How to reduce all employees’ salary?

Recently, “layoffs” or “salary cuts” frequently popped up on social media. Employers believe that they could independently determine the salary level of all employees according to Article 47 of the “Labor Law”, which prescribes that, “An employer shall, in light of the characteristics of its production and business operations and its economic benefits, independently determine its own salary distribution measures and salary levels.” Employees believe that the salary level could only be changed based on employees’ consent according to Article 35 of the “Labor Contract Law”, which prescribes that, “Upon negotiation and consensus between an employer and an employee, the contents of a labor contract may be varied.” Whose opinion is right?  

The salary reduction has two categories, which are the individual salary reduction and the collective salary reduction. The individual salary reduction could be implemented by two methods, that is, the employee agrees to reduce his salary, or the salary is reduced within a reasonable range due to the change of the employee’s position legally. Since the individual salary reduction is not the focus of this article, we will not go further. The collective salary reduction is more complicated, and it shall meet the following requirements.

Firstly, if the collective labor contract has a provision which states that the employer could reduce salary due to a decrease in its economic benefits, such provision could be directly implemented.

Secondly, if there is no collective labor contract, or the collective labor contract does not have such provision, the collective salary reduction could be conducted with a precondition as a decrease in the employer’s economic benefits, and by the procedure as stipulated in Article 4 of the “Labor Contract Law”.

How to determine a decrease in the employer’s economic benefits is a reasonable precondition? In view that there is no law or regulation that prescribes such issue, the rules regarding layoffs may be taken into reference.

One of the conditions for economic layoffs stipulated in Article 41 of the “Labor Contract Law” is that the employer encounters serious difficulties in production and operation. Meanwhile, Article 27 of the “Explanation on Several Articles of the Labor Law” (Lao Ban Fa [1994] No. 289) stipulates that “serious difficulties in production and operation” can be defined according to the standards for difficult enterprises set by local governments. Therefore, it is recommended to self-check according to local standards.

In addition, some local governments have published rules regarding economic layoffs. For example, Shanghai once issued the “Measures for Implementing Economic Layoffs in Local Enterprises”, which stipulated two preconditions, that is, the enterprise has taken measures by stopping recruitment, dismissing external employees, cancelling overtime work, reducing salaries and so on; and the enterprise does not have a significant improvement after taking such measures for half a year. However, this document was abolished in 2002 and there have been no new regulations since then. The “Notice of Wuxi Labor Bureau on Issuing the Implementation Measures for Enterprise Economic Layoffs” is currently effective, and its content is roughly similar to that of Shanghai.

In fact, the collective salary reduction does not have to reach the level of economic layoffs, so the above standards are just for reference. In view of the previous judicial judgments, if an employer’s financial reports showing continuous losses for three years, most courts would determine that the enterprise has a decrease in economic benefits. It should be noted that if a collective salary reduction is only aimed at reducing costs and improving operations, normally such reduction would be deemed as illegal, such as (2021) Hu 01 Min Zhong No.9999.

If the precondition is met, the employer shall go through the legal procedures. Article 4 of the “Labor Contract Law” prescribes that when an employer formulates, revises or decides on rules or major matters pertaining to labor remuneration etc., it shall go through the legal procedures of democratic consultation and public disclosure.

In practice, if an employer meets the precondition, and goes through legal procedures, the majority courts would support the employer. However, we have noticed that in rare individual cases, the court still believes that the employee’s personal consent should be obtained, such as (2021) Jing 03 Min Zhong No.4988.

In order to implement the collective salary reduction more smoothly, it is recommended to evaluate the acceptability and rationality of the collective salary reduction plan, such as the duration of salary reduction, the reduction ratios for different positions and so on.