AI-Driven Structural Layoffs in China: Legal Application and Compliance Recommendations
Drawing on the relevant regulations of China’s judicial practice, this article analyzes the legal application and compliance issues behind AI-induced structural layoffs and proposes corresponding compliance recommendations.
In recent years, with the rapid development and extensive application of artificial intelligence (AI), automation, and robotics, major industries worldwide have been undergoing profound transformation. Large numbers of positions in manufacturing, finance, media, retail, IT services, and other sectors are being replaced by AI or restructured due to AI integration. This trend has brought significant improvements in production efficiency for enterprises, but it has also directly triggered internal structural layoffs and job adjustments, placing employee job security and labor rights under unprecedented pressure. According to a report by Bloomberg, the global banking industry is expected to cut approximately 200,000 jobs due to advances in AI. Against this background of AI-driven technological change, an urgent challenge arises: how can enterprises maintain developmental vitality while handling the labor-relations issues caused by AI in a lawful and compliant manner? Drawing on the relevant regulations of China’s judicial practice, this article analyzes the legal application and compliance issues behind AI-induced structural layoffs and proposes corresponding compliance recommendations.
In practice, many employers invoke Article 40(3), but whether AI-driven job substitution falls within “major changes in objective circumstances” remains highly controversial.
I. China’s Judicial Practice Regarding AI-Induced Structural Layoffs
Under China’s labor-law framework, termination of employment contracts must meet statutory conditions and procedural requirements. Unless the employer and employee reach mutual agreement, termination must be based on legally recognized grounds. In recent years, cases involving structural layoffs resulting from AI have become increasingly common in China. Employers frequently cite Article 40(3) of the Employment Contract Law — “major changes in objective circumstances” — which requires the employer to first negotiate with the employee. Large-scale layoffs may invoke Article 41(1)(3) — “enterprise transformation, significant technological upgrading, or changes in business methods, after amending employment contracts still necessitating staff reduction.” This provision imposes stricter obligations: employers must notify impacted employees or the trade union, report to labor authorities, and ensure that employees entitled to priority retention or employees protected from dismissal under Articles 41(2) and 42 are not unlawfully laid off.
In practice, many employers invoke Article 40(3), but whether AI-driven job substitution falls within “major changes in objective circumstances” remains highly controversial.
The definition of “objective circumstances” originates from the former Ministry of Labor’s Explanation of Certain Provisions of the Labor Law, which lists situations such as force majeure, enterprise relocation, mergers, and asset transfers.
In Beijing, the Interpretation (I) on Labor Dispute Cases issued by the Beijing High People’s Court and the Beijing Labor Arbitration Commission expands this to include natural disasters, changes in laws/policies causing enterprise relocation or restructuring, and changes to operating scope for franchised businesses. However, none explicitly address technological upgrades driven by AI, resulting in divergent judicial outcomes. In practice, there are at least two different views on this matter as follows:
1) AI-driven adjustments do not constitute “major changes in objective circumstances.”
Courts such as the Beijing First Intermediate Court, Beijing Chaoyang District Court, Guangzhou Intermediate Court, and Kunshan Court hold that AI-induced job replacement is a business decision within normal commercial risks, which are foreseeable and do not satisfy Article 40(3).
In Beijing Technology Co., Ltd. v. Liu, the employer argued that AI eliminated traditional manual mapping and thus justified termination under Article 40(3). The court held that market and technological changes fall within normal business risks, not “major changes in objective circumstances.”
2) AI-driven adjustments do constitute “major changes in objective circumstances.”
Courts such as the Shanghai Jing’an District Court, Tianjin First Intermediate Court, and Handan Intermediate Court hold that technological substitution eliminating job functions may constitute “objective circumstances.” If negotiation on job changes fails, employers may terminate the contract.
II. Preliminary Compliance Recommendations
Based on the foregoing analysis, we propose the following preliminary compliance recommendations:
First, conduct a full assessment of the impact of AI deployment on business operations and preserve relevant evidence (e.g., restructuring plans, technology-upgrade documentation, market conditions). External counsel may assist. Generally, the greater the disruption caused by AI to job functions and required skill sets, the more likely courts are to accept AI-related restructuring as a legitimate ground for structural layoffs under “major changes in objective circumstances” or Article 41.
Second, strictly comply with statutory procedures. When implementing organizational changes driven by AI or automation, enterprises should follow Articles 40–43 of the Employment Contract Law, ensure employees do not fall within protected categories under Article 42, conduct genuine negotiations regarding reassignment, and avoid using “negotiation” merely as a pretext for unilateral dismissal. Employers must also notify trade unions and report to government authorities where required.
Third, strengthen employee placement and retraining mechanisms. Layoffs are not always economically optimal. Employers should consider job adjustments, reskilling, internal transfers, career-transition programs, or external training resources. Enterprises with capacity may establish special training funds. For employees who cannot be accommodated, employers should provide humane support such as compensation, career counseling, and mental-health assistance.
Fourth, prevent discrimination and protect vulnerable groups. In addition to Chinese rules regarding employees who may not be dismissed, companies implementing AI-related layoffs overseas must comply with host-country mandatory anti-discrimination laws, avoiding differential treatment based on age, gender, ethnicity, etc.
In Beijing World City Property v. Yang, the Beijing Third Intermediate Court noted that: “Shifting from manual charging to intelligent automated parking-fee systems reflects progress in productivity and technological development. Although this may objectively result in some workers losing jobs, the overall social effect remains an efficient conservation of human resources.” As AI and automation penetrate all sectors, structural layoffs have become an unavoidable social reality. Enterprises should plan ahead, design transitional arrangements for employees and departments, and—where layoffs are unavoidable—evaluate local judicial tendencies and strictly follow statutory procedures to reduce the risk of disputes.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.