What conditions must be met for a company to terminate a labor contract on the grounds of "significant changes in objective circumstances"?

Terminating a labor contract on the grounds of "significant changes in objective circumstances" is a relatively error-prone reason for dismissal. The reason for this lies in the fact that although the law grants certain rights to lay off employees, there are deviations in the understanding of the legal provisions in practice, especially in the operation of the "negotiation" stage, which is prone to be non-standard. This article will, from a practical perspective, deeply dissect this frequent reason for layoffs.

I. Legal Origin: What is "Significant Change in Objective Circumstances"?

When a company terminates a labor relationship, it must have a valid reason and cannot create excuses.

This type of termination is based on Article 40, Paragraph 3 of the Labor Contract Law

Where the objective circumstances on which the labor contract was based undergo significant changes at the time of its conclusion, making it impossible to continue the performance of the labor contract, and the employer and the employee fail to reach an agreement on amending the content of the labor contract through consultation. According to the law, a legal dissolution must simultaneously meet two conditions, neither of which can be missing:

1. Major changes occur in objective circumstances, making it impossible to perform the contract;

2. The two sides failed to reach an agreement through consultation.

In practice, many companies often fail on the second condition.

Ii. Core Dispute One: What exactly constitutes "objective circumstances"?

Traditional definitions and modern expansions

The document issued by the Ministry of Labor in 1994 (" Explanation on Several Articles of the Labor Law ") (No. 289 of the Office of the Ministry of Labor on September 5, 1994) limited objective circumstances to external factors such as "enterprise relocation, merger, and asset transfer" that are beyond the subjective will of the enterprise to transfer, and these are excluded from the reasons of "economic layoffs" such as severe operational difficulties.

However, in today's market economy environment, the judgment's stance has somewhat loosened. It is often believed that subjective business adjustments made by enterprises to adapt to market changes, such as departmental layoffs, organizational upgrades, business transformations, project completions, and operating losses, may also be regarded as "objective circumstances".

2. Two essential elements that "change" must possess

Although the scope has become more lenient, enterprises still need to provide evidence to prove that:

Significance: Not all changes are called "significant". The enterprise must prove that this change makes the original contract fundamentally impossible to perform. For instance, if a company claims to be incurring losses, it needs to provide audit reports and financial statements to prove that it has reached a point where it has no choice but to lay off staff and "downsize".

Newness (time point) : The change must occur relative to the "time of contract formation".

Previously, a major Internet company had laid off employees due to consecutive years of losses, but the court eventually ruled in favor of the employees. The reason is that this loss already existed when the employee signed the contract upon joining the company and was not a new change. The company should have foreseen this risk when recruiting.

Iii. Core Dispute Two: False "Negotiation" and Invalid "Job Transfer" This is the most error-prone link.

Negotiation is not about "discussing compensation", but about "discussing changes".

Many HRS believe that "negotiation" means discussing whether to pay N+1 or N+3 compensation. If they fail to reach an agreement, they will be fired. This is completely wrong. The negotiation as stipulated by law refers to the negotiation to modify the contents of a labor contract (such as position, location, and salary). Only when the company provides a change plan and the employee refuses it can it be regarded as "unsuccessful negotiation".

2. Be vigilant against "special" negotiations

In judicial practice, the key point to review is whether the obligation of honest and good-faith negotiation has been fulfilled:

What is dishonesty? It's just a simple notification of the department's revocation without explaining the reason, or the so-called "revocation" is merely a change in the department's name, with the original staff doing the same thing and only laying off a certain person specifically.

(1) Provide competitive opportunities rather than determine positions

Many companies tell their employees, "There is an internal fresh water program. You go and compete for it yourself." This does not fall under the category of effective negotiated resettlement. Since layoffs are a unilateral act of the company, the enterprise has the obligation to make a specific and definite offer to the employees (including clear job titles, responsibilities, salaries, and locations), rather than leaving them to take a chance.

(2) Relocation to a different location/significant salary reduction

If the company offers a position in a different location (such as being transferred from Shanghai to Suzhou) or with a salary cut in half, can the employee not take it?

This is a high-risk game point. Although this may seem like "malicious forced resignation", in some precedents (such as those in Hongkou District), if an employee directly and stiffly refuses, it may be regarded as "the company has provided an opportunity, but the employee has voluntarily given it up".

3. Another decision made by the company: from "layoffs" to "dismissal for absenteeism". Some companies, if they find that negotiations cannot reach an agreement, will issue a "Notice of Deadline for Return to Work", forcing employees to move to a new position (either in a different location or by job transfer). If an employee fails to show up, the company will send consecutive letters and eventually terminate the contract on the grounds of "absenteeism" (serious disciplinary violation) without paying a penny in compensation. The key to dealing with this situation lies in arguing the rationality of the job transfer. If the job transfer itself lacks objective necessity or is insulting, the employee has the right to refuse.

Iv. Legal Consequences and Compensation Calculation

1. Legal termination: N or N+1

If the company still fails to reach an agreement with the employee after strictly following all the above procedures, the act of terminating the contract is considered a legal termination: compensation standard (N+1) : Pay economic compensation (N). If no written notice is given 30 days in advance, an additional month's salary shall be paid as a substitute allowance (1).

Ceiling limit: According to the "Labor Contract Law", if an employee's average monthly salary exceeds three times the average social wage of the previous year in the local area (the current triple ceiling base in Shanghai is 12,434 *3= 37,302 yuan), it will be calculated based on the triple ceiling, and the maximum service period shall not exceed 12 years.

Note: Before 2008, there is no 12-year cap on the length of service. It needs to be calculated in segments, but the conditions for paying economic compensation at that time must be met.

2. Illegal termination: 2N or restoration of the labor relationship

If the company fails to meet the legal conditions (such as no substantive negotiation), it is considered an illegal termination. The employee has two options:

Option A: Request to continue the performance of the labor contract (restore the labor relationship). In practice, except for female employees in the "three periods" or those with work-related injuries, it is rather difficult for ordinary employees to claim the restoration of labor relations, and the success rate is very low. However, it can be considered as a litigation strategy.

Option B: Claim compensation for illegal termination (2N).

Regarding the cap: It should be noted that as of the time of publication, current judges tend to believe that 2N is also subject to a dual cap of three times the average social wage and a 12-year service period. Even if the termination is illegal, the upper limit of the compensation that high-paying and long-service employees can receive is usually: 3 times the social average ×12 months ×2 times. The service years before 2008 mentioned above are not calculated in segments.

V. Conclusion

Whether the termination of a labor contract on the grounds of "significant changes in objective circumstances" is legal depends on the objectivity of the company's basis and whether the negotiation process is honest and in good faith. Only when all the above conditions are met can the company pay N+1 or N to terminate the labor contract. Any other termination is considered illegal. When enterprises apply this rule, they must be cautious. They should do a good job in both procedures and substance, handle labor disputes properly, and build harmonious labor relations.