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09. Transfer of Undertakings
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09. Transfer of Undertakings

Employees’ Rights in Case of a Transfer of Undertaking

Under the Labour Contract Law, when an employer decides major company matters that directly implicate the interests of employees, the employer should discuss such matters with the employee representative congress or its entire staff. It should only make a decision after consulting with the trade union or employee representatives. The consultation procedure is designed to give the trade union and employees a chance to express their opinions, but the employer has the authority to make the final decision.

A transfer of undertaking may include many scenarios, such as mergers and acquisitions. The key issue is whether such transfer will materially affect the interests of some or all employees. Under PRC law, if the transfer only involves a change of shareholders with the employer remaining unchanged, the performance of employment contracts will not be affected. Furthermore, in case of a merger, the original employment contracts may remain valid and the surviving party will continue to recognise and perform the employment contracts. In both of these scenarios, the consultation obligation would not be triggered because the employees’ interests are not materially affected (there are different requirements for the restructuring of state-owned enterprises).

Another scenario involves the acquisition of assets, which may be defined by the labour law as a material change in the objective conditions on which the employment contracts were based. Such change would usually result in a shift of employment relationships or redundancies. Accordingly, the acquisition of assets itself would not trigger the consultation obligation; but if the acquisition of assets results in mass redundancy of employees, then a similar consultation obligation is required to be performed by the employer.

Requirements for Predecessor and Successor Parties

  • Equity Deal

A change of shareholders and a merger would not affect the performance of employment contracts and therefore neither the transferor nor the acquiring party is obliged to pay severance to employees. However, in practice, employees often demand severance and even collectively oppose such transfer, because they misconstrue a change of shareholders as a termination of employment or they worry that their rights and interests will be impaired after the transfer. Therefore, to appease these employees, some acquiring parties may promise that they will not reduce employees’ compensation or benefits after the transfer and may even undertake to refrain from collective layoffs for a certain period (such as two years) following the consummation of the transfer of undertaking.

  • Asset Deal

In the event of the acquisition of assets, the acquiring party is not legally obliged to employ the employees of the target company, unless both the acquiring party and the employee agree to establish an employment relationship. If both the acquiring party and the employee agree on the transfer of employment, they may enter into a tri-party agreement together with the transferor to stipulate that the transferor and the employee will terminate their employment contract and that the transferee and the employee will sign new employment contracts. This may raise the issue of severance. According to the Implementation Rules of PRC Labour Contract Law, the transferor may ask the acquiring party to assume the employees’ seniority. In other words, any seniority of transferred employees may be carried over to the acquiring party after the acquisition and no severance is paid until the employee is actually terminated during the employment with the acquiring party. This option for the transferee to carry over the employees’ seniority reduces immediate transaction costs for the transferor, and thus it is more common in practice.

When the employment contract between the acquiring party and the employee is finally terminated, the employee may be entitled to receive severance according to law. At that time, the continuous seniority with the transferee and the transferor will be combined together for severance calculation. However, some employees may firmly request severance even when they agree to transfer their employment relationship to the acquiring party. This makes the payment of severance difficult to avoid.

If the employee does not want to transfer to the acquiring party or the acquiring party does not want to hire an employee, the transferor may terminate the employment contract with the employee by a mutual termination agreement. If the employee refuses to sign the mutual termination agreement, the transferor may offer to amend the employment contract for the reason that the objective situation has materially changed and then unilaterally terminate the employment contract, by giving the employee 30 days’ prior written notice or one month’s salary in lieu of notice, when the parties fail to reach an agreement on the amended employment contract.

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