice in the process of restructuring state-owned enterprises, which refers to a practice of the state-owned enterprises paying certain economic compensation to some employees to find other jobs in order to survive while maintaining the original labor relationship. This process can transfer the original employees out of the enterprise. It is called “first implicitly unemployed in original units” and “later implicitly employed in other units.”
Regarding waiting for a new job post at home, there is no legal definition. Maybe we can perceive it as a temporary waiting period in the process of retraining and the transferal of incompetent employees to more suitable positions. It is a short period distinctly different from lay-off which is permanent. Since 2000, when the large-scale restructuring of state-owned enterprises had been completed, enterprises in Shanghai no longer implemented lay-off as a modification of the labor relationship. Currently, if a unit plans to dissolve a labor relationship, it shall directly dissolve the labor contract and then sign a new one. This is what we call “first explicitly unemployed” and “later explicitly employed.”
In this case, on one hand, the representative in favor of Mr. Tian argued from a small-scale perspective that without prior consultation of the two parties, it is illegal for the unit to assign Mr. Tian to wait for a new job post at home. This should have been a negotiated modification of the labor contract. On the other hand, the lawyer in favor of the unit argued from a large-scale perspective that it was reasonable for the unit to give laborers a chance to find another job in order to survive by assigning the laborers to wait for a new job post at home during the process of transferal when the unit faced pressure from the competitive market.
A point worth mentioning here is that the unit claimed two reasons for the dissolution of the labor contract: “incompetence” and “a major change in objective circumstances.” These are conditions under which a unit may dissolve a labor contract after giving the laborer thirty days advance written notice. The specific stipulations are written as follows: “If the laborer is proven incompetent and remains incompetent after training or adjustment of his position and if a major change in the objective circumstances at the time of conclusion of the labor contract hinders continued performance of the original contract and, after consultations, the unit and laborer are unable to reach agreement on amending the labor contract.” We should notice that there is an “adjustment period” respectively in both sub-articles of the Labor Law. The former article requires employees to be proven incompetent for their jobs after training or position transfer; the latter article requires both ‘a major change in objective circumstances’ and a failure to reach an agreement about modification of the labor contract after consultation between the two parties. 
The facts in this case did not conform to either of the above two legal circumstances under which the unit can be justified in dissolving the labor contract. Hence, we can see that the result of this case was a compromise made by the two parties within the framework of the current legislation concerning labor contracts.
A problem discovered in this case is that the legislated conditions for dissolution of the labor contract are too strict while those for termination of the labor contract are too loose. Therefore, personally, I propose that reforms should be carried out to improve the current system of labor contract dissolution and termination. We should appropriately tighten the conditions for legal termination. The newly enacted Labor Contract Law stipulates the unit’s obligation of economic compensation at termination, which I think is viable. But meanwhile, we should loosen the restrictions on contract dissolution. The most reasonable way to loosen the restrictions for dissolution is to stipulate that the unit may unilaterally dissolve the labor contract by economically compensating the laborers. The unit shall compensate the employees in proportion to the number of working years; the employees can find other jobs using the compensation. This is a point where China’s legislation on labor contracts should be improved.
But according to the Labor Contract Law, although it adds the system of compensation for employees when the labor contract is terminated, it still has not taken a step toward loosening the system of labor contract dissolution. Thus, this kind of “narrowing from two directions” would make the employment system even more rigid.

From LexisNexis