Global economic crisis

With many businesses facing economic problems, the legal focus of business in China is shifting to an understanding of the implications of the new labor law, and specifically, its provisions for the reduction of staff salaries.

The Labor Contract Law is not specific on the reductions of salaries due to economic conditions. However, Article 41 of the law recognizes the reality of ?serious difficulties in production and/or business operations? in the context of terminating staff. When it comes to being faced with the choice of either terminating employment contracts, or reducing salaries, local governments in China are keen to see the staff retained. The Chinese government?s overriding concern is maintaining social stability ahead of economic concerns. Salary reduction is an alternative that both government and employer can agree upon rather than face stiff compensation penalties for terminating staff contracts.

The procedure, however, is not just a matter of agreement between the employer and employee and an amendment to the contract. While not specifically mentioned in China?s labor law, businesses are encouraged to ?consider the opinion? of the labor union and the relevant local labor administration bureau. In practice this means that a report, outlining the economic situation of the business, together with the required contingency plan over salary reductions, needs to be filed with, and agreed by both bodies. In fact, when faced with an economically bleak picture, the labor union may be able to help the company manage the transition. The approval of the Labor Union and the local labor authority will allow amendments to employment contracts to be made, then agreed upon.

China does see certain criteria as being important when it comes to the health of businesses. Key among these are maintaining profitability, employee retention and business sustainability. Businesses in China with a track record of success yet facing difficulties in maintaining salary levels would be well advised to enter into discussions with the labor union or the local labor authority and work with them to reach an effective compromise in staff retention.

The author is the Senior Partner of Dezan Shira & Associates. Companies requiring legal opinion on salary reductions in China may contact Marie Bi, Legal Counsel, Dezan Shira & Associates at legal@dezshira.com.

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Liquidating a China business

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