China: Termination Based on Position Elimination After Merger Deemed Illegitimate
Under Article 40(3) of the Employment Contract Law of People’s Republic of China (the “Employment Contract Law”), an employer may terminate an employment contract if a major change in objective circumstances makes performance impossible and no amendment can be agreed through consultation. In this case, after a merger, the Company terminated Mr. Jiang’s open-ended contract on that ground. The Beijing Third Intermediate People’s Court held that the merger was a business decision rather than a qualifying objective change, so the termination was wrongful. However, because prolonged litigation had destroyed mutual trust, the court found that the employment relationship was no longer suitable for continuation.
Mr. Jiang joined a computer systems company (the “Company”) on 9 March 2015 under an open-ended employment contract. Following a merger and acquisition, the Company transferred its assets and business and, on 7 May 2019, terminated his employment. The parties then went through multiple rounds of arbitration and litigation over issues including wrongful termination and whether the employment contract should continue to be performed. An effective decision held that the parties should continue performing the contract. However, the Company did not arrange for Mr. Jiang to resume work and instead paid him standby pay at a reduced rate from 5 November 2022 to 15 September 2023.
On 15 September 2023, the Company again issued a termination notice, relying on “a material change in the objective circumstances” and failure to agree on an amendment to the contract. Mr. Jiang applied for arbitration, seeking salary losses, bonuses, rescission of the termination notice, and continued performance of the contract. The arbitral award supported his claims, and the Company sued.
The court held that a merger or acquisition resulting from the employer’s own business decisions does not constitute a “material change in the objective circumstances” under Article 40(3) of the Employment Contract Law, so the termination was wrongful. However, given the parties’ prolonged disputes since 2019, the court found that mutual trust had irretrievably broken down and that there was no basis to continue performing the employment contract.
Key Action Points
When handling employment relationships in the context of mergers, acquisitions, or restructurings, companies should exercise caution in relying on Article 40(3) of the Employment Contract Law and should not treat the merger or acquisition itself as a direct ground for unilateral termination. A more prudent approach is to prioritize termination by mutual agreement, so as to reduce the risk of a wrongful termination finding. Where an employee seeks continued performance of the employment contract, the company’s defence strategy should depend on the circumstances. If the parties are not yet clearly antagonistic and the employee still has a realistic possibility of returning to work, the company should be cautious about arguing that continued performance is impossible. By contrast, where the parties have already gone through multiple rounds of arbitration, litigation, or enforcement proceedings and the conflict has become prolonged and severe, the company may argue that mutual trust has broken down and that there is no longer any basis for continued performance of the employment contract.
