[Q&A] Early Company Dissolution: What About Labor Contracts?

2024. 10. 29

Question: Should a company's early dissolution and deregistration result in the termination or the rescission of labor contracts?

Answer: In the case of a company's early dissolution and deregistration, it can unilaterally terminate the labor contracts. However, in practice, it is recommended that the company negotiates with the employees to rescind the labor contracts whenever possible.

During the course of business operations, a company may face dissolution for various reasons, such as poor performance or a decision by shareholders to liquidate the company early. In such scenarios, aside from clearing debts and liabilities, handling labor relations is an important and potentially contentious issue. On one hand, termination of a labor contract refers to the end of the contract due to legal reasons, resulting in the cessation of the rights and obligations between the employer and the employee. On the other hand, rescission of a labor contract occurs during the performance of the contract due to certain reasons, leading to the early cessation of the rights and obligations of both parties. Although both result in the termination of the labor relationship, the Labor Contract Law has significant differences in their legal application and conditions.

Legally, the handling of labor relations during a company's early dissolution and deregistration is most directly governed by Articles 44 (5) and 46 (6) of the Labor Contract Law, which state:

Article 44: "A labor contract shall be terminated if... (5) The employer has its business license revoked, is ordered to close down, is dissolved, or decides to dissolve the company early." Article 46: "An employer shall pay economic compensation to employees under any of the following circumstances... (6) Termination of the labor contract according to Article 44 (4) and (5)."

Thus, the company's decision to dissolve early is a legal ground for terminating labor contracts. In this case, the company has the right to unilaterally terminate the labor contracts but must pay economic compensation to the employees. The specific standards for economic compensation are set out in Article 47 of the Labor Contract Law, which stipulates that compensation is based on the number of years the employee has worked at the company, with one month's salary for each full year of service. For service between six months and one year, one year's salary is calculated; for less than six months, half a month's salary is given. If the employee's monthly salary is higher than three times the local average monthly salary announced by the municipal government, compensation is capped at three times the average monthly salary and is limited to no more than twelve years. The term "monthly salary" refers to the employee's average salary for the twelve months before the termination of the labor contract.

Besides the calculation of economic compensation, there are numerous other issues to address during the dissolution and termination of labor contracts, including the legal basis for termination, the timing of termination, the design of compensation packages, and arrangements for special employees (e.g., injured employees, female employees in the pregnancy, childbirth, and lactation periods), all of which require detailed planning according to the company's actual situation. Therefore, in practice, many companies prefer to negotiate the rescission of labor contracts with employees to minimize conflicts and reduce the risk of labor disputes, arbitration, or litigation. In such cases, the legal basis shifts to Article 36 of the Labor Contract Law, which states: "The employer and the employee may terminate the labor contract upon mutual agreement."

Through negotiation, the company and the employees can sign a contract termination agreement, specifying the termination date, compensation, and other relevant matters, ensuring no further disputes between the parties. This approach is generally more beneficial for both the company and the employees.