China: Compliance Required for Layoff due to AI Replacement
On December 26, 2025, the Beijing Municipal Human Resources and Social Security Bureau published the “Top Ten Typical Labour and Personnel Dispute Arbitration Cases in Beijing for 2025” on its official website. One notable case addresses an employer’s dismissal of an employee due to job replacement by AI and offers critical guidance for current practices.
Case Summary
An employee began working for an employer on July 1, 2009, as a data collector, handling traditional manual map data collection. In early 2024, to adapt to market shifts and technological advancements, the employer decided to transition operations from traditional manual collection to AI-driven automated data collection. Consequently, the employee’s department, Navigation Products, and his position were abolished.
By late 2024, the employer issued a written notice unilaterally terminating the labour contract, citing “significant changes in the objective circumstances upon which the labour contract was based, rendering its continued performance impossible, and failure to reach agreement on contract amendments” (i.e., Article 40(3) of the Chinese Labour Contract Law). The employee subsequently filed for labour arbitration, claiming the termination was unlawful and sought compensation for unlawful termination (i.e., double the statutory severance pay).
The competent arbitration committee ruled in favor of the employee’s claims. The employer contested this ruling and initiated court proceedings. The court of first instance issued a judgment consistent with the arbitral award. The employer appealed, but the appellate court upheld the judgment of the court of first instance.
Case Analysis
The focal points of this case concern:
- whether the employer’s abolition of the position due to AI implementation constitutes a “significant change in the objective circumstances upon which the labour contract was based” as stipulated in Article 40(3) of the Chinese Labour Contract Law, and
- whether the employer lawfully negotiated and was unable to reach an agreement with the employee regarding contract amendments prior to its unilateral termination.
Pursuant to Article 79 of the “Interpretations on the Trial of Labour Dispute Cases (I)” issued by the Beijing High People’s Court and the Beijing Labour and Personnel Dispute Arbitration Commission on April 30, 2024, “[a] significant change in the objective circumstances on which the labour contract was based” refers to unforeseeable changes occurring after the contract’s conclusion that render all or principal contract terms unfulfillable, or where continued performance would entail disproportionate costs or manifest unfairness.
In the present case, the introduction of AI technology by the employer falls within the scope of its autonomous business decisions. It represents technological innovation and operational adaptations proactively implemented by the employer as a market participant. Such transformations may entail adjustments to the job structure, but these adjustments fall within the risks that the employer should reasonably foresee during normal business operations. They do not constitute a “significant change” due to the lack of force majeure and unforeseeability required for “objective circumstances.”
The employer’s termination on the grounds of job replacement by AI effectively shifts the normal risks of technological iteration onto the employee, which is contrary to the principles of labour law. Furthermore, the employer failed to provide sufficient evidence of having consulted the employee regarding contract amendments prior to the unilateral termination.
Consequently, the unilateral termination contravenes legal provisions and constitutes an unlawful termination. The employer is therefore required to compensate the employee for unlawful termination of the labour contract.
Key Takeaways
With the rapid advancements in AI technology, employers are increasingly optimizing business processes and enhancing operational efficiency through technological upgrades. However, job adjustments stemming from technological substitution are proactive business decisions rather than unavoidable, unforeseeable objective circumstances.
Employers should prioritize accommodating affected employees by negotiating contract amendments, providing skills training, or facilitating internal redeployment. If termination of labour contracts is genuinely necessary for cost reduction and efficiency gains, strict adherence to the relevant provisions of the Chinese Labour Contract Law is essential. For instance, Article 36 allows termination by mutual agreement, while Article 41 covers redundancies from corporate restructuring or significant changes in the objective economic circumstances. Employers should avoid simplistically invoking “significant changes in objective circumstances” as grounds for termination without prior consultation with employees.
