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Adjusting pay structures is essential for cost management, but it carries the risk of labour disputes. Mitigating adverse impacts is a critical concern for employers

Corporate compensation structures affect both employees¡¯ welfare and companies¡¯ cost control and incentive efficiency. In recent years, as the economic environment has shifted and market competition has intensified, many companies have begun to adjust their compensation structures, often leading to labour disputes.

This article combines current legal requirements with practical experience to systematically outline the compliance processes and key risk prevention measures for such adjustments, offering practical guidance for developing a legal, flexible and sustainable compensation system.

Judicial adjudication tendencies

In practice, most labour disputes over compensation structure adjustments arise from unilateral changes made by companies. The outcome of such cases generally hinges on whether the adjustment adversely affects employee earnings.

According to prevailing judicial practice in Beijing, Shanghai and Guangzhou, if an adjustment is deemed to have an adverse impact, courts typically reject the unilateral action and favour the employee claims, such as compensating wage differences.

In assessing whether there is an adverse impact, adjudicating bodies generally consider whether the adjustment could lead to a reduction in employee earnings, taking into account the company¡¯s specific circumstances and the facts of the case.

In addition to a direct reduction in fixed wages, which clearly constitutes an adverse effect, other measures may also be seen as indirectly detrimental. These include:

1. Splitting the original fixed wage into fixed and variable components;
2. Reducing the proportion of fixed wages while increasing the variable portion; and
3. Maintaining the fixed-to-variable ratio but altering the criteria and standards for assessing the variable component (such as bonuses), thereby increasing uncertainty.

Conversely, if it is determined that the company¡¯s compensation adjustment does not reduce employee benefits or create an adverse impact, the unilateral action may be upheld.

For example, in case Hu 0115 Min Chu No.118105 (2023), the court found that the company¡¯s decision to cancel the fixed allowances within the skill wage and driver subsidy, while modestly increasing the commission component, did not alter the fixed wage stipulated in the employment contract, did not fall below the city¡¯s minimum wage standard, and had been confirmed by the majority of drivers through their signatures. The court also approved the company¡¯s new compensation scheme.

Compliance path

Based on the above-mentioned adjudication trends, companies should carefully assess whether adjustments to their compensation structures may hurt employees, and adopt differentiated strategies to ensure compliance and reduce dispute risks.

No adverse impact. Article 35 of the Labour Contract Law provides that any changes to the content of an employment contract must be made in consultation with employees. Ideally, companies should either sign a written amendment agreement with their employees or modify the compensation system through statutory procedures.

However, if a company unilaterally implements adjustments while maintaining or even improving employees¡¯ levels of compensation, the risks are relatively low. In such cases, the company may consider issuing a written notice to employees to implement the new scheme quickly. It must clearly state that the benefits will not be reduced and preserve evidence of the written notification to demonstrate that reasonable, good-faith communication has taken place.

Adverse impact. If an adjustment may lead to an adverse impact, a unilateral and forceful change in compensation could trigger a series of unfavourable legal consequences.

For example, employees might use labour inspection, arbitration or litigation to require the company to continue to provide the original compensation standards and benefits. Therefore, it is recommended that companies reach an agreement with employees through thorough communication. The specific procedures are as follows:

(1) If the compensation structure is stipulated in the company¡¯s internal regulations, the company should amend these by the procedures set out in article 4 of the Labour Contract Law. During this process, the company must publicly and comprehensively explain the reasons for the adjustment, solicit employees¡¯ opinions and provide appropriate responses and explanations.

Although the law does not require the consent of every employee, the company must explain in a proper manner whether it has adopted the employees¡¯ views and, if not, provide reasons for the rejection.

If more than half of the employees oppose the change, the company should exercise greater caution by providing a more detailed explanation to secure the support of at least a majority. Once the revisions are finalised, the company should complete the final public notification or announcement process.

(2) If the compensation structure is also clearly stipulated in the employment contract, due to the statutory requirements for contract modifications and the priority of employment contracts over internal regulations, the company must, after completing the statutory procedure for amending the internal regulations, obtain a written agreement from each affected employee concerning the changes to the employment contract. Both parties should agree on the details of the adjustment and the effective date.

Advice for optimisation

Companies should incorporate potential future adjustments into the initial design of their compensation structures. This can be achieved by pre-establishing, within labour contracts or internal regulations, the unilateral right to make adjustments under reasonable circumstances.

The companies should also appropriately allocate and define the content and scope of compensation provisions across contracts and policies. Such measures are intended to maximise flexibility for subsequent modifications.

Should adjustments become necessary, companies are advised to control both the extent of changes and their potential adverse impacts. It is also essential to prepare reasonable objectives and justifications in advance to facilitate clear explanations to employees and secure their understanding and acceptance.

Tracy Liu is a partner at Jingtian & Gongcheng. She can be contacted by phone at +86 21 2613 6125 and by email at tracy.liu@jingtian.com

Larry Lian is a counsel at Jingtian & Gongcheng. He can be contacted by phone at +86 21 2613 6129 and by email at larry.lian@jingtian.com