China economic redundancy: the 20-person and 10% tests

1. Count the proposed reduction against the relevant workforce

Article 41 addresses a reduction of at least 20 employees, or fewer than 20 employees where the reduction represents at least 10% of the enterprise’s total workforce. These are alternative numerical tests. Passing either test does not dispense with the statutory grounds, employee protections or procedure.

For illustration only, a proposed reduction of 18 out of 150 employees is 12%, so it meets the percentage test despite being below 20. A reduction of 8 out of 150 does not meet either numerical test. That second example does not mean the employer can dismiss eight employees without a separate lawful basis. Neither illustration is a reported case.

Reconcile the proposed list with contracts and the current employee register. Identify the employing entities, branches, agency arrangements and affected dates before choosing the denominator; a regional group spreadsheet is not sufficient by itself. Have the counting basis reviewed if several entities or successive batches are involved. Do not split a single plan merely to avoid examining Article 41.

2. Connect the commercial reason to a statutory ground

Article 41 lists four grounds: reorganization under the Enterprise Bankruptcy Law; serious production or business difficulties; a change in production, major technological innovation or adjustment of business methods that still requires reductions after employment contracts have been modified; or another major change in the objective economic circumstances underlying the contracts that makes them impossible to perform.

A group-wide cost target, removal of a reporting line or an overseas board resolution does not by itself prove one of those grounds for the China employer. Match the proposed ground to dated financial and operating records, order or business changes, the organization before and after the proposal, and the effect on the relevant contracts. Where contract modification is part of the statutory ground, preserve the actual modification process and explain why reductions remain necessary.

If the evidence does not support Article 41, reconsider the route. A negotiated exit under Article 36 requires agreement. An individual termination under Article 40 has its own conditions. Relabeling the same unsupported proposal does not resolve the missing legal basis.

3. Separate protected employees from priority-retention groups

Article 42 bars termination under Articles 40 and 41 in specified circumstances. These cover occupational-hazard workers without a pre-departure occupational health examination, or suspected occupational-disease patients during diagnosis or observation; occupational disease or work injury at this employer with confirmed total or partial loss of working capacity; the prescribed medical-treatment period for illness or non-work injury; pregnancy, maternity or nursing; and at least 15 consecutive years with the employer while less than five years from statutory retirement age. Other protections under laws or administrative regulations must also be checked.

Article 41 separately gives priority for retention to employees on relatively long fixed-term contracts, employees on open-ended contracts, and employees whose households have no other employed member and include an elderly person or minor requiring support. Treat these as distinct reviews: a selection score cannot replace a protection check or an explanation of priority retention. Verify the applicable statutory retirement date for the individual instead of relying on a standard age in an old HR template.

4. Build consultation and reporting into the timetable

Article 41 requires the employer to explain the circumstances to the trade union or all employees 30 days in advance, hear the union’s or employees’ opinions, and report the reduction plan to the labor administrative department before implementing the reduction. Article 43 also governs prior notification of reasons to the trade union for unilateral termination and the handling of its opinions; check the applicable union arrangements.

Prepare a proposal that can be explained and reviewed, record questions and responses, and retain the final plan and reporting evidence. Confirm the responsible local department and its current submission requirements before promising an implementation date. A report receipt records the reporting step; it does not by itself establish that the ground or each individual termination is lawful.

Do not treat Article 40’s option of an additional month’s wages instead of individual advance written notice as a substitute for Article 41’s explanation, consultation and reporting sequence. Align headquarters communications with the China process so a global announcement does not present an unreviewed local outcome as final.

5. Budget the exit and assign responsibility after it

Article 46(4) requires economic compensation for a termination under Article 41(1). Review service history, the wage basis and applicable limits under Article 47, together with any relevant transitional rules, rather than applying one flat amount to everyone. A budget is not evidence that the dismissal route is lawful.

The process also continues after departure. Under Article 41, if the employer hires again within six months after a reduction under its first paragraph, it must notify the employees who were made redundant and give them priority under equal conditions. Assign an owner to retain contact and notification records and review proposed hiring during that period.

6. Prepare a decision file before the announcement

A focused legal review needs the employing-entity map, workforce and proposed-reduction counts, the ground and its supporting records, an employee protection and retention matrix, consultation and reporting records or a proposed timetable, and the compensation and rehiring arrangements. Article 44 of the SPC Interpretation (I) on Labor Disputes, Fa Shi [2020] No. 26, places the evidential burden on the employer for disputes arising from employer decisions including termination. Preserve contemporaneous records and keep headquarters’ explanation consistent with the local file.

For an initial discussion, provide a non-confidential outline of the China entity, city, business change, workforce size, proposed reduction and intended timing. Agree the document-sharing arrangements before sending individual medical, family or payroll records.