Is corporate merger ‘significant change of objective circumstances’?

According to Article 40 of the Labour Contract Law, an employer may terminate an employee’s labour contract by giving a 30-day written notice to the employee or paying the employee an extra month’s salary in lieu of the notice under certain circumstances where “any significant change of the objective circumstances on which the conclusion of the labour contract is based renders the performance of the contract impossible, and the employer and the employee have attempted to negotiate, but failed to reach an agreement on how the labour contract may be modified.” (Article 40 (3) of the Labour Contract Law).

In the past couple of years, understanding and interpreting “significant changes of objective circumstances” have been highlights of many local guidelines for arbitration and judicial proceedings involving labour disputes. Examples include the Explanations on Issues Concerning Application of Laws in the Hearing of Labour Dispute Cases jointly released by Beijing Higher People’s Court and Beijing Labour and Personnel Dispute Arbitration Committee, the Explanations on Challenges Concerning the Hearing of Labour Dispute Cases issued by Guangdong Higher People’s Court, the Minutes of the Symposium on Challenges in the Settlement of Labour and Personnel Disputes published by the Labour and Personnel Dispute Arbitration Committee of Jiangsu Province, as well as the Minutes of the Symposium on Issues Concerning Application of Laws (I) and the Minutes of the Symposium on Issues Concerning Application of Laws (II) of the First Civil Chamber of Chongqing Higher People’s Court. One of these issues or challenges relates to arguments over whether a corporate merger can be interpreted as a “significant change of objective circumstances”. For enterprises, it is important to gain a correct understanding of these regulations so as to avoid violations in terminating labour contracts. In this article, we will analyze this issue by looking at a real case.

Case overview

The general meetings of Company B and Company A approved a merger between the two, upon which Company A would be deregistered and Company B would still exist. As the merger was expected to lead to overlapping jobs, Company A, as the entity being acquired before the deregistration, decided to reallocate Brown, one of its employees, to a new position. It discussed the reallocation with Brown, but Brown declined three job offers from Company A. Subsequently, Company A terminated the employment of Brown, claiming there was a “significant change of objective circumstances”.

Qi Bin is the PRC employment legal service leader and Wilson Dong is an associate at Xin Bai Law Firm. Rui Bai and Xin Bai are independent law firms and members of the PwC global network of firms