Determination of “significant changes in the objective circumstances” of a company

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IIf a company is unable to continue an employment contract due to “significant changes in objective circumstances”, is it legal to terminate an employee in the absence of successful negotiation? In this article, the author examines the “objective circumstances” and the criteria for determining them, based on a specific case.

In this case, Zheng joined Company A as an account manager in October 2005 under a permanent employment contract. On September 7, 2018, Company A terminated Zheng’s employment contract on the grounds that “the company suffered severe losses due to market impact, necessitating adjusting the mode of operation and suspending the activity for accommodation, and could not continue to perform the employment contract despite the consultation”.

Believing that Company A had illegally terminated the contract, Zheng filed for labor arbitration and sought compensation for illegal termination.

ARBITRATION REWARD

Xaio Jianji
Partner
ETR law firm

Initially, the Labor Dispute Arbitration Commission held that the termination of the employment relationship was legal, but Company A should pay economic compensation to Zheng.

Zheng refused to accept the reward and filed a lawsuit with the court of first instance to seek compensation from Company A for unlawful termination of the employment relationship. This time, the court ruled that Company A’s dismissal was illegal and that it should pay damages to Zheng.

However, Company A refused to accept the judgment at first instance and requested the author’s intervention at second instance.

Eventually, the court of second instance ruled that Company A’s termination of the employment relationship was in accordance with Article 40.3 of China’s Labor Contract Law on the grounds that the two parties failed to reach an agreement n did not break the law and that the trial court’s decision was wrong and should be corrected in accordance with the law. Finally, the second instance court ruled that Company A only needs to pay Zheng economic compensation to legally end the employment relationship.

AUTHOR’S OPINION

The subject of the dispute in this case was whether the situation of Company A was consistent with “significant changes in objective circumstances”.

The author was of the opinion that:

  • In accordance with article 26 of the Explanations of the Ministry of Labor concerning the provisions of the law on employment contracts, “objective circumstances” means events of force majeure or other circumstances which make the contract impossible to perform, such as relocation of a business, merger of a business, and transfer of business assets. In this case, Company A was merged with a third-party hotel due to its mismanagement and serious long-term losses. According to the provisions, the merger was a material change in the objective circumstances on which the employment contract was originally based.
  • According to Article 19 of the Regulations Implementing the Employment Contracts Law, the act of Company A in this case was an adjustment of the mode of operation due to serious difficulties in production and operation, which which makes it a material change in objective economic circumstances.
Yin Songmao, ETR Law Firm
Yin Songmao
Associated
ETR law firm

Moreover, Company A did not fire Zheng maliciously. After the “objective circumstances” changed, Company A immediately sent out summonses to all employees, and Zheng personally attended the meeting.

Later, Company A negotiated with Zheng several times, but he did not accept the termination. Company A has exhausted all means of negotiating with Zheng to modify or terminate the employment relationship. In this case, it would have been too difficult to require Company A to terminate the employment contract with Zheng’s consent. Otherwise, the double compensation provided for by the law on the employment contract would only become a legal tool allowing some to obtain illegal advantages.

CASE ANALYSIS

Company A, a large private company, was engaged in hotel management. Due to poor management and the impact of the market, it had been in the red for a long time, so the way it operated had to be changed. Whether it was to stop a loss or save the company, a third-party merger was the best choice. After the merger, the renovation and redecoration of the hotel was in line with market rules for mergers, splits or business combinations.

Since Company A had to completely suspend operations for the layout, it was unable to offer Zheng a corresponding job and terms. After failing to reach an agreement with him despite long negotiations, she terminated the working relationship and paid economic compensation.

It would have been unfair to Company A if the merger decision had been its subjective adjustment to its own operating conditions, rather than an objective factor, and exposed the company to a dilemma, which was not conducive to the transformation or the rescue of the business company. Since the merger became an unexpected objective fact for Zheng or Company A, it fell into the scope of “objective circumstances”.

The decision to merge was made by Company A based on its overall business situation, rather than targeting Zheng or any other employee. It should not be considered as a subjective decision of the company, affecting the legitimate rights and interests of employees. Otherwise, it would undoubtedly make the difficulty of merging worse.

Furthermore, even if the company’s decision was subjective, the essential point to consider in this case was whether it was necessary – upon the occurrence of the objective fact of the merger – for Zheng and company A to negotiate to modify the original employment contract to determine whether it was legal for Company A to terminate the employment relationship when the negotiation failed, rather than whether the merger decision was a subjective adjustment or an objective factor.

After a thorough analysis of this case, the author suggests that in dealing with similar cases, regardless of the party, achieving the ideal result requires understanding and correctly grasping whether the employer’s situation is objective or not. .

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