what we think

By Maarten Roos

The lockdown in Shanghai of April 2022 has already caused a lot of difficulties to foreign-invested companies. Some of these may be temporary, with certain facilities (delivery, banks) not operating and offices closed. For example:

• Many companies are unable to issue fapiao (legal invoices) or even if they can, they cannot send these fapiao to customers or clients because delivery companies are not operating. 

• Some companies have temporarily suspended paying salaries – whether because the U-keys to access the company’s bank account were left in the office, or because financing from abroad cannot be settled due to closing of all banks in Shanghai.

For some businesses however, the impact has been disastrous rather than an inconvenience. Companies that rely on employees to service customers on-site for example, or fashion retailers that have physical shops in Shanghai, have seen their business effectively come to a stand-still. 

Preferential Policies

Shanghai has adopted various policies to support businesses in Shanghai. The deadline for declaring and paying taxes has been postponed, certain tax subsidies have been introduced, and micro- and small-scale companies that rent from state-owned landlords can enjoy rent-reductions. Commercial landlords are also encouraged to reduce rents, but this remains subject to negotiations (and the landlord’s goodwill).

Strategies for Cutting Employment Costs

Unfortunately, relatively little has been done policy-wise to alleviate the labor costs that many employers continue to bear while their operations are suspended. The Several Policies and Measures of the City's Human Resources and Social Security Sector on Full Support to Combat the Epidemic (effective from March 27) reduce the rates of unemployment insurance and work-related injury insurance, but with very limited impact. Likewise, a CNY 600 p.p. subsidy for online vocational training is not going to make much of a difference. 

Nonetheless, there are some legal strategies to consider for companies that want – or need – to curtail their labor costs during the lockdown.

1. Use-up of Annual Leave and Compensatory Leave

In principle, where employees are at home they should continue to work. However, if employees are unable or unwilling to work from home during the lockdown, then the first step that the employer can take is to arrange (some of) these employees to use their remaining annual leave and compensatory leave (leave earned by working overtime). Legally speaking this arrangement may be subject to negotiations, but even if employees disagree, there is basis to expect authorities to side with the company to arrange enforced leave on this as long as it acts reasonably.

2. Negotiations for Reduction of Salary, or Payroll Delay

Another option for employers is to enter negotiations with employees on the reduction of salary. This kind of reduction requires the approval of the involved employees, and so cannot be implemented unilaterally without risking a claim. On the other hand, where business conditions are critical and the company is fighting for survival, employees may well be willing to compromise for the greater good. 

Even if a salary reduction is too big a step, a company could try to negotiate a delay of salary payments to give the company some breathing room. Again, this is subject to negotiation, but we have already seen examples of companies that have successfully convinced employees to accept.

3. Forced Salary Reduction Based on Temporary “Business Closure”

Where due to objective circumstances (incl. the lockdown) the employment contracts cannot be performed, and the employer has serious operational difficulties, but there remains a potential to re-open after the circumstances have changes (i.e. the lockdown has been lifted), then the company can revert to a temporary business closure. There is no clear legal basis for a business closure, but in practice it has been recognized as a reasonable measure for employers to consider. 

To argue business closure in Shanghai, the employer must in any case notify the employees in advance and continue to pay full salaries for at least one monthly payroll cycle. But thereafter, it can reduce such salaries to the legal minimum salary applicable in the location of employment for as long as the business remains closed. Note that this cannot be used as an excuse to reduce the salary of only certain employees. The closure of business must relate to the whole company or, at the very least, whole units of the employer. 

4. Employment Terminations

No special rules apply if a company prefers to directly terminate some or all of its employees during or because of the lockdown. In fact, additional scrutiny may be expected on whether the legal ground for termination is genuine. Still, employers that want to cut staff can consider one of the below options. Note that in each case, severance must still be paid.

1. Material change of the circumstances from when the employment contract was signed, and the parties are unable to negotiate a change to the contract. 

The so-called “material change” clause can be used to terminate employees that no longer can perform their job if the parties cannot reach an agreement on change of the contract terms. In the end however, it is for the arbitration tribunals and courts to determine whether a certain change (in this case the current lockdown) is sufficiently material to warrant termination. Presuming that the lockdown is only temporary, the general expectation is that tribunals and courts will not easily grant application of this rule. In the end, the specific circumstances should dictate whether employment termination based on “material change” is warranted.

2. (Pending) Liquidation of the Employer

The final closing of the business (as opposed to the temporary closing, see above) and entering into liquidation (or bankruptcy) of a company is always a legal ground for termination, regardless of the lockdown situation. So the lockdown should not prevent the shareholders to decide on liquidation, in which case employees can be terminated. Moreover, the pending closure of the business could be a good commercial basis to negotiate an amicable termination to employment relationships, which may be preferrable to minimize any risk of claims from former employees later on.

Conclusions

With their employees already facing severe difficulties, many companies in Shanghai will be wary of adding to the burden by taking (legal) steps to try to reduce their employment costs. They are not wrong, but if the company’s future is in the balance, then some businesses may be left with no other choice. 

The arrangement of annual leave (and compensatory leave, if applicable) and negotiating a temporary reduction of salaries, are increasingly common strategies for companies under pressure. Temporary business closure, or even the final closure of the company and termination of employment contracts, are measures of last resort. 

R&P’s employment law team advises international clients on employment strategies. They draft employment documents such as contracts and handbooks, and assists clients on both individual and mass-termination of staff. They also represent clients in labor disputes, and is developing employment policies in compliance with China’s new data privacy rules. The practice has been widely recognized as one of the best in China by Legal500 and Asialaw Profiles, For more information, please contact Maarten Roos at roos@rplawyers.cn), or your usual contact at R&P.