China: Replacing Employees with AI is an Operational Decision, not Force Majeure or Material Change in Circumstances
Article 40 of PRC Employment Contract Law permits termination where objective circumstances materially change, rendering the contract unperformable and no amendment agreement is reached. Mr. Liu, a data collector, had his role replaced due to the company’s AI-driven business transformation. The dispute centred on whether this constituted a “material change in objective circumstances.” The arbitration commission and both trial courts uniformly concluded that adopting AI technology was an autonomous business decision, lacking the irresistibility and unforeseeability required under the law for material change in objective circumstances. Therefore, the company’s direct termination of Mr. Liu’s contract was deemed wrongful.
Mr. Liu joined a technology company as a data collector on 1 July 2009, and was responsible for traditional manual map data collection. In early 2024, the company decided to undergo a business transformation, shifting entirely from traditional manual collection to AI-led automated data collection, resulting in the cancellation of the navigation product department where Liu worked and the corresponding position.
On 26 December 2024, the company terminated Mr. Liu’s employment contract on the grounds that “materials changes in the objective circumstances” upon which the employment contract was based have rendered it impossible to continue performing the contract, and both parties have failed to reach an agreement on amending the contract’s content. Mr. Liu subsequently applied for arbitration.
The Beijing Arbitration Commission held that the company’s adoption of AI technology constituted a normal business decision and proactive innovation, rather than an unforeseeable “objective circumstance” justifying termination of employment. By citing AI-based role replacement as grounds for dismissal, the company wrongfully shifted the ordinary risks of technological evolution onto the employee. Consequently, the termination of Mr. Liu’s contract was deemed to lack factual basis and amounted to wrongful dismissal.
The technology company did not accept the arbitration award and subsequently filed a lawsuit with the court. The court of first instance rendered a judgment consistent with the arbitration award and the court of second instance upheld the original judgment of the first instance.
The second-instance judgment stated that the “material change in objective circumstances” claimed by the technology company referred to the adjustments in its business strategies and operations due to factors such as technological development and market changes. However, as a market entity, the company is inherently subject to influences like market changes and technological development. These factors constitute risks that the technology company should have been able to foresee in its normal operations. The circumstances described by the technology company do not fall within the scope of “material change in the objective circumstances relied upon at the time of conclusion” as stipulated by the aforementioned law.
Key Action Points
The key issue of this dispute is whether an employer’s termination of a position due to the introduction of AI technology constitutes a “martial change in the objective circumstances upon which the employment contract was based.”
According to Article 79 of the Answers of the Beijing Higher People’s Court and the Beijing Labour and Personnel Dispute Arbitration Commission on the Adjudication of Labour Dispute Cases (I), a “martial change in objective circumstances” refers to unforeseeable changes occurring after the conclusion of an employment contract and are not foreseeable to both the employer and the employee at the time of contract conclusion. Such changes must be beyond the employer’s normal operational risk control and carry characteristics of irresistibility and unforeseeability. Typical examples include force majeure events, employer relocation, or production suspension due to legal or policy changes.
In the context of the rapid development of artificial intelligence technology, it has become a common trend for employers to optimize business processes through technological upgrades. However, it is crucial to clarify that job adjustments resulting from technological substitution fundamentally belong to the realm of enterprise operational decisions. It is advisable to prioritize the proper placement of affected employees through measures such as negotiating changes to employment contracts, providing skills training, arranging internal job transfers or reaching mutual termination agreements. Directly proceeding with unilateral termination of employment contracts may face the risk of wrongful termination.
