Employee Rights When an Undertaking is Transferred in China

1. Employees’ Rights

Under the Labor 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.

2. Requirements for Predecessor and Successor Parties

As discussed, 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.

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.

For more information on these articles or any other issues involving labour and employment matters in China, please contact Carol Zhu, Partner at Zhong Lun Law Firm ( at
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