On the evening of August 10, 2023, Alibaba released its Q1 FY2024 financial report, with quarterly revenue of RMB 234.16 billion, a year-on-year increase of 14%, setting the highest record in seven consecutive quarters. Net profit attributable to ordinary shareholders was RMB 34.332 billion, an increase of 51% year-on-year, far exceeding market expectations of RMB 28.65 billion.

Driven by the results, on August 11, Alibaba’s US-listed shares surged nearly 7% at the open, driving the entire Chinese stock sector. Over the past two years, Alibaba had been in a slump of poor performance. In March this year, Alibaba launched a series of drastic changes, even restructuring its core businesses and adjusting personnel, determined to regain the growth and momentum of its entrepreneurial days. Judging from the latest financial report performance, this transformation has begun to yield positive feedback.

This was also the last group report card handed over by Zhang Yong before stepping down as Chairman of the Board and CEO of Alibaba Group. He attributed the better-than-expected performance to the results of self-reform: “As Alibaba continues to advance its structural reorganization, various businesses are beginning to show new vitality. Alibaba has achieved a quarter of stable performance.”

Thus, organizational restructuring holds special significance at particular stages of enterprise development. Organizational restructuring refers to the adjustment and transformation of an organization’s structure by an enterprise to adapt to changes in the external environment and internal management needs. The purpose of organizational restructuring is to make the enterprise’s organizational structure more reasonable, scientific, and efficient to meet development needs.

Organizational restructuring inevitably has a significant impact on the performance of labor relations. So, from a legal perspective, how should we view organizational restructuring? Against the backdrop of organizational restructuring, how can labor relations compliance be achieved? This article intends to start from the legal nature of organizational restructuring, its impact on labor relations, adjudication standards, and judicial cases, summarize the key points of judicial review of labor relations handling under organizational restructuring, and thereby explore compliant paths, supporting documents, and best practices for labor relations handling, providing guidance and suggestions for enterprises to handle labor relations legally and compliantly against the backdrop of organizational restructuring, promoting harmonious labor relations, and smoothly achieving the original intent of organizational restructuring.

Generally, organizational restructuring is closely related to the concept of “significant change in objective circumstances” in labor law.

“Significant change in objective circumstances” originally originated from Article 26 of the 1994 Labor Law (劳动法): “(3) Where the objective circumstances based on which the labor contract was concluded have undergone significant changes, rendering the original labor contract unperformable, and the parties cannot reach an agreement on modifying the labor contract through negotiation.” Subsequently, the former Ministry of Labor’s General Office’s Explanation on Several Provisions of the Labor Law (《关于劳动法若干条文的说明》, Laobanfa [1994] No. 289) pointed out that “objective circumstances” refers to: force majeure or other circumstances that render all or part of the terms of the labor contract unperformable, such as enterprise relocation, merger, asset transfer, etc., excluding the objective circumstances listed in Article 27 of the Law (i.e., excluding the objective circumstances of “economic layoffs”).

Article 40 of the Labor Contract Law (劳动合同法), effective from January 1, 2008, stipulates: “If any of the following circumstances occur, the employer may terminate the labor contract by giving the employee 30 days’ prior written notice or paying the employee an additional month’s salary in lieu of notice: (3) Where the objective circumstances based on which the labor contract was concluded have undergone significant changes, rendering the labor contract unperformable, and the employer and the employee fail to reach an agreement on modifying the content of the labor contract through negotiation.”

Based on the above legal provisions, we can note the following points:

1

“Objective circumstances based on which the labor contract was concluded” means that objective circumstances that already existed at the time of concluding the labor contract cannot subsequently serve as the basis or reason for adjusting labor relations under this provision.

2

“Significant change” — whether it is significant should be analyzed on a case-by-case basis and judged comprehensively. This introduces a certain degree of uncertainty in adjudication standards and outcomes, making the determination of “significant change in objective circumstances” a difficult and critical point in case handling.

3

“Rendering the labor contract unperformable” — comparing the above provisions of the Labor Law and the Labor Contract Law, there appears to be a one-character difference: under the Labor Law, after a significant change in objective circumstances, the consideration is whether the “original” labor contract is rendered unperformable; while the Labor Contract Law deleted the word “original,” requiring “rendering the labor contract unperformable.” Although the one-character difference seems to have no substantive distinction, it also reflects that under the Labor Contract Law, the impact of “significant change in objective circumstances” seems to be whether it leads to the “labor contract” being unperformable, without being limited to or rigidly understood as “the original labor contract being unperformable.” In other words, under the Labor Contract Law, the impact of significant changes in objective circumstances on labor relations should be assessed comprehensively and flexibly. For example, if the “position” agreed in the original labor contract is eliminated, it does not automatically mean the labor contract is unperformable — this requires specific analysis and cannot be generalized.

4

“Where the employer and the employee fail to reach an agreement on modifying the content of the labor contract through negotiation” — this is a statutory procedural requirement for using “significant change in objective circumstances” as a basis for termination. First, note that the obligation to “negotiate” lies with the “employer,” meaning the employer bears the burden of proving whether “negotiation” occurred. Second, the specific object of “negotiation” is “modifying the content of the labor contract.” Common negotiation content includes “negotiating changes in job position, work location, remuneration, job content, reporting line, employing entity, contract term, whether to terminate the labor contract, etc.” Whether negotiations on the above content can all be considered negotiations on “labor contract content” needs to be judged on a case-by-case basis. However, it is generally believed that directly negotiating termination of the labor contract, or even negotiating changes to the labor contract term, cannot be considered as the employer completing the negotiation procedure. Finally, the employer must also prove that no agreement was reached through the above negotiation.

From the employee’s perspective, common challenging views on whether organizational restructuring constitutes a significant change in objective circumstances and whether the termination is lawful include: (1) Organizational restructuring is not an objective circumstance but a subjective act based on the enterprise’s own business interests, therefore not an “objective change” but a “subjective change”; (2) The organizational restructuring change is not significant enough to be considered a major change, and it is not a circumstance listed in the Ministry of Labor’s provisions; (3) Organizational restructuring does not necessarily render the labor contract unperformable — the position still exists and should not trigger labor relations adjustment; (4) The employer’s handling is targeted and retaliatory; (5) The employer did not initiate the negotiation procedure; (6) The employer’s negotiation did not meet legal requirements; (7) The employer has no evidence that no agreement was reached through negotiation; (8) The employee is subject to termination protection, etc.

In summary, when using significant change in objective circumstances as a statutory ground for termination, the employer often needs to make “two basic judgments” and carry out “a series of operations.” The two basic judgments are: (1) Whether there has been a significant change in objective circumstances; (2) Whether this renders the labor contract unperformable. The series of operations is: initiating negotiations on modifying the labor contract and fully proving that no agreement was reached.

Additionally, based on the statutory nature of grounds for termination of labor contracts, termination under “significant change in objective circumstances” and termination for “two instances of incompetence” are the only legal grounds under current law for employers to proactively terminate labor contracts. Both are grounds for termination without fault on the employee’s part. Therefore, the law imposes strict regulations on the handling of labor relations in these two situations, not only in terms of strict procedural requirements for termination (e.g., negotiation for modification under significant change in objective circumstances, and job transfer or training for two instances of incompetence) but also in balancing the interests of employers and employees substantively. Even in cases of lawful termination of labor relations, severance payment or payment in lieu of notice is required, and termination protection applies to specific categories of employees as stipulated in Article 42 of the Labor Contract Law:

(1) Employees engaged in operations involving occupational disease hazards who have not undergone pre-departure occupational health checks, or suspected occupational disease patients during diagnosis or medical observation;

(2) Employees who have contracted occupational diseases or suffered work-related injuries and have been confirmed to have lost or partially lost labor capacity;

(3) Employees who are ill or suffering from non-work-related injuries and are within the statutory medical treatment period;

(4) Female employees during pregnancy, childbirth, or nursing;

(5) Employees who have worked continuously for the employer for 15 years or more and are less than 5 years away from the statutory retirement age;

(6) Other circumstances as stipulated by laws and administrative regulations.

In adjudication practice, regarding whether organizational restructuring constitutes a significant change in objective circumstances, adjudication authorities generally take a positive stance. Courts often consider that: employers, as independent business entities, have operational autonomy and employment autonomy according to law, and have the right to adjust their organizational structure and business framework based on their own operational needs, and accordingly reasonably adjust employees’ work departments, work content, and positions. Regarding the understanding of “change in objective circumstances,” during the performance of a labor contract, the objective circumstances on which the contract was based undergo significant changes that were unforeseeable and not attributable to either party, ultimately making it difficult to achieve the contract’s purpose, rendering the contract unperformable, or making continued performance clearly unfair, thus requiring the application of the change of circumstances principle. Against the backdrop of the current economic environment, considering the difficulties, losses, or business contractions that enterprises may face in actual operations, if enterprises are forced to make no adjustments, this would inevitably cause enormous damage to enterprise interests, ultimately affecting the actual interests of employees. Therefore, from a long-term development perspective, adjustments actively made by enterprises to their business models and organizational structures, as long as they do not violate the principles of good faith and fairness, should be deemed to constitute “significant change in objective circumstances.” The “objective circumstances” in Article 40(3) of the Labor Contract Law include not only natural conditions, enterprise relocation, merger, and asset transfer. The listed circumstances should be understood as merely illustrative explanations of “force majeure or other circumstances rendering all or part of the labor contract unperformable” and should not be considered exhaustive.

In judicial practice, the impact of organizational restructuring on labor relations extends beyond disputes over the legality of terminating labor contracts based on significant change in objective circumstances. It also often triggers disputes over the legality of unilateral position and salary adjustments by employers, and subsequent handling by employers based on internal rules/employee handbooks when employees refuse to comply — such as warnings and ultimately unilateral termination for “serious violation of discipline.” Therefore, against the backdrop of organizational restructuring, the key points of judicial review by adjudication authorities can be summarized as follows:

1

Whether the organizational restructuring objectively exists — this often involves reviewing whether corresponding resolutions exist, such as board resolutions, shareholder decisions, or management decisions;

2

Whether the organizational restructuring has commercial reasonableness — generally, adjudication authorities do not conduct excessive review or demand deep-seated reasons behind management decisions. However, sufficient support for decision-making background, such as financial audit reports, often strengthens proof of the objectivity of the organizational restructuring;

3

The impact of organizational restructuring on labor relations — does it render the labor contract unperformable?

4

Under organizational restructuring, has the employer fulfilled its obligation of good faith consultation? Is the position and salary adjustment reasonable? Is it targeted?

5

Does the employee fall under termination protection?

Based on the above judicial review points, the following exemplary practices for legally and compliantly handling labor relations under organizational restructuring can be summarized:

1

Solidify the motives and background for organizational restructuring, form corresponding resolutions on organizational restructuring — supporting documents include board resolutions, shareholder decisions, financial audit reports, management resolutions, organizational restructuring comparison charts, etc.;

2

Publicize or inform employees of the specific content of organizational restructuring, including necessity explanations, etc., and carry out necessary democratic consultation procedures;

3

Form a written Labor Relations Adjustment Plan in the context of organizational restructuring to promote open and transparent communication and prove that the organizational restructuring is not targeted;

4

Form a written FAQ on Labor Relations Handling in the context of organizational restructuring to help employees understand and accept the employer’s arrangements;

5

Document the consultation procedures and process in writing — supporting documents include labor relations adjustment opinion solicitation letters, implementation progress notifications and reminder letters, etc.;

6

Prefer mutual agreement over unilateral employer decisions — supporting documents include labor contract modification agreements, labor contract termination agreements, etc.;

7

When no agreement can be reached, exercise caution in directly terminating employment. Reasonable unilateral position and salary adjustments can reduce risk and promote stability in labor relations.

8

In cases of unilateral position and salary adjustments where the employee refuses to comply, issue warnings based on internal rules/employee handbooks and diligently inform the employee of the consequences. After multiple warnings, consider unilateral termination as appropriate — supporting documents include warning letters, termination notices, etc.

It should be noted that in handling labor relations, an awareness of the “evidence pile” should be given high importance. The concept of an “evidence chain” is easy to understand. Taking termination based on significant change in objective circumstances as an example, the evidence chain for judicial review includes: whether a significant change in objective circumstances occurred — whether it affected continued performance of the labor contract — whether negotiations on modifying the labor contract content were conducted — whether no agreement was reached on modifying the labor contract content through negotiation. The concept of an “evidence pile,” on the other hand, requires that at each link of the evidence chain, we should have more evidence rather than less. For example, in proving “whether a significant change in objective circumstances occurred,” evidence can come from the labor contract itself, internal rules/employee handbooks, shareholder decisions, board resolutions, management decisions, official website announcements, and other sources — using a pile of evidence to prove one point in the chain, thereby strengthening the force of the evidence chain.

In summary, labor relations handling brought about by organizational restructuring involves certain basic judgments and operational procedural requirements. For employers to systematically plan and steadily advance based on laws and regulations, combined with their own internal rules and agreements with employees, reducing costs and increasing efficiency while enhancing competitiveness on the basis of legal compliance, employers need to act cautiously and follow proper procedures throughout the process. Introducing professional support can undoubtedly reduce risks, create value, and ultimately maximize the achievement of commercial objectives.