China: Determining the Termination Date of Labour Contracts Upon Employer Dissolution: Judicial Interpretations and Practical Guidance

Introduction

Article 44 of the Labour Contract Law recognises the dissolution of the employer as a statutory ground for terminating a labour contract. This provision applies to all types of employees and is therefore of considerable importance in the context of large-scale workforce restructuring. As a key element of the employer’s dissolution or cancellation process, the timing and procedural execution of labour contract terminations have consistently been focal points in judicial practice.

1. Dissolution of the Employer

According to Article 69 of the Civil Code, a legal person shall be dissolved under any of the following circumstances:

1. Upon expiry of the duration specified in its articles of association or for any other reason provided therein;

2. Upon resolution to dissolve by the relevant authority of the legal person;

3. Due to a merger or division of the legal person;

4. Upon revocation of its business licence or registration certificate by law, or being ordered to close down or deregistered;

5. Under any other circumstance as stipulated by law.

Article 44 of the Labour Contract Law and Article 48 of the Supreme People’s Court Interpretation on the Application of Law in the Trial of Labour Dispute Cases (I) affirm that employer dissolution constitutes a statutory ground for labour contract termination. Further, where an employer ceases operation due to the expiry of its business term, it must pay economic compensation for terminating the labour contract.

As such, both early dissolution and the decision not to continue business operations upon expiry of the business term are lawful grounds for terminating labour contracts.

2. Timing of Labour Contract Termination

Judicial practice reveals that the timing of labour contract termination due to employer dissolution can be marked by several different milestones: the formal resolution to dissolve, the cessation of operations and commencement of liquidation, or the deregistration of the employer. Courts also often consider whether the employee has ceased work and has been properly notified.

2.1 Date of the Official Dissolution Resolution

In the case (2016) Jing 03 Min Zhong No. 7267, Factory A submitted a shareholders’ resolution as proof of its dissolution. Despite the employee disputing its authenticity, the Beijing Third Intermediate People’s Court accepted the resolution as valid evidence of the employer’s dissolution, finding that failure to cancel registration or change the legal representative did not negate the dissolution itself.

In case (2017) Hu 01 Min Zhong No. 1842, the Shanghai No. 1 Intermediate People’s Court held that labour law does not require the completion of termination or liquidation procedures before the labour contract can be terminated. A shareholders’ decision to dissolve was accepted as lawful grounds.

Similarly, in case (2017) Yue 03 Min Zhong No. 658, the Shenzhen Intermediate People’s Court found that an early dissolution decision by the employer was sufficient to terminate the labour contract, even if other procedures had not yet been completed.

However, other courts have disagreed. In case (2019) Jing 0105 Min Chu No. 38757, the Beijing Haidian Court held that an internal dissolution resolution without submission to the relevant authority did not justify termination. Likewise, in case (2020) Jing 03 Min Zhong No. 9680, the court ruled that the employer’s evidence did not establish actual dissolution or operational difficulties.

In case (2018) Yue 0106 Min Chu No. 294, the People’s Court of Tianhe District found that despite various documents submitted by the employer, it was still operating at the time of trial and had not completed cancellation, rendering the termination unlawful.

2.2 Date of Cessation of Business and Entry into Liquidation

According to the Company Law, a liquidation committee is responsible for settling claims and debts, and distributing the company’s remaining assets after paying expenses, wages, social insurance premiums, compensation, taxes, and debts.

Courts have accepted the start of liquidation proceedings as the effective termination date. In case (2021) Jing 01 Min Zhong No. 9792, both parties acknowledged that liquidation began in May 2019, and the court upheld termination on that basis.

In case (2019) Yue 0303 Min Chu No. 25076, the Luohu District Court in Shenzhen emphasised that employee termination should occur during liquidation and not merely upon a resolution to dissolve.

2.3 Date of Deregistration

Article 239 of the Company Law states that once liquidation is complete, the liquidation report must be submitted to the registration authority to cancel the company’s registration.

In case (2023) Chuan 0114 Min Chu No. 4398, the Xindu District Court in Chengdu held that the labour contract was terminated upon the company’s deregistration on 22 July 2022.

2.4 Effective Delivery of the Termination Notice

Some courts focus on the effective delivery of a termination notice. For example, in case (2016) Supreme People’s Court Min Shen No. 800, the lower court held the contract terminated upon the dissolution resolution, but the appellate and Supreme Court held that the effective date of contract termination should be based on practical implementation and notice delivery.

Dissolution is not a single time point but a potentially lengthy process. Since employers rarely enter liquidation immediately upon adopting a dissolution resolution, the date of such a resolution should generally be treated as the point of labour contract termination. The employer should not be considered as continuing operations merely because it is resolving residual business matters.

3. Practical Recommendations

1. It is generally advisable for the employer to treat the date of the formal dissolution resolution as the termination point. However, final judgment should consider the company’s actual operations and the views of local social security and judicial authorities.

2. Employers should first attempt to negotiate mutual termination with employees and proactively engage with trade unions and social security departments to explain the dissolution plan and termination timeline, in order to gain support and reduce the risk of group disputes.

3. To mitigate future disputes, employers should retain documentary evidence such as the dissolution resolution, liquidation report, tax clearance certificates, cancellation announcements, notice of liquidation team appointment, deregistration approval, lease termination documents, and the termination notice and proof of service.

Exegesis

[1] Article 44 of the Labour Contract Law provides that the labour contract shall be terminated if the employer’s business licence is revoked, the employer is ordered to close, or dissolves voluntarily, or in other circumstances provided by law.

[2] Article 48 of the Supreme People’s Court Interpretation on Labour Disputes (I) confirms that upon expiry of an employer’s business term, if continuation is impossible and the employee seeks compensation, the court shall support the claim.

[3] This case had special circumstances: the employee was a female worker in the third phase of pregnancy, and although the company claimed to terminate on 31 October 2017, it remained in operation and provided no evidence of ceasing operations.

[4] Refer to Articles 234 and 236 of the Company Law of the People’s Republic of China.

[5] For instance, in case (2024) Yu 0114 Min Chu No. 4798, the Qianjiang District People’s Court in Chongqing held that the company’s deregistration on 26 May 2023 marked the termination of its legal status and thus the labour contract.

[6] First instance: (2015) Zhejiang Hu Min Chu Zi No. 2, Huzhou Intermediate People’s Court; Second instance: (2015) Zhejiang Min Zhong Zi No. 13, Zhejiang Provincial High People’s Court.

Anjie Broad, China, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact china@transatlanticlaw.com

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