Chinese law and policy require a specific good cause for replacing AI with employees to cut costs, otherwise it’s unlawful termination. Employers have repeatedly fallen into traps by misinterpreting the statutory rule allowing layoffs when objective business circumstances have changed. Courts have rejected claims that AI constitutes an objective change, reasoning that management under those facts made a purely internal management decision that was not an external business necessity. In this article, we will explain how Chinese courts rule on AI layoffs and provide compliance strategies that can protect you from potential lawsuits.

Contents

• Statutory Elements and Legislative Intent
• How Courts Rule on AI Layoffs
• Judicial Pitfalls for AI Replacement
• Common Pitfalls Leading to Employer Liability
• Digital Transformation Compliance Strategy
• Implementing an AI Layoffs Plan

Statutory Elements and Legislative Intent

Employee termination has long been allowed when changed business circumstances make contract performance impossible, but the vague statutory language and common human resource process defects have made it a major source of employment litigation. (See China Employment Contracts Act § 40(c)) In judicial precedents, Chinese courts increasingly distinguish between changed business circumstances that justify termination and internal management decisions, such as adoption of AI, that don’t. Employers who misunderstand this distinction risk unlawful termination claims. In this article, we will examine the threshold issues in changed business circumstances through the case of AI layoffs, and compliance strategies employers should adopt to avoid legal risks.

The legislative intent is key to understanding the criteria for determining changed business circumstances. The China Employment Contracts Act added this provision to address force majeure events during contract performance not attributable to either party. Employers have a right to autonomously manage the business; thus, they have flexibility to legally restructure the workforce, but they can’t abuse those rights to violate employee rights.

Former Ministry of Labor interpretations and Supreme Court guidelines identify four legal elements of changed business circumstances:

• Time: The change must occur after signing the contract and be unforeseeable to both parties, it can’t have occurred before signing or be a foreseeable business risk.
• Objectivity: The change must be objective, not be attributable to either party, and beyond the company’s control, arising from external factors such as policy changes, market downturns, natural disasters, or be necessary to business continuity. It excludes subjective bad-faith changes such as layoffs solely to reduce costs or targeting certain roles for elimination.
• Impact: The change must make all or most original contract terms impossible to perform, by eliminating the position itself. It can’t be resolved with job redesign or changing the role.
• Process: The employer must first negotiate a contract amendment with the employee and offer a reassignment with a comparable role and pay. Termination is only allowed if negotiations fail and you must provide 30 days’ written notice or pay one month’s salary in lieu of notice, plus severance.

The former Ministry of Labor listed illustrative examples that it says includes, but are not limited to relocation, asset transfer, production shifts, restructuring, and business model changes.[1] The courts retain extensive discretion over what constitutes changed business circumstances.

How Courts Rule on AI Layoffs

New judicial doctrines have emerged because digital transformation initiatives aiming to replace labor with AI replacement have driven a new wave of employment litigation throughout China. A 2025 unlawful termination case in Beijing involving AI replacement of data scraping roles is an example.[2] Liu, a tech employee with over ten years of experience in data collection, was discharged after his company adopted AI.

The company shuttered Liu’s department, eliminated his role, and canceled his contract, citing changed business circumstances. The arbitral tribunal held that adopting AI was an internal management choice, not force majeure or unavoidable, and thus did not qualify as changed business circumstances. The discharge was held illegal, and the employer was ordered to pay significant damages. The court held under the China Employment Contracts Act § 40(c) elements and regional court differences, AI replacement does not constitute changed business circumstances.

Such cases are a warning to businesses undergoing iterative digital transformation. Courts turn on three factors during determination: objectivity, legal elements, and exceptions.

Judicial Pitfalls for AI Replacement

The Liu court provided a very narrow doctrine to analyze whether terminating an employee due to AI is lawful, by drawing a line between whether termination due to AI is due to objective circumstances or not.

AI replacement schemes are classified as an internal management decision, not an objective force majeure event. Replacing workers with AI is an internal business management decision to raise productivity and cut costs, not an external event such as when restructuring is driven by public policy changes, industry-wide collapse, or unforeseeable events. Even if AI is an industry trend, the company controls when to adopt it, which system to choose, and any resulting layoffs, so the adoption does not satisfy the objectivity requirement under the former Ministry of Labor’s definition. This further supports the Beijing arbitral tribunal’s ruling that the termination was unlawful.

AI replacement does not meet the four legal elements for changed business circumstances. AI advancement is a foreseeable industry trend, so employers can anticipate its effects on roles when making employment contracts; it is not an unforeseeable post-contract change. The impact of AI adoption is to eliminate jobs but streamlines and reallocates position duties. Some human tasks remain necessary to work with AI systems. Even if some jobs disappear, employers can reassign employees internally, so it does not constitute impracticability. The process is defective because employers replacing jobs with AI eliminate positions and terminate contracts, without any negotiation reassignment or pay change.

Exceptions are narrowly limited to extreme cases of industry upheaval. Chinese courts do not necessarily reject all AI-driven elimination of roles. Rare cases where policy mandates or technological upheaval force companies to adopt AI automation to survive are considered changed business circumstances. For example, if regulations permit only fully AI-automated companies to operate, eliminating roles may satisfy the legal elements because the environment makes it necessary. ever, such cases remain exceptionally rare in precedents, therefore companies must clearly prove the insurmountable change makes business transformation necessary.

Common Pitfalls Leading to Employer Liability

Trying to legally justify terminations with changed business circumstances is a trap for the unwary. Common pitfalls seen in recent AI replacement cases reported in China are confusion over the legal elements and defective process, with four patterns:

Treating internal management decisions and subjective changes as objective changed business circumstances is the most common pitfall. Employers label restructuring, consolidation, technology upgrades, and AI adoption as changed business circumstances, neglecting that changes be beyond either party’s control. Some even use AI washing or restructuring as a pretext for cost-cutting layoffs, with obvious bad faith that is ruled unlawful termination.

Skipping the statutory prerequisite of negotiating before a termination. The former Ministry of Labor and local courts have held that termination is permitted only after negotiations fail. However, most employers do not engage in substantive negotiations over reassignment, pay rates, or work location after a role is eliminated. Some even fail to offer reassignment and skip to sending termination notices, which leads to defeat in court for procedural defects even if there were objective changes.

Insufficient proof that the contract is impracticable or that the change is objectively necessary. In court, employers must prove changed business circumstances, but they try to prove it with job elimination or restructuring notices, which do not prove an objectively necessary change, actual elimination of the original role, or impossibility of contract performance. For example, courts will rule against an employer who proves they adopted AI, without proving—or inadequately proving—humans are rendered obsolete and reassignment is impossible.

Conflating job redesign with role elimination. Some employers treat adjusted, split, or consolidated duties as role elimination and invoke the clause to terminate the contract. However, courts in judicial precedents require the position to be completely eliminated and reassignment to be impossible before performance becomes impracticable. The statutory condition is not met if there is only a redesign, the employee can still perform the new duties, or the employer can offer a comparable role.

Digital Transformation Compliance Strategy

Employers in China will inevitably need to adjust roles and workforce during a digital transformation or adopting AI or other technologies. Instead of using a top-down process terminations, use documentation, negotiation, and responsible restructuring to ensure compliance while meeting workforce requirements.

To do this, define changes and avoid misusing the changed business circumstances clause. Start by determining whether the change is due to an internal management decision, such as AI adoption or restructuring, or from external objective factors such as policy changes, market downturns, or force majeure. If it is internal, the clause does not apply and cannot justify discharge. If it is external, the clause may apply, and evidence should be prepared in advance. When AI replaces jobs, companies should respond by redesigning jobs and not eliminating roles and support the transition through internal reassignment.

Consider asking CBL to find a lawyer for you if you need help with these issues.

Document the objective change before doing any restructuring, including its necessity, and the contract impracticability. This includes documenting external factors, including policy documents, industry reports, and market data; evidence that eliminating the role is reasonable, such as financial statements and business data; and proof that no suitable internal reassignment is available, such as job listings and suitability analysis.

Use an inclusive process to establish legal defensibility with union talks and review by employee representatives.

Update employment contracts, handbooks, and company policy to include reasonable reassignment provisions. For example, “The employee agrees the employer may reasonably reassign them due to technological upgrades or business needs, with pay appropriate to the new role.” The employee must sign and acknowledge this provision, and any reassignment under it must be fair. Advance agreements are efficient and can reduce risk of reassignment disputes.

Your company employment legal documents should be drafted by an expert who knows how local judges will react to them. If you need help with this, CBL has affordable legal service offerings provided through our network of expert local attorneys.

Implementing an AI Layoffs Plan

Substantive negotiation is a legal prerequisite for restructuring in China. The employer must give the employee a written Notice of Employment Contract Change Negotiation and a reassignment plan stating the role title, duties, pay rate, and work location. You should discuss the plan with the employee, keep written negotiation records, and ask the employee to sign them. If the employee refuses the plan, propose other reasonable options until negotiation is no longer possible to so a court will not rule this was a sham negotiation.

Prioritize responsible restructuring over firings in your response to AI disruption to jobs. Train employees in AI use and redesign jobs to help them transition to human-AI collaboration or reassign employees internally to comparable roles with comparable pay rates. Any salary reduction must be negotiated and confirmed in writing. Negotiate termination of the employment contract if reassignment is not possible and pay statutory severance. Additional compensation may improve the chance of agreement.

Follow local law wherever you do business by reviewing what judicial opinions say is permissible. In stricter regions such as Beijing, avoid relying on the changed business circumstances clause for internal management decisions. In more lenient jurisdictions such as Shanghai, if market upheaval makes restructuring and eliminating some job categories necessary, you must document the necessity and causes and follow the required negotiation process. In jurisdictions falling into the middle such as Guangdong, show that the changes are passive rather than voluntary and that all alternatives have been exhausted.

Conclusion

Digital transformation and AI are reshaping business operations and employment structures. Courts’ rejection of AI layoffs does not prevent technological upgrades or business restructuring, but they do limit employers right of autonomous management. Employers must not use AI layoff as a pretext to cut costs, but use responsible restructuring, including training, reassignment, and negotiated separation, to reduce legal risk, retain key employees, and support workforce transition.

Consider asking CBL to find a lawyer for you if you need help with these issues.

FURTHER READING

Get more insights about Chinese employment law:

How to Conduct a Layoff in China Legally

For a general overview of this topic, see also CBL’s China Employment Law FAQ.

Footnotes

[1] Former Ministry of Labor Interpretations of Employment Act, 劳动部关于《中华人民共和国劳动法》若干条文的说明, (Ministry of Labor, Sept. 5, 1994), text available at Baidu Encyclopedia, (in Mandarin)

[2] Beijing Human Resources and Social Security Administration 2025 AI Layoff Unlawful Termination Case, (2025年北京市劳动人事争议仲裁十大典型案例), (Beijing Human Resources and Social Security Administration, Dec. 26, 2025), (in Mandarin)