04.03.2020
In order to prevent the spread of the novel coronavirus pneumonia epidemic, relevant departments of the State Council and local governments have successively released notices to extend the Chinese New Year holidays and postpone normal business operation of enterprises, which have caused a series of labor issues, including the salary payment during the extended period of the Chinese New Year holidays and during the period of work postponement, the application of alternative office modes in the context of epidemic prevention and control, and the suspension of work and production of enterprises due to the epidemic. On the basis of summarizing the relevant policies issued by some provinces and municipalities, this article provides guidelines for enterprises to deal with relevant labor issues.
Notice of the General Office of the State Council on Extending the Chinese New Year Holidays of 2020 (Guo Ban Fa Ming Dian [2020] No. 1)
http://www.gov.cn/zhengce/content/2020-01/27/content_5472352.htm (only Chinese version)
Notice of the General Office of the Ministry of Human Resources and Social Security on Properly Handling Labor Related Issues during the Prevention and Control of the Pneumonia Epidemic Caused by Novel Coronavirus (Ren She Ting Fa Ming Dian [2020] No. 5)
http://www.gov.cn/zhengce/zhengceku/2020-01/27/content_5472508.htm (only Chinese version)
Opinions on Stabilizing Labor Relations and Supporting Resumption of Production and Reproduction of Novel Coronavirus Infected Pneumonia http://www.gov.cn/zhengce/zhengceku/2020-02/08/content_5476137.htm (only Chinese version)
Province/Municipality Hubei
Notice of the General Office of the People’s Government of Hubei Province on Extending the Chinese New Year Holidays of 2020
http://www.xinhuanet.com/local/2020-02/01/c_1125520350.htm (only Chinese version)
Notice of the Provincial Office of Human Resources and Social Security on forwarding the Notice of the General Office of the Ministry of Human Resources and Social Security on Properly Handling Labor Issues during the Prevention and Control of the Pneumonia Epidemic Caused by Novel Coronavirus (E Ren She Ban Han [2020] No. 7)
http://rst.hubei.gov.cn/fbjd/dtyw/stfb/202001/t20200127_2015368.shtml (only Chinese version)
Province/Municipality Beijing
Notice of the People’s Government of Beijing Municipality on the Flexible Arrangement of Work by Enterprises during the Prevention and Control of Pneumonia Epidemic Caused by Novel Coronavirus http://www.beijing.gov.cn/zhengce/zhengcefagui/202001/t20200131_1622070.html (only Chinese version)
Notice on Several Issues of Maintaining Stable Labor Relations during the Epidemic Prevention and Control (Jing Ren She Lao Zi [2020] No. 11) http://www.beijing.gov.cn/zhengce/gfxwj/202001/t20200124_1621272.html (only Chinese version)
Notice on Further Improving Works Relating to Human Resources and Social Security During the Epidemic Prevention and Control http://www.beijing.gov.cn/zhengce/zcjd/202002/t20200203_1622928.html (only Chinese version)
Notice regarding the Salary Payment of Enterprise Employees Taking Care of Minor Children during the School Postponement Due to the Epidemic Prevention and Control (Jing Ren She Lao Zi [2020] No. 13) http://rsj.beijing.gov.cn/bm/ztzl/yqzl/rs/202002/t20200203_1623049.html (only Chinese version)
Province/Municipality Tianjin
Notice on Postponing the Resumption of Work and the Opening of Schools http://www.tj.gov.cn/wz/hygq/202002/t20200201_3668408.html (only Chinese version)
Enterprises in Tianjin are temporarily not allowed to resume work until later notice on work resumption time point, except for those enterprises which are necessary to the urban and rural operation, necessary for the prevention and control of the epidemic, or necessary for the people’s livelihood, and other enterprises concerning major issues of national economy and people’s livelihoods
Notice of the Tianjin Municipal Human Resources and Social Security Bureau on Properly Handling Labor Issues during the Prevention and Control of Pneumonia Epidemic Caused by Novel Coronavirus http://gk.tj.gov.cn/gkml/00012568x/202001/t20200125_86676.shtml (only Chinese version)
Province/Municipality Shanghai
Notice of the People’s Government of Shanghai Municipality on Postponing the Resumption of Work and the Opening of Schools http://www.shanghai.gov.cn/nw2/nw2314/nw2319/nw12344/u26aw63451.html (only Chinese version)
Enterprises of any kind in Shanghai are not allowed to resume work before 24:00 on February 9, except for those enterprises which are necessary to the operation of the city, necessary for the prevention and control of the epidemic, necessary for the people’s livelihood, and other enterprises concerning major issues of national economy and people’s livelihoods.
Notice of the Shanghai Municipal Human Resources and Social Security Bureau on Implementing Support and Safeguard Measures in Response to the Pneumonia Epidemic Caused by Novel Coronavirus http://www.shanghai.gov.cn/nw2/nw2314/nw32419/nw48516/nw48580/u21aw1424024.html (only Chinese version)
Authoritative Answer by Shanghai Municipal Human Resources and Social Security Bureau to Questions on Postponing Work Resumption of Enterprises http://www.shanghai.gov.cn/nw2/nw2314/nw32419/nw48516/nw48545/u26aw63619.html (only Chinese version)
Notice of the Office of Shanghai Leading Group for Pneumonia Epidemic Prevention and Control of New Coronavirus Infection http://www.shanghai.gov.cn/nw2/nw2314/nw32419/nw48516/nw48545/u26aw63485.html (only Chinese version)
Notice of Shanghai Municipal People's Government on Further Strict Implementation of Various Epidemic Prevention and Control Measures http://www.shanghai.gov.cn/nw2/nw2314/nw32419/nw48516/nw48545/u26aw63661.html (only Chinese version)
Province/Municipality Jiangsu
The General Office of the People’s Government of Jiangsu Province issued a notice notifying that enterprises should not resume work before 24:00 on February 9
Notice of the Jiangsu Provincial Department of Human Resources and Social Security on forwarding the Notice of the General Office of the Ministry of Human Resources and Social Security on Properly Handling Labor Issues during the Prevention and Control of the Pneumonia Epidemic Caused by Novel Coronavirus (Su Ren She Ming Dian [2020] No. 5)http://jsrlzyshbz.jiangsu.gov.cn/art/2020/2/3/art_51036_8960175.html (only Chinese version)
Province/Municipality Jiangsu
Answers to questions about wage payment for "Extending the Spring Festival Holiday" and "Delaying and Resuming Work" http://rsj.nanjing.gov.cn/njsrlzyhshbzj/202002/t20200204_1785982.html (only Chinese version)
Interpretation of "Several Measures to Support the Development of Service Enterprises during Epidemic Prevention and Control" http://rsj.nanjing.gov.cn/njsrlzyhshbzj/202002/t20200206_1787030.html (only Chinese version)
Wuxi City, Jiangsu
Notice of Wuxi Human Resources and Social Security Bureau on Properly Handling Issues Concerning the Salary Payment of Employees during the Postponement of Work Resumption hrss.wuxi.gov.cn/doc/2020/01/29/2770146.shtml (only Chinese version)
Notice on Properly Handling Certain Labor Relations during Epidemic Prevention and Control http://hrss.wuxi.gov.cn/doc/2020/02/07/2775810.shtml (only Chinese version)
Changzhou City, Jiangsu
Notice on Arrangements Regarding the Prevention and Control of Pneumonia Epidemic Caused by Novel Coronavirus (Chang Ren She Fa [2020] No. 14) http://wsbs.czhrss.gov.cn/publicservice/knode/31019 (only Chinese version)
Suzhou City, Jiangsu
Notice on Properly Handling issues of Human Resource and Social Security during the Prevention and Control of the Epidemic (Su Ren Bao [2020] No. 1) [1] http://hrss.suzhou.gov.cn/jsszhrss/gsgg/202001/30e062930ef14b4c84ba19e9aebd4da7.shtml (only Chinese version)
Province/Municipality Zhejiang
Notice of the General Office of the People’s Government of Zhejiang Province on Postponing the Work Resumption of Enterprises and the Opening of Schools http://www.zhejiang.gov.cn/art/2020/1/27/art_1554467_41858317.html (only Chinese version)
Notice of the Zhejiang Provincial Department of Human Resources and Social Security on Actively Responding to the Epidemic Caused by New Coronavirus and Properly Handling Labor Issues (Zhe Ren She Ming Dian [2020] No. 3) http://www.zjhrss.gov.cn/art/2020/1/28/art_1391002_10431.html (only Chinese version)
Province/Municopality Guangdong
Notice of the People’s Government of Guangdong Province on the Time of Work Resumption of Enterprises and Opening of Schools http://www.gd.gov.cn/gdywdt/gdyw/content/post_2879851.html (only Chinese version)
Notice of the Guangdong Provincial Department of Human Resources and Social Security on Actively Responding to the Epidemic Caused by New Coronavirus and Properly Handling Labor Issues http://hrss.gd.gov.cn/gkmlpt/content/2/2879/post_2879157.html (only Chinese version)
Answers to Questions regarding Salary Payment during the Extension of Chinese New Year Holidays, the Postponement of Work Resumption and Salaries of Patients with Pneumonia Caused by the Novel Coronavirus, Suspected Patients, and Close Contacts during the Quarantine Period http://hrss.gd.gov.cn/gkmlpt/content/2/2880/post_2880702.html (only Chinese version)
[1] Also applicable to county-level cities such as Taicang.
[1] Article 40 of the Labor Contract Law:
An employer may terminate an employment contract by giving the employee 30 days’ prior written notice, or one month’s wage in lieu of notice, if:
[2] Article 41 of the Labor Contract Law:
If any of the following circumstances makes it necessary to reduce the workforce by 20 persons or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the enterprise’s employees, the employer may reduce the workforce after it has explained the circumstances to its trade union or to all of its employees 30 days in advance, has considered the opinions of the trade union or the employees and has subsequently reported the workforce reduction plan to the labor administration department:
When reducing the workforce, the employer shall retain with priority persons;
If an Employer that has reduced its workforce pursuant to the first paragraph hereof hires again within six months, it shall give notice to the persons dismissed at the time of the reduction and, all things being equal, hire them on a preferential basis.
Based on the relevant policies issued by the central and local governments, we put forward the following suggestions with respect to labor issues that enterprises may face at different stages of the epidemic prevention and control and in special cases caused by the epidemic:
Extended Chinese New Year holidays (January 31 and February 1)
*According to the Notice of the State Council, the Chinese New Year holidays are extended to February 2, and the Notice issued by Hubei provincial government extended the holidays to February 13.
Q: How to determine the legal nature of the extended period of the Chinese New Year holidays?
A: The extended period of the Chinese New Year holidays are rest days in nature.
Q: How should enterprises pay employees during this period?
A: For employees who take the rest, salaries should be paid as agreed in the labor contract; for employees working for security or other tasks, it shall be regarded as overtime work on rest days and compensatory rest or overtime pay (200% of the daily wage) shall be provided.
Postponement of work resumption in accordance with local provisions (February 3 to February 9)
* Currently, enterprises in most provinces and municipalities are allowed to resume work from February 10, except for in Tianjin, where the time of work resumption has not been noticed yet.
Q: How should enterprises pay employees during this period?
A: During the postponement of work resumption, the enterprises shall pay the salaries of the employees as stipulated in the labor contract. According to Article 12 of the Interim Provisions on Salary Payments, if an enterprise suspends production and production within a salary payment term, the enterprise shall pay the salaries of employees in accordance with the standards agreed in the labor contract. The central and local governments also hold the same attitude in the notices concerning the epidemic.
Q: May enterprises adopt flexible office modes and arrange employees to work from home via the Internet and phone? If so, how should the wages be paid?
A: Basically, local governments support and encourage enterprises to apply flexible office models during the work postponement period. We recommend that qualified enterprises adopt flexible office modes as much as possible, and maintain operations during the official postponement of work resumption. Regarding the labor remuneration, some provinces and municipalities (such as Beijing) further clarified that if enterprises require employees to work at home through flexible methods such as via the Internet and telephone, they should be paid as during normal work. If an enterprise arranges employees to work on rest days (February 8 and February 9) but cannot provide compensatory rest, it must pay remuneration at no less than 200% of the employee’s salary standard.
It is worth noting that according to information from Shanghai Human Resources and Social Security Bureau, the period of work resumption postponement (February 3 to February 9) is also rest days. If an enterprise requires employees to work during this period (regardless of whether they are working from home), they should be compensated for overtime work on rest days with compensatory rest or overtime pay (200% of the daily wage standard). It is recommended that the employers in Shanghai consider the labor costs in a comprehensive manner during this period, and reasonably arrange the employees to work, e.g., arranging some core employees to work from home.
From the work resumption of enterprises to the opening of schools
Q: If an employee requests to take care of minor children whose school opening is delayed due to epidemic prevention at home, may the enterprise reject the request?
A: At present, only Beijing government has issued relevant notices, allowing each household to have one employee to take care of minor children at home, and the wages during such period shall be paid by the enterprise as for normal attendance. When an enterprise receives such application submitted by an employee, it may require the employee to provide relevant supporting materials, such as proof of both parents being employed, proof of spouse being unable to return to the city to care for the children due to emergency measures for epidemic prevention and control. The enterprises in Beijing shall approve the employee’s application after verifying the situation, may require the employee to work from home via telephone, internet, etc.
Except for in Beijing, enterprises in other provinces are not obliged to approve employees' request with regard to taking care of minor children at home. But we suggest enterprises to take employees' actual situation into consideration and arrange for employees to work from home or use paid annual leave under the condition of normal operation
Continuous business suspension after the expiration of the work postponement period required by the government due to the impact of the epidemic
Q: How should the employees be paid during this suspension?
A: According to relevant notice issued by the Ministry of Human Resources and Social Security, if an enterprise suspends work and production within one salary payment term, the enterprise shall pay the employees’ salaries in accordance with the standards stipulated in the labor contract. For suspension exceeding one salary payment term, if an employee performed work normally, the salaries paid by the enterprise to the employee shall not be lower than the local minimum wage standard. If an employee did not performed work normally, the enterprise shall pay living expenses. The standard of living expenses shall be subject to the rules issued by the provinces, autonomous regions and municipalities. For example, it is required not to be less than the local minimum wage standard in Shanghai and Tianjin, and not to be less than 70% of the local minimum wage standard in Beijing.
Q: May an enterprise lay off staff if it falls into operational difficulty?
A: In principle, if an enterprise falls into operational difficulties due to the epidemic and the conditions stipulated in Articles 40 and 41 of the Labor Contract Law are met, it may terminate the labor contract with employees in accordance with the law (please note that for pneumonia patients infected with novel coronavirus, suspected patients, and close contacts during their isolation treatment or medical observation, as well as employees who are unable to perform work normally due to the implementation of isolation measures or other emergency measures by the government, the enterprise shall not terminate the labor contract with them according to Articles 40, 41 of the Labor Contract Law). However, given that policies issued by the central and local governments all convey the tendency to maintain stable labor relations, we recommend that enterprise be cautious when laying off employees under such circumstances. As an alternative, enterprises may consider adopting methods such as adjusting salaries, rotating shifts, shortening working hours, etc., after consultation with employees, to reduce labor costs and stabilize job positions.
Special cases caused by the epidemic
Employees have been diagnosed as pneumonia patients infected with novel coronavirus, suspected as patients, or in close contact thereto who are under isolation treatment, medical observation, or unable to perform work normally due to quarantine measures or other emergency measures taken by the government
Q: How should employees be paid who are diagnosed as patients infected with novel coronavirus, suspected as patients, or in close contact thereto during the isolation treatment, medical treatment or quarantine measures, or unable to perform work normally due to quarantine measures or other emergency measures taken by the government?
A: For employees diagnosed as pneumonia patients infected with novel coronavirus, suspected as patients, or in close contact thereto who are unable to perform their work normally during the isolation treatment, medical observation, or employees who are unable to perform their work normally due to quarantine measures or other emergency measures taken by the government, the enterprise shall pay their salaries. It is worth noting that some provinces, autonomous regions and municipalities further clarified that in this case it should be considered as normal attendance, and the salary paid by the enterprise shall be the salary and remuneration that the employee can obtain under normal attendance (as we understand, that should include bonuses and allowances such as rental allowances the employee can obtain under normal attendance)
Q: If an employee used to be identified as a suspected patient or close contact, and after medical observation or quarantine, it is confirmed that he/she is not a patient infected with novel coronavirus, but still needs to be treated or recuperated at home after the expiration of the medical observation period or quarantine period, how should he/she be paid?
A: If an employee used to be identified as a suspected patient or close contact, after medical observation or quarantine, it is confirmed that he/she is not a patient infected with novel coronavirus, but still needs to be treated or recuperated at home after the end of the medical observation period or quarantine period, he/she may enjoy the medical treatment period provided that supporting documents issued by hospitals are submitted. The enterprise shall provide the employee with sick pay in accordance with legal provisions and the labor contract.
Employees are unable to return to the enterprise for work in time due to the epidemic
Q: Should enterprises continuously pay salaries to such employees?
A: Local governments in different regions issued different rules on employees’ inability to return to the enterprise for work in time due to the epidemic. In Beijing, enterprises may give priority in arranging employees to take paid annual leave without stopping paying. If an employee fails to work for a long period of time, the enterprise may arrange for the employee to await for job assignment and pay the employee a certain amount of living expenses after consultation with the employee. However, in other provinces, autonomous regions, and municipalities, such as Guangdong and Changzhou city of Jiangsu, mutual consultation and agreement with the employee is required to arrange for the use of paid annual leave. In this regard, we recommend that if an employee is unable to return to work due to the objective epidemic situation, the enterprise may first negotiate with the employee to arrange them to work from home or give priority to taking paid annual leave. If the conditions to work from home are not met, or the paid annual leave has been used up, the enterprise may take the “Beijing solution” for reference i.e. arranging the employee to wait job assignment and pay him/her basic living expenses (The Beijing standard is not less than 70% of the minimum wage standard).
Q: If an employee refuses reasonable arrangements by the enterprise, may it be handled as absenteeism?
A: If an employee refuses reasonable arrangements by the company, we do not recommend the company to handle it as absenteeism in a one-size-fits-all approach. Instead, it is necessary to take measures based on analysis of concrete circumstances of employees concerned.
Status 19.02.2020
The corona virus (officially now called "SARS-CoV-2" by the WHO) also affects many companies outside China and the Wuhan epicentre. The emergency measures taken by the Chinese government have paralyzed large parts of the Chinese economy, production is starting up again very slowly in some cases and many services are still experiencing delays. As a result, demand from China has collapsed and at the same time Chinese supplies have been cut off. Numerous German companies are strongly affected by this - we try to answer some of the frequently asked questions below.
1. What do the Chinese government's measures mean for companies and workers?
The emergency measures are unprecedented and have brought public life in large parts of China to a standstill during and after the Spring Festival. Forced holidays, company closures, entry and exit bans and many other restrictions have serious effects on small and large companies and, of course, also on employees in China. In the meantime, a large number of partly very different local regulations have been enacted, which are constantly changing.
The national and local regulations for prevention as well as the quarantine requirements and reporting requirements must be strictly followed. Ongoing salary payments in spite work interruption primarily affects the employer, and the same is true for expected revenue losses or impending payment default as a result of officially prescribed downtime or because no more goods or workers can reach the plant. Companies may also receive claims for damages from customers for delay or disruption in performance.
According to Chinese law, employees are financially well protected, especially in the first month of a business closure, after which the employer no longer has to pay the full wages. Due to the employer's duty of care, it is advisable in the current situation to arrange only inevitable trips to China and to check how dangerous the situation is for posted employees on site. Like other crises, epidemics generally are within the risk sphere of the employer, who then also has to bear the costs for a necessary return trip of employees.
2. Can companies in the current situation rely on a case of force majeure or the impossibility of fulfilling the contract respectively fundamental change in objective circumstances?
Many companies are currently faced with the question whether they have to perform and whether they are liable to pay damages. First of all, the contractual agreements are decisive. It is pertinent to first check which law actually applies between the business partners, German or Chinese law. It is important in any case whether the contract contains a force majeure clause and what exactly it prescribes. Otherwise the statutory regulations may apply.
In general: the event (in China: fundamental change in objective circumstances) must (i) have occurred after conclusion of the contract (ii) but before the contractual fulfillment time (delivery, completion date) and (iii) still continue. The contract itself must have been concluded before the occurrence of force majeure, otherwise the event was not "unpredictable". Whether and how long the supplier can then really rely on force majeure or "impossibility" (or change in the objective circumstances) without becoming liable for damages depends on other circumstances, e.g. whether it is a custom-made product or simple commercial goods for which a replacement can also be obtained in another way. The "exemption from liability" only refers to the obligation to pay damages or pay a contractual penalty; the obligation to meet the primary debt, e.g. delivery of goods does not automatically disappear. Whether the debtor is entitled to request a contract adjustment based on the legal principle of “frustration of contract” due to a fundamental change in objective circumstances (“Wegfall der Geschäftsgrundlage”).
3. Is an epidemic a case of force majeure?
Generally yes. Force majeure is understood in German and Chinese law as an external event that was not foreseeable when the contract was concluded and is unavoidable and insurmountable. For example, in the explanatory memorandum to the Federal Government's draft law on the travel agency contract, epidemics are mentioned as cases of force majeure in addition to war, internal unrest, strikes, official orders, natural disasters and the like. If a contract contains a force majeure clause, it must be checked whether force majeure is defined differently there, in particular whether there is an exhaustive list of cases of force majeure or (as above) an exemplary list only. Even if the virus epidemic is considered a case of force majeure, it does not mean that it is the cause of any obstacle to performance and that every debtor can rely on it. There are no general answers here.
4. Is the outbreak of the Covid-19 virus classified as an epidemic?
Yes. In China, this was clarified by the decision of the State Council on January 24, 2020. In Germany by ordinance of the Federal Ministry of Health on February 1, 2020. An epidemic is the highly frequent, local and temporary occurrence of a disease. A pandemic is an epidemic that spreads across countries and continents. On February 13, 2020, the Robert Koch Institute announced that global development suggests that the virus could even spread worldwide in the sense of a pandemic.
5. Does it matter where a supplier is located in China?
Yes, the location or region in China is decisive for the question of whether and from when or for how long there has been a force majeure affecting the company. If a manufacturing plant is located in Wuhan and no more goods come in and out (or employees no longer can enter the factory), the situation is different from that of a plant in a city less affected by the virus. When or how long force majeure can be affirmed can also vary regionally. In Wuhan, force majeure could be said to have started on January 23 when the order to seal off the entire city came into force. In Shanghai and most other provinces, businesses had to remain closed until February 9th, and even longer in some regions hit particularly hard by the situation. However, because of the quarantine regulations and access controls at the city borders that have been introduced everywhere at the local level, the compulsory lock-down de facto lasts much longer. Each case must be examined individually.
6. Do customers have a damage claim in case of delayed performance?
According to German law, in principle yes, if the supplier is responsible for the non-performance, in particular if he is at fault (willful intent, negligence). In the case of the virus epidemic, however, fault is often doubtful, at least if the performance obligation was established at a time before the virus broke out. Furthermore, strict liability can result from the fact that the debtor has assumed a guarantee or the so-called procurement risk with regard to goods or services. This depends on the contractual arrangement in individual cases. According to Chinese law, the debtor is liable regardless of fault. Force majeure also leads to an exemption from liability in China, of course only to the extent that the non-performance is caused by force majeure. The question of causality is often more complicated than expected. However, based on the experience of the SARS crisis, it is expected that the courts will interpret this generously.
If the United Nations Convention on Contracts for the International Sale of Goods has been agreed in the contract or is applied due to a lack of choice of law, similar considerations apply.
7. What applies to services?
German companies and their Chinese subsidiaries typically provide high-quality, specialized services. As a rule, the service cannot simply be replaced. This is the case, for example, when a German manufacturer would have to set up, connect and install a complicated special machine by his technicians in China, but his employees would refuse to travel to China because of the epidemic or a trip appears to be “senseless “ because the technicians are not allowed to enter the company due to the quarantine regulations. In such cases, it will often not be possible in practice to commission other employees or local staff. Whether the German supplier can rely on force majeure or impossibility and thus (temporarily) free himself from his obligation to pay without being liable for damages or whether he can request a contract adjustment based on the legal principle of “frustration of contract” due to a fundamental change, depends on the circumstances of the individual case, as already described above under question 2, in the present case in particular on whether the trip to the customer is practically impossible or whether there is just nobody to take over the trip. If an employee unreasonably refuses to travel to Asia, his fault is typically attributable to the service provider.
8. What should suppliers or service providers do at the moment to ward off or minimize possible claims for damages?
In any case, the contractual partner must be informed of the situation in good time in order to protect him from consequential damage. It is advisable to find practical solutions by mutual agreement. According to Chinese law, proof is also required within a reasonable period, e.g. by presenting a certificate from the Chinese foreign trade association CCPIT. Even if German law is applicable, companies should document the situation and their own steps, in particular the effort to find a solution.
A common question in practice is whether the contractual goods or services cannot (otherwise) be obtained on the market in the short term. Here there are regular questions of reasonableness and when, due to unforeseeable circumstances, there is such a blatant mismatch between performance and consideration that the debtor can no longer adhere to the contract without modifications, citing a "fundamental change". The Chinese courts are relatively generous here and, with regard to the coronavirus, will probably refer to the views of the Supreme People's Court (SPC) in 2003 regarding SARS. At that time, the SPC had issued interpretative guidelines on the existence of "force majeure" and "fundamental changes in circumstances". Observers assume that the SPC will continue to have such views this time.
9. Can a contractual partner refuse to pay due payments invoking the situation in China?
No, there is generally no such right. This also applies if the contractual partner no longer receives any payments due to the downtime of its customers in China. Depending on which law is applicable or what the contractual regulation looks like in individual cases, the supplier may not be liable for the damage caused by delay (i.e. the actual damage caused by delay). It can therefore be that he can delay the payment "unpunished". According to German law, a debtor cannot invoke impossibility with respect to money debts. If a debtor cannot meet his payment obligation due to financial insolvency, he is responsible for the non-performance at the same time regardless of fault.
10. Which practical procedure is recommended in the event of (actual or legal) uncertainty?
Generally speaking: one should take a constructive approach. The disorder often affects both sides, so a common solution must be found anyway. This is also the situation in which one would like to be remembered as a flexible and considerate partner. The following steps are usually useful:
(1) basic legal review and risk assessment (internally): contractual scope of obligations, possible assurances and penalties, status of suppliers, logistics chain, production and storage capacity, personnel situation, effects on delivery ability and dates, etc.;
(2) Discussion with the contract partner for the amicable adjustment of the contract conditions, e.g. delivery times, alternative solutions, handling of down payments, etc.;
(3) Notification to the contracting party and ensuring appropriate evidence, e.g. a certificate from the China Council for the Promotion of International Trade (CCPIT). If the contract partner is reasonable, a balance of interests should be possible. Caution is advised if there are indications that the customer wants to take advantage of the situation.
11. Is there a legal risk by sending a “hasty notice” about the existence of force majeure to customers?
There is usually no risk in the mere notification. By reporting force majeure, the debtor can however indicate that he (supposedly) cannot deliver or perform and accordingly does not want to do so. The contractual partner could then be prompted to take an (from his perspective) unjustified refusal to perform as a reason, to enforce debtor default, claim damages, withdraw from the contract, etc. As already mentioned, it is advisable to communicate openly with the contracting parties concerned in order to achieve mutually acceptable solutions.
12. What is advisable when concluding new contracts?
If one concludes a contract today with knowledge of the problems caused by the corona virus, one takes the risk of having to fulfill the contract. An appeal to force majeure will then generally no longer be possible unless this has been expressly stipulated in the contract. Companies should carefully consider whether they can actually deliver on their promises against the backdrop of the epidemic. Clauses should possibly be agreed that enable the parties to react flexibly to the changing and still uncertain circumstances, for example by specifying specific assumptions under which a service is deemed feasible by the agreed time and specific mechanisms that apply if the assumptions change. From the supplier's perspective, one could also think of expressly including a maximum limit for damages.
13. Does the Chinese government grant financial support for companies to cover their running costs despite factory closures and production stoppages?
There are tax breaks for a very small group of companies. However, no substantial help is in sight for the vast majority of companies. However, this can change if the extent of the losses becomes more visible and there are mass layoffs.
We expect more or less openly declared stimulus measures in the coming weeks and months to keep the economy on a growth path. Beijing is currently leaving this task up to local authorities, which are already suffering from high levels of debt.
The government is using various means to prevent companies from being made redundant. On February 18, the central government in Beijing decided to reduce the incidental wage costs with immediate effect. Employer social security contributions are to be significantly reduced by June 2020 inclusive, for companies within the province of Hubei and all small businesses outside Hubei, at least 100% of the pension and unemployment insurance (around 21% of the gross wages), for medium and large companies outside Hubei 50%. However, the conditions in detail have not yet been announced and must be determined by the provincial governments.
In view of the extremely tense situation, in particular for smaller companies, China’s central bank has made additional funds of around € 7.5 million available to the banks. The participating banks are to offer support loans at a reduced interest rate of 3.15. However, the application conditions are very restrictive, so that this measure can at best be understood as a signal. After all, banks are instructed in an informal way not to make loans due or to defer them.
The outbreak of Novel Coronavirus Pneumonia (“NCP”) is a war without smoke for China and even the whole worldwide. In order to win the fight against NCP outbreak, the state and local government departments have introduced a series of policies covering taxation, fiscal, finance and job stabilization for supporting epidemic prevention and control, hoping to help the enterprises survive the crisis and making effort to stabilize the enterprises and economy development. This article will mainly share with you the state and local tax relief policies.
To give full play to taxation function, during the period from February 2 to February 6, 2020, China's finance and taxation department issued four announcements consecutively, covering twelve specific policies concerning "six types of taxes (i.e. enterprise income tax, individual income tax, value added tax, consumption tax, duties and urban maintenance and construction tax)" and "two types of fees (i.e. education fee and local education fee)”, aiming to provide taxation support for epidemic prevention and control from four aspects, i.e. support for epidemic protection and medical treatment, support for materials supply, encouragement of public welfare donations, and support for resumption of work and production. Those announcements are respectively:
Luther has combed and summarized the salient points in the abovementioned tax preferential policies and would like to share with you the table as follows:
In order to support the epidemic prevention and control and implement the relevant tax preferential policies during the epidemic prevention and control period, the State Administration of Taxation (“SAT”) also issued an announcement on tax collection and management operations related to epidemic prevention and control on February 10, and further issued a guideline on the implementation of tax preferential policies for epidemic prevention and control. In addition, SAT has also introduced a total of 18 measures to help winning the fight against novel coronavirus outbreak. Among them, the following highlights are worthy to be noted:
Stable employment is the key for epidemic prevention and control and development of economy during this epidemic period. To help to stabilize the employment and economy, several substantial social insurance relief measures are going to implement as introduced by Premier Li Keqiang at the recent State Council meeting held on February 18, 2020. Following are the salient points of the insurance relief measures that have been stressed during the council meeting covering:
To ease the impact of NPC on enterprises, in particular for micro-, small and medium-sized enterprises (“MSMEs”) and to enable the enterprises to have a buffer period after resumption of work and production, it is decided by the State Council that reduction and exemption of social insurance contribution shall be implemented for a certain period. The degree and period of such relief policy varies from the location and scale of the enterprises, respectively:
Before June 2020, all enterprises, regardless of scales and locations can apply for deferred contribution for housing provident fund. During such period, any housing provident fund loans which are not repaid by the employees within due period because of the impact of epidemic would not be deemed as overdue payment.
The above-mentioned tax preferential policies are mainly focused on the enterprises and personnel involved in the epidemic prevention and control, as well as enterprises in difficult industries affected by the epidemic, including transportation, catering, accommodation, and tourism. For enterprises in other industries that are severely affected by the epidemic, particularly small and medium-sized enterprises (“SMEs”), they are eager to get more policy support to mitigate the impact of NCP due to insufficient cash flow and short life cycle. In view of this, various local governments have successively introduced policies and measures to prompt the stable and healthy development of SMEs mainly in four aspects: reducing the burden on enterprises, increasing financial support, helping enterprises stabilize their jobs, and promoting resumption of work and production.
Among them, the local finance and taxation preferential policies issued by local governments in support of epidemic prevention and controls mainly includes local tax relief, social insurance preferential measure and financial subsidy, details are as follows:
In most areas (such as Hubei, Zhejiang, Jiangsu, Anhui, etc.), enterprises that have suffered significant losses due to the epidemic and have real difficulties in payment of RET and ULUT can apply for reduction and exemption of the said taxes. In Shanghai, however, only two types of enterprises which have genuine difficulties in payment of such taxes during the epidemic prevention and control period are allowed for reduction and exemption of RET and ULUT, respectively:
For enterprises which are temporarily unable to resume work or have difficulty in operating due to the impact of epidemic, especially labor-intensive service industries, wages and social insurance expenses costs will bring huge financial pressure on them. Certain reductions or delays in payment of social insurance premiums as well as housing provident funds will help to stabilize the employment relationship and avoid a large-scale wave of layoffs.
Refunds of unemployment insurance premiums have been introduced by most areas in China, which are mostly applicable for the enterprises that do not lay off staff or rarely reduce staff numbers. The calculation base and proportion of refunds of unemployment insurance premium varies from region to region, 50% of the total unemployment insurance premiums actually paid by the employer and its employees in the preceding year is most adopted. In addition, for enterprises which are facing production and operation difficulties temporarily but are expected to resume and insist on non-layoffs or fewer layoffs, social insurance or unemployment insurance premiums can be refunded according to certain standards, such as Zhejiang and Anhui.
For enterprises which are unable to pay the social insurance premiums in full amount due to the impact of epidemic, the payment of social insurance premiums can be postponed without late fees. The deferment period generally shall not exceed 6 months. In some areas, such as Hubei and Anhui, the longest deferment period is 12 months. Within 3 months after the deferment period expires, the enterprise shall make full repayment of the deferred social insurance premiums and the individual rights and interests of the insured would be not be affected thereof.
In addition to the above-mentioned preferential social insurance policies that are generally applicable in most areas, the Shanghai government also stated that it will postpone the time for adjusting the social insurance contribution base and appropriately lower the medical insurance rates for employees. And the Shenzhen government also stipulated that the minimum percentage of corporate housing provident fund deposits can be reduced to 3% or the enterprise can defer the payment of housing provident funds within certain period.
The above-mentioned preferential policies in terms of social insurance and housing provident fund were released by various local governments before February 18, 2020. With the introduction of latest social insurance relief measures by State Council, local governments are expected to issue more detailed measure in that regard thereafter.
In addition to tax and fee relief measures, local governments provide different types of financial subsidies to SMEs affected by the epidemic according to different policy objectives. For example, Shanghai provides financial subsidies to cultural service construction fee payers who provide entertainment services according to 100% of their actual payment; Beijing grants R&D expenditure subsidies to technical SMEs enterprises in specific regions; and Jiangsu provides a certain percentage of financial subsidiaries to the enterprise that purchase new equipment for epidemic prevention and control.
Facing the sudden outbreak of NCP, the finance and taxation departments promptly formulated the tax preferential policies to support epidemic prevention and control. In general, these tax relief policies are highly targeted, and by comparison of those introduced during the SARS epidemic in 2003, there are some breakthroughs in policy-making this time, such as extending the carried-forward period for loss. Moreover, for the SMEs accounted for half of the country, particularly those not related to the epidemic prevention and control and are not covered in the difficult industries, the current fiscal and tax preferential policies are far from supporting them to pull through the epidemic. As the epidemic continues to spread, the negative impacts on enterprises and individuals will gradually appear. It is expected that the financial and taxation departments will provide further polices that are more preferential and enforceable, so as to give enterprises especially SMEs greater financial and tax support and ease their burden, assist them to overcome the difficulties and win the fight against the epidemic.
When winter comes, will spring be far away? When spring comes, smile to the sunshine.
Axel Braun
Partner
Cologne
axel.braun@luther-lawfirm.com
+49 221 9937 25740
Ole-Jochen Melchior
Partner
Essen
ole.melchior@luther-lawfirm.com
+49 201 9220 24028
Thomas Weidlich, LL.M. (Hull)
Partner
Cologne
thomas.weidlich@luther-lawfirm.com
+49 221 9937 16280
Dr Maresa Hormes
Counsel
Essen
maresa.hormes@luther-lawfirm.com
+49 201 9220 24815
Dr SHEN Yuan / 沈媛 博士 LL.M. (CUPL/Köln)
Counsel
Cologne
yuan.shen@luther-lawfirm.com
+49 221 9937 25075
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