Salary treatment and Force Majeure during Lockdowns

Shanghai Regulations

Pursuant to labor legislation and special circulars issued on lockdown, it is generally possible to reduce wages, where it is not possible for the company or for the employee to work remotely, starting from the second month.

During the first month it remains possible, after negotiation, to use the employee's paid leaves during the days of lockdown.

Starting from the second month, if the work cannot resume normally or organized remotely, it is possible to temporarily reduce the salary even up to the minimum wage (so-called living expenses) depending on the degree of inactivity of the company and / or employee.

A salary reduction in the first month remains possible, but only on a mutually negotiated basis with individual employees or employee representatives, it can not result from a unilateral decision from the company.

These rules are drawn from the circulars issued by the Ministry of Human Resources (HR&Social Security Ministry Publication No. 8 [2020], Article 2.1) and the Local Government of Shanghai (Hu Fu Guu [2020] No. 3, Shanghai Municipal People's Government) in 2020 to regulate cases of home or centralized quarantine and impact on work activity.


Can we stand down the employees if we do not have meaningful work for them to do?

If your company suspends operations – whether in whole or to a limited extent – for the current pay cycle (i.e., for the current month), the company is required to pay wages and benefits to employees according to their labour contract. To this end RsA recommends only committing to the suspension towards the end of the month.

However, if the suspension exceeds one pay cycle, the company shall pay wages and benefits in compliance with the local rules for salary arrangements during "suspension of production or business" periods: - If the employee provides normal work, employers are required to at least pay according to their workload as stipulated by the contract. - If the employee does not provide any work, employers are required to pay only the living allowances as determined in accordance with the local measures.


If we stop production and stand down employees, are we required to pay them?

As explained in the preceding paragraph if the company suspends operations entirely or operates a work from home policy for the period, office workers who are able to provide work remotely are entitled to at least be paid according to their contract.

The manual labourers who cannot provide any work during the suspension during this period are entitled at a minimum to the local living allowances.

The majority of employees will be aware of the regulations regarding the suspension and salaries during this period, they will know that they are just entitled to minimum wage or living allowances but it maybe advisable to offer a figure above these entitlements to avoid labour disputes and arbitration with the local labour bureau. This will have to be considered with the length of the suspension of the factory of course.

Can we use force majeure with regards to outstanding contracts?

Under Articles 117 and 118 of the PRC Contract Law along with Article 180 of the General Rules on the Civil Law, force majeure exists as a doctrine covering diseases, pandemics as well as epidemics.

(COVID-19) is a naturally occurring event (the virus) and also has governmental restrictions put into place. Therefore, it qualifies as a force majeure event. COVID-19 itself will not count as the FM event, but the consequences which lead to the inability to fulfill the contractual obligations deem it as one. However, due to the fact that COVID-19 has been present in some form for over two years, and the resulting lockdowns from the zero covid polices are well known, it may prove challenging to rely completely on a force majeure defence.

How Is Force Majeure(FM) Invoked?

The China Council for the Promotion of International Trade (CCPIT) is offering force majeure certificates enabling Chinese companies, seeking to rely on such provisions, to suspend their contractual obligations after the submission of relevant documents.

But, any company invoking FM must establish a link between the non-performance of their contractual duties and the FM event. The FM event must result in non-performance directly and must be occurring during the performance period of the contract. Just because the process might have gotten a bit more time-consuming or costlier, the contractor may not be excused from their obligations.

The affected party must produce sufficient evidence to prove that their working is impacted.

Under PRC General Provisions of the Civil Law, FM is an excuse for non-performance of their obligations. If a contract does not have the provision for FM, it is automatically implied. But, in case the clause is included in the contract, the affected party can depend on it. However, if a dispute arises out of contractual non-performances, the final decision will be made by the court or an arbitrary body depending on the contract provisions.

Make sure to check:

a) Whether or not there is a force majeure clause in the contract

b) If there is an actual link between the event and non-performance

c) Evaluate if at all the performance is excusable under the frustration of contract

d) Provide evidence and regular updates to the other party of the contract

e) Amend the agreement to reflect a commercially acceptable resolution

Within 30 days of sending the notice, the other contractual party must decide whether they want to terminate the contract or modify the same. If there is a contractual dispute, it will require litigation or arbitration.


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