China: Shanghai Court Upholds Legitimate Termination After AI-Driven Job Change
Under Article 40, Item (3) of Employment Contract Law of People’s Republic of China (the “Employment Contract Law”), if a major change in objective circumstances, upon which the employment contract was based, makes the contract unperformable, and the employer and employee cannot reach an agreement on modifications through consultation, the employer may unilaterally terminate the contract by providing 30 days’ written notice or paying one month’s salary in lieu of notice, along with severance pay.
In this case, Mr. Gui joined a retail company (the “Company”) in June 2004 as a data analyst. The company launched an ERP system nationwide, significantly reducing manual data work, leading to the cancellation of his operational analysis position in January 2017. After Mr. Gui rejected the company’s offer to transfer to an equivalent store management role, the company terminated his contract, prompting Mr. Gui to file for arbitration, claiming wrongful termination. The key issue was whether such situation constitutes a major change in the objective circumstances. The Shanghai First Intermediate People’s Court held that this situation objectively reduced the company’s demand, resulting in the position ceasing to exist, which falls under the circumstance of a major change in objective circumstances. Where the company conducted good faith negotiations and offered a reasonable alternative position, the termination was lawful.
Mr. Gui joined the company in June 2004, working as a data analysist. At the beginning of 2016, the company promoted the launch of an ERP system in stores nationwide, resulting in a significant reduction in the original manual data statistics workload. In January 2017, due to a major change in objective circumstances, the company decided to cancel the operational analysist position following a management meeting.
Subsequently, the company proposed transferring Mr. Gui to a store management position of the same rank multiple times via email and in-person meetings, promising to provide training support. Mr. Gui explicitly refused multiple times on the grounds that the position still existed, and the job transfer was unreasonable.
On 16 May 2017, the company terminated the employment contract in accordance with the provisions of Article 40, Item (3) of the Employment Contract Law, and paid Mr. Gui statutory severance and one-month salary in lieu of notice.
Mr. Gui considered the company’s termination to be wrongful and subsequently applied for arbitration, requesting payment of the difference in compensation for wrongful termination.
The key issue was whether an employer’s abolition of a position due to the introduction of an intelligent system constitutes a “major change in the objective circumstances under which the employment contract was concluded” as stipulated in the Employment Contract Law.
The Shanghai First Intermediate People’s Court held that this situation objectively reduced the company’s demand, resulting in the position ceasing to exist, which falls under the circumstance of a major change in objective circumstances. Since the company conducted good faith negotiations and offered a reasonable alternative position with same level of pay and title but the employee refused, the termination was lawful.
Key Action Points
The core issue in this case is the reasonableness of replacing an employee’s position due to introduction of an intelligent system, reflecting the controversy over the understanding and application of Article 40, Item (3) of Employment Contract Law. The ruling shows that Shanghai’s approach to determining what constitutes a major change in objective circumstances is slightly more lenient compared to other regions when meeting similar situations.
Article 40 of the Employment Contract Law lists the specific circumstances under which an employer may unilaterally terminate an Employment Contract. Its purpose is to balance the employer’s operational autonomy with the fundamental rights of employees. It is precisely based on this legislative consideration of balancing values that the definition of relevant concepts within this clause is bound to have inherent ambiguity, making it highly susceptible to disputes in practice. When applying this clause, employers should exercise caution considering local judicial practice.
With the rapid development of artificial intelligence technology, it has become an irreversible market trend for employers to optimize business processes and improve operational efficiency by introducing AI or other intelligent systems. The differing value orientations demonstrated by relevant judicial precedents across various regions precisely illustrate that while enterprises possess the legitimate right to pursue technological innovation, they must also adhere to legal and compliant employment procedures in the process of advancing transformation, ultimately promoting the harmonious advancement of technological development and employment relations. Only by reconciling these values in practice can businesses ensure compliance and minimize legal risks when upgrading their operational models.
