Becoming dormant

Employee termination implications

Employers in China who are struggling during covid lockdowns and subsequent downturns in business have a new rule that could make employee terminations a bit easier.

A little-noticed provision in national regulations on business registration issued by the State Council that became effective on March 1 now allows companies to file for approval to suspend operations and become dormant.

Article 30 of the Regulations on the Registration and Administration of Market Entities (市场主体登记管理条例), provides that a business may get approval to change its registration to a dormant company for up to three years. One of the specific situations under Article 30 that would justify becoming dormant is when business difficulties are caused by “public health incidents”.

Central government officials commented last year after the announcement of the regulations that a purpose of the dormancy procedure was to assist companies that become temporarily unable to engage in operations due to the covid epidemic.

If an employer decides to become dormant, what about their employees, which the employer presumably would not need?

Under Article 30, employers would need to “negotiate” with their employees before closing their businesses. In other words, it would be expected that an employer would reach agreements with employees on any terminations before getting an approval to change its registration to a dormant company. It would seem possible that the business registration authorities in practice could require companies during the application process to provide information regarding the future employment situation of employees. It may also be conceivable that the authorities could make registration approval subject to employee settlements.

It is probably not likely that a company getting approval to become dormant would trigger an automatic ending of employment contracts, as would a liquidation decision under Article 41 of the Labor Contract Law. Still, getting approval as a dormant company could assist an employer to reduce wages to the local minimum wage, as is permitted under other rules following an announced suspension of business. Moreover, getting approval as a dormant company could support individual redundancies or even a mass layoff.