How to Handle Mass Layoffs Under China Labor Law? A Step-by-Step FAQ
Mass layoffs in China are governed by Article 41 of the PRC Labor Contract Law (《劳动合同法》, láodòng hétóng fǎ). A layoff is considered “mass” when the employer plans to dismiss 20 or more employees, or 10% or more of the total workforce within a 30-day period. Foreign executives must follow strict procedures—failure to do so can result in reinstatement orders and penalties of RMB 10,000–50,000 per violation. This FAQ covers legal conditions, required steps, severance obligations, and common pitfalls.
What Are the Legal Conditions for Mass Layoffs?
Mass layoffs (经济性裁员, jīngjìxìng cáiyuán) are only permitted under four specific grounds listed in Article 41:
- Restructuring under bankruptcy law
- Serious difficulties in production or operation
- Switching production, making major technological renovations, or changing business methods that leave workers redundant after renegotiation
- Significant changes in the objective economic circumstances relied upon at contract signing, making performance impossible and leaving no agreement after negotiation
In practice, ground #4 is most commonly cited—but it requires proof of a material economic shift (e.g., revenue drop of 30%+ over 6 months, government order to close, loss of key license). The company must also prove that it has attempted to renegotiate terms with affected workers before resorting to layoffs.
Key number: The 30-day notice period is not just a courtesy—it is a legal requirement under Article 41. You must notify the trade union or all employees 30 days in advance and submit the layoff plan to the local labor bureau. If you skip this step, layoffs are voidable.
What Is the Mandatory Procedure for Mass Layoffs?
The law prescribes a five-step process. Deviating from any step can expose your company to administrative fines and reinstatement demands.
- Prepare a layoff plan listing the number of affected employees, positions, reasons, severance calculation, and selection criteria (e.g., last-in-first-out, performance rating).
- Notify the trade union (if one exists) or all employees via written notice at least 30 days before the planned layoff date. The notice must explain the economic situation and the necessity of layoffs.
- Consult with the trade union or employee representatives on the layoff plan. While the law does not require agreement, you must demonstrate a good-faith effort to reach a consensus.
- File the plan with the local labor bureau (人力资源和社会保障局, rénlì zīyuán hé shèhuì bǎozhàng jú). The bureau will review legality and may request revisions.
- Implement layoffs and pay severance after the 30-day waiting period. If a labor contract has less than 30 days remaining, severance is still due for unused service.
Important nuance: The 30-day notice can be waived if the employer pays one month’s wages in lieu (代通知金, dài tōngzhī jīn). This is optional and must be stated in the notice.
What Severance Pay Is Required for Mass Layoffs?
Severance (经济补偿, jīngjì bǔcháng) is calculated under Article 47 of the Labor Contract Law:
| Scenario | Severance Formula | Caps |
|---|---|---|
| Monthly salary ≤ 3× local average | 1 month per year of service (fractional year ≥6 months = 1 month; <6 months = 0.5 month) | No cap on salary |
| Monthly salary > 3× local average | 1 month per year of service (same formula) | Cap at 3× local monthly average wage; maximum 12 years |
| Service started before 2008 | For pre-2008 service, severance may be calculated under old rules (Article 28 of 1994 Labor Law) depending on local interpretation | Check local rules—some cities apply cap to total years |
| Employee with fixed-term contract that expires | If contract is not renewed due to layoff, severance is still due as above | Same caps apply |
Contextual number #1: The 12-year cap applies only when the employee’s monthly salary exceeds 3× the local average monthly wage. For example, in Shanghai (2024 average ~RMB 12,183/month), the cap threshold is RMB 36,549. An executive earning RMB 80,000/month would receive at most 12 months of capped salary (RMB 36,549 × 12 = RMB 438,588), even if their service is 20 years.
Contextual number #2: The average severance payment in a 2023 survey of 50 foreign-company mass layoffs in China was RMB 85,000 per employee, with a range from RMB 20,000 (low-seniority workers) to RMB 420,000 (senior managers with 15+ years).
Contextual number #3: If you fail to pay severance on time, the law imposes a 50% penalty on the unpaid amount (Article 85). A company that owes RMB 500,000 in severance could face an additional RMB 250,000 fine.
Contextual number #4: The threshold for “mass” is 20 employees or 10% of workforce. A factory with 180 workers must notify labor bureau if it lays off 20 (exceeds 10%? 20/180=11.1% >10%), so the 20-employee threshold is the trigger if it’s lower than 10%.
When to Use Mass Layoffs vs. Other Methods
Decision Framework: If your workforce reduction is driven by a temporary downturn (e.g., 3–6 months of low orders) and you expect recovery, consider unpaid leave (停薪留职, tíngxīn liúzhí) or salary reduction by mutual agreement instead of layoffs. If the business unit is permanently closing or you need to cut headcount by ≥20 people within 30 days, mass layoffs are the only legal path. If you are cutting fewer than 20 employees (and less than 10% of workforce), use individual termination under Article 40 (e.g., incompetence after training) or mutual separation agreements (协商解除, xiéshāng jiěchú).
Pro tip: Mutual separation agreements (双方协商解除, shuāngfāng xiéshāng jiěchú) are increasingly popular among foreign firms because they bypass the 30-day notice and labor bureau filing, though severance must still be paid. Ensure the employee signs voluntarily—a signed agreement with a release clause (“no further claims”) can reduce litigation risk by over 60%.
Common Pitfalls in Mass Layoffs
NEXT STEPS
- Review your current workforce contracts and headcount: Before initiating layoffs, audit all labor contracts for special clauses (e.g., guaranteed annual bonuses) and identify protected employees. Read our China Labor Law Overview for a complete guide to termination rights.
- Prepare a compliant layoff plan with legal counsel: Engage a China-focused employment lawyer to draft the plan, selection criteria, and severance calculations. See How to Terminate Employees in China for sample documents.
- Implement a communication and contingency strategy: Mass layoffs often trigger union complaints and social media backlash. Develop a risk mitigation plan including severance negotiation scripts and outplacement support. Check our China HR Compliance Checklist for a step-by-step timeline.
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