Salary cuts can be justified in a bad economy but can turn into an expensive legal mistake if handled non-compliantly China. Even reasonable decisions can trigger back pay claims or even unlawful termination liability if not done right. A very specific statutory process must be followed to insulate yourself from lawsuits. Employers often cite the contract or economy as a reason, only to lose a lawsuit on arcane technical grounds. This article will shed light on some common pitfalls and how to avoid them through a poorly understood pillar of Chinese employment law, the inclusive process.
Contents
- Three Common Salary Reductions Approaches
- Compliant Salary Reductions: the “Inclusive Process”
- Sample Process Guide: Shanghai
Three Common Salary Reductions Approaches
There is a pervasive myth among Chinese managers that the contract or economy automatically justifies adjusting salaries—and those local myths have resulted in thousands of arbitration claims and unlawful termination liabilities, even social media blowups. The following is a breakdown of three common approaches towards salary reductions and when—and whether—you can use them. Choosing the correct process can be challenging, because it requires expertise in local law. Fortunately, CBL can help find a lawyer that’s knowledgeable and affordable. We’ll take care of end-to-end legal management and translation so you can focus on your core business.
Unilateral Salary Changes. Employees in China have the right to reject unilateral changes to wages, without it constituting a breach of the employment contract or company policy. Terminating employees who refuse a salary cut may lead to claims of unlawful termination and forcing unilateral change to wages increases the risk of resignations and employment disputes. In many reported cases, employees terminated the employment contract on the grounds that full wages weren’t paid and claimed severance in arbitration. Such claims are typically upheld, with employers liable for unpaid wages and severance.
However, Chinese courts have sometimes denied severance claims when a company-wide salary cut is made, absent bad faith. Beyond legal risks, salary cuts can also lead to increased turnover and reduced morale, so employers should communicate the reasons for pay cuts and future plans to employees in advance to minimize negative impacts and take action to maintain work engagement. Salary cuts can also harm a company’s reputation since employees often post about salary cuts on social media, damaging public image and brand perception. Maintaining transparency and offering compensatory measures during the process can help protect the company’s reputation and maintain employee relations.
Employment Contract Provisions on Salary Cuts. Salary cut terms don’t override the China Employment Contract Act’s negotiation requirement, which require proving salary changes are necessary and reasonable, notwithstanding contrary agreement. § 35 requires that changes to an employment contract be negotiated with the employees. However, employers often include provisions such as, “The employer may change the employee’s position, compensation, and benefits based on work performance and company profitability, and the employee may not refuse.”
Because salary terms are fundamental to the contract, changes made without oral or written agreement are treated as unilateral changes, which have been declared illegal by arbitration tribunals and courts in China. For example, in a case handled by Beijing Haidian District Court, the court found that a unilateral decision by the management was not a valid basis for reducing wages.[1] In this case, the salary cut plan was created and announced at a company meeting without discussion or negotiation with the labor union or employee representatives, and there was no evidence of employee agreement. The employee terminated the employment contract on the basis of not receiving the full wages and his claim for severance and back pay was upheld.
Salary Cuts Due to Poor Business Conditions. Under the Civil Code and its adjudication guidelines,[2] poor business conditions such as sustained losses or force majeure events may justify layoffs under China Employment Contract Act § 41 but do not meet the threshold of a “material change in business conditions that makes continued performance of the contract impracticable” under § 40(c). Here, employers may not reduce salaries before changing an employee’s job role or duties. In such cases, an employer may suspend operations to reduce wages. The full salary must be paid for the first month and minimum wage or stipend thereafter.
If poor business conditions necessitate a merger, reorganization, or the elimination of an employee’s department or job role, this may constitute a “material change in business conditions,” allowing the employer to negotiate salary cuts with employees. The employer should meet with each employee to explain the reasons and necessity for the pay cut and, upon agreement, execute a written agreement detailing the specifics and duration of the pay cut. If negotiations succeed, the employment contract continues in effect with the pay cut applied. If any employee refuses the pay cut and negotiations fail, the employer must terminate the employment contract; otherwise, the pay cut cannot be enforced.
The Guangzhou Case No. 01-cv-20709 (2024) dealt with whether the company was experiencing materially poor business conditions.[3] The court held that even if genuinely poor business conditions existed, they did not constitute a material change in business conditions under China Employment Contracts Act § 40(c). The court explained that if the company was indeed facing substantially poor business conditions, it should proceed with layoffs under China Employment Contracts Act § 41. However, the employer terminated Li, who had worked at the company for over ten years, had executed two fixed-term contracts, and had requested an indefinite-term employment contract. That termination violated the above statutory rules, consequently, the employer was ordered to pay damages.
Compliant Salary Reductions: the “Inclusive Process”
Chinese law allows employers to reduce salaries through an inclusive process, which is less risky than the above approaches. The legal basis here is China Employment Contracts Act § 4 that requires an employer to negotiate with the labor union or employee representatives when deciding any significant matter that directly affects employee rights, including compensation and benefits. The inclusive process can be completed in three ways, depending on whether the company has established a labor union or has an employee representative meeting.
A company with both a labor union and a meeting of employee representatives must first discuss any policy or other major decision with employees, and then the union. Here, you are only required to disclose the negotiations and notify all employees of the final decision. You don’t have to negotiate with individual employees, nor obtain their consent. This minimizes resistance to salary cuts from individual employees by substantially limiting their right to object.
Similarly, companies with a union but no employee representatives must convene a meeting of all employees to solicit input before negotiating with the labor union, wherein they have the right to object and make suggestions. This gives them substantial influence over company decisions. The China Wages Payment Temporary Rules § 17 requires employers to negotiate wage payment policies with employee representatives or all employees, then inform all employees and file it with the appropriate local government agency.
Filing with the local labor regulator, i.e. agencies such as human resources and social security, tax, social security, or labor unions, is an urgent matter. In a leading case on appeal to the Jiangsu Upper Appeals Court in 2023, a collective bargaining agreement (CBA) negotiated with and executed by the labor union to adjust wages is legally binding on all employees.[4] In that case, the salary adjustment plan was discussed with employee representatives and approved by over half. Then, the employer executed a CBA with the labor union and filed it with the local labor regulator. The court thus held that the agreement is enforceable against both the company and its employee, Yuan.
No Representatives or Union. These companies must meet with all employees to solicit employee feedback and negotiate the salary cuts policy. Here, making salary cuts compliantly is hard, so many companies opt to unilaterally notify employees of salary cuts or even coerce employee consent. This often results in employee conflict and lawsuits.
The China Employment Contracts Act § 4 and the Shanghai Employee Meeting Ordinance require employers to convene a meeting of all employees after creating a salary cut policy, where they can voice an opinion.[5] Thereafter, the employer must hold an election to select employee representatives and separately negotiate to finalize a plan. Many enterprises and mid-market companies find it difficult to discuss salary cuts with all employees, as a substantial portion typically opposes it. Even when representatives are elected, agreement may not be reached.
Small businesses should consider meeting with all employees, because the majority of their employees will likely agree due to concerns about future job security. Judicial precedents also show that courts accept this as a reasonable implementation of the inclusive process requirement. In Jiangsu Case No. 0192-cv-12905 (2023), for example, the company provided evidence of a meeting of employee representatives to discuss the salary cuts.[6] 36 out of 45 representatives approved and the company entered into a collective bargaining agreement with the labor union, so the court thus held that the company satisfied the negotiation and inclusive process obligation, and the salary cuts apply to Jiang, despite his rejection.
Sample Process Guide: Shanghai
The best practices for salary cuts implementation in China might vary due to different local laws and judicial precedents. The following is an example of a process for a company with a labor union and an employee representative meeting in Shanghai.
First, perform a comprehensive risk assessment before making a company-wide salary cut. You should be able to document materially poor business conditions with bank transaction records, financial statements, or financial reports. The risk assessment should analyze your financial condition, the impact of the policy on employee livelihoods, and threats to the company’s long-term prospects. Grounding the salary reduction plan in the assessment can reduce the negative effects on both employees and the company. Ensure the plan is fair and reasonable, especially if it varies based on position and rank, to avoid backlash or lawsuits.
HR or Legal prepares a salary reduction plan specifying the basis, reasons, amount, affected positions, and timeline for the reduction. They ensure the plan is fair, reasonable, and non-discriminatory. It should balance the company’s financial performance and operational needs with employee welfare and rights. Tiered reductions can mitigate loss of living standards. Reductions should not be excessive, otherwise you’ll get demotivation and turnover. In addition, develop response plans in advance to ensure frictionless rollout, avoiding disruption. The above strategies apply throughout China; let’s now look at rules applying specifically to Shanghai.
Organize elections for employee representatives from each department or team pursuant to the Shanghai Employee Meeting Ordinance.[5] While employers may nominate candidates and select those who support pay cuts, employees can also nominate candidates. The Ordinance provides companies with 100 to 3,000 employees must have at least 30 representatives, plus 5 more for every 100 headcounts.[5] Headcounts over 3,000 require 175+ representatives. Employees are entitled to at least seven days’ notice of any preliminary decision, whether by email or announcements; and get a comprehensive, transparent explanation of the reasons, amount, duration, and potential impact, with clear specifics and rationale.
Employees usually oppose pay cuts, but you must get their opinion to show it’s been considered, so meet with employee representatives, either online or in person to go over the plan. The Ordinance requires a two-thirds quorum a plan meeting;[5] it’s enforceable after when approved by a majority vote. Take negotiation meeting minutes to document the date, time, location, recorder, main content, and the signatures and opinions of all attendees.
Documenting the Inclusive Process. In China, a salary reduction can be invalidated by courts even when an inclusive process is used, on a finding that a meeting of the minds was not reached with employees. In Beijing Case No. 03-cv-4988 (2021), a case followed by labor lawyers throughout China, companywide pay cuts were justified by business survival.[7] The employer provided as evidence a request for opinion and response from the labor union, and notification to employees, to show the plan had been fully communicated. Nonetheless, employee Peng claimed that he did not accept it and objected to receiving notice.
Following salary reductions, Peng resigned on wage non-payment grounds. The court held that salary is an essential term of the employment contract and that a pay reduction constitutes a material change requiring mutual agreement by the parties. The evidence failed to show agreement had been reached; therefore, the court held the company liable for backpay and severance. As this case illustrates, employers need to document all aspects of the inclusive process, including agreements, communications, notifications, and agreement modifications. In case of lawsuits, file the salary reduction plan with the appropriate government agency, if possible.
Incentives and Future Salary Restoration. To help offset the impact of a salary reduction, provide incentives and compensation such as performance bonuses, training, promotion opportunities, and salary increases or restoration when business improves. Say reduced salaries are temporary and that it’ll be restored as soon as possible, so as to reduce dissatisfaction and maintain work engagement. To avoid employment disputes, negotiate a separation agreement with employees who reject the pay cut; if an agreement is not reached, proceed with the pay cut. If an employee unilaterally terminates the employment contract claiming wage nonpayment resulting in a filed dispute, respond promptly, or seek settlement through mediation, or await the arbitration decision.
If you need help finding an expert to review your salary cut plans, CBL has a turnkey legal service to connect you with our network of expert, affordable attorneys on the ground in China.
FURTHER READING
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For a general overview of this topic, see also CBL’s China Employment Law FAQ.
FOOTNOTES
[1] Haidian District Court Case, (海淀法院审理案件), (People’s Daily Online, Jul.23, 2025), (in Mandarin)
[2] China Civil Code, (中华人民共和国民法典), (China Ministry of Justice, May 7, 2025), (in Mandarin)
[3] Guangzhou Case No. 01-cv-20709 (2024), ((2024)粤01民终20709号), (China Judgements Online, Nov. 5, 2024), (in Mandarin)
[4] Jiangsu Upper Appeals Court Leading Case, (江苏高院2023年度劳动人事争议典型案例), (Xinhuanet, Apr. 29, 2024), (in Mandarin)
[5] Shanghai Employee Meeting Ordinance, (上海市职工代表大会条例), (Baidu Encyclopedia, Sept. 26, 2024), (in Mandarin)
[6] Jiangsu Case No. 0192-cv-12905 (2023), ((2023)苏0192民初12905号), (China Judgements Online, Jan. 31, 2024), (in Mandarin)
[7] Beijing Case No. 03-cv-4988, ((2021）京03民终4988号), (China Judgements Online, May 28, 2021), (in Mandarin)