The legal limits of unilateral termination

Against the backdrop of rapid technological advancement, particularly the growing adoption of artificial intelligence (AI) in the workplace, companies are increasingly facing the need to restructure their workforce. While AI-driven redundancies may reduce operational costs and improve efficiency, they also raise significant legal and practical challenges for workforce management. The question of whether the elimination of work positions resulting from the introduction of AI may justify employment termination is now a hotly debated issue, argue Jeanette Yu and Chase Chen.

Under the framework of Chinese employment law, the termination of an employment relationship is subject to stringent statutory regulation, and an employer may unilaterally terminate an employment contract only where one of the statutory reasons for a termination has been fulfilled. Such statutory reasons include a serious violation of the employer’s internal rules or policies, incompetence in the workplace, inability to work upon expiration of the statutory medical treatment period, or a material change in objective circumstance that renders continued performance of the employment contract impossible.

The termination reason of ‘material change in objective circumstance’ is most widely invoked by employers in circumstances where employee separation is driven by adjustments to business strategy or other operational needs, and thus it is also considered the most relevant termination reason for employment termination driven by adoption of AI.

In practice, labour disputes frequently arise as to what kind of circumstance can legally constitute a ‘material change in objective circumstance’ and is sufficient to justify unilateral termination of an employment relationship. According to the Circular of the Ministry of Labour on Issuing the Explanation on Several Provisions of the Labour Law (Circular), a material change in objective circumstance refers to the occurrence of force majeure events or other situations that render all or part of the employment contract impossible to perform.[1] The Circular also provides illustrative examples, including the relocation or merger of the employer and the employer’s transfer of assets.

Notably, the Circular was promulgated more than three decades ago. Considering China’s significant economic transformation and rapid social development over the past 30 years, the guidance offered by the Circular is generally regarded as limited and insufficient to address the complexity of modern business situations and employment management. As a result, in current judicial practice, the labour arbitration commissions and the People’s Courts are vested with considerable discretion in determining whether a particular circumstance constitutes a material change in objective circumstances.

Beyond the three scenarios expressly identified in the Circular—namely employer relocation, merger and asset transfer, according to the judicial precedents in the past—material changes in objective circumstance have also been recognised in the following typical situations:

• an employer faces business difficulties caused by natural disasters;
• employers’ loss of essential licences or permits required to sustain original business operations; and
• employers’ reorganisation or restructuring resulting in the elimination of an entire department or core function, such as the elimination of the entire production function.

Recent judicial developments have helped shed light on whether AI-driven job displacement may constitute a material change in objective circumstance that justifies terminating an employment contract. In December 2025, the Beijing Municipal Labour Arbitration Commission first publicly released a representative case (Beijing Typical Case) addressing this issue.[2] The details of the Beijing Typical Case are summarised as follows:

• Case facts:

The employee concerned, surnamed Liu, worked as a data collection specialist in Company A and was responsible for traditional manual map data collection. In 2024, Company A decided to transform its business by fully shifting from manual data collection to AI-driven automated data collection. As a result, Company A eliminated Liu’s position and terminated its employment relationship with him based on a material change in objective circumstance.

• Case result:

Liu filed a labour arbitration case against Company A at the competent labour arbitration commission in Beijing and claimed double the normal statutory severance amount for unjustified termination of his employment relationship.[3] After hearing the dispute, the labour arbitration commission in Beijing found that Liu’s termination lacked sufficient factual basis and eventually ruled in his favour.

The labour arbitration commission in Beijing came to its decision based on the following reasoning:

• To qualify as a material change in objective circumstance, the event shall have the characteristics of ‘force majeure’ and ‘unpredictability’ and fall outside the scope of routine business decisions and risk management.
• Company A’s adoption of AI technology falls within the scope of its independent business decisions and constitutes a proactive technological innovation to adapt to market competition, which does not meet the criteria for ‘force majeure’ and  ‘unpredictability’.
• Company A shifted the business risks of a normal technological upgrade onto employees, and its termination of the employment relationship therefore constituted an unjustified termination.

In addition to the Beijing Typical Case, Hangzhou, usually known as the leading hub for internet and high-tech companies in China, also addressed this issue in recent judicial practice. In April 2026, the Hangzhou Intermediate People’s Court published a set of typical labour dispute cases regarding AI technology companies, with one case specifically concerning the elimination of a position as a result of an employer’s adoption and application of AI (Hangzhou Typical Case).[4]

In the Hangzhou Typical Case, Company B considered replacing human labour with AI, which offers a greater cost advantage and thus terminated its employment contract with an employee named Zhou based on a material change in objective circumstance. The Hangzhou Intermediate People’s Court adjudicated the dispute and ultimately held that Company B’s termination was unjustified.

The court came to this decision based on the reasoning that, first, the circumstance giving rise to the employment termination was not a passive or externally imposed situation faced by the employer, such as loss of business, but rather a business decision driven by cost consideration; second, the relevant circumstance did not fall within any category of material change in objective circumstance as defined in the law.

Although the judicial practice for employment-related matters in different cities in China can vary, the Beijing and Hangzhou cases are still valuable references to prove the current judicial practice that AI-driven job displacement does not necessarily constitute a material change in objective circumstance that is sufficient for employers to justify unilateral termination of employment.

In light of the potentially severe legal liabilities that could arise from unjustified termination (i.e., double statutory severance or reinstatement of employment with back pay of salary), employers in China are advised to exercise prudence and avoid solely relying on AI-driven job displacement as the basis for employment termination.

Rather than adopting a purely replacement-orientated approach, employers may consider how AI can be leveraged to enhance employees’ productivity and optimise workforce management in a cost-efficient manner without resorting to employment termination. Specifically, to achieve more effective employment management in the age of AI, employers may consider taking the following measures:

• providing training and reskilling opportunities to help employees adapt to new technologies and improve work efficiency through the use of AI tools;
• engaging with employees whose workload has been reduced due to AI assistance and redefining their roles and responsibilities accordingly; and
• offering employees internal transfer opportunities to positions that require a higher level of human input, participation, judgement or oversight.

Where termination of employment due to the adoption of AI becomes unavoidable, employers are encouraged to give priority to separation through mutual agreement with employees. While mutual agreement is widely regarded as the most effective approach to achieve employee separation, the negotiable nature of severance compensation under this method often creates a perceived burden for employers. One practical solution is to strengthen workforce management by establishing clear rules and policies and ensuring fair and consistent enforcement, particularly in areas such as employees’ work performance and discipline. This approach will not only foster a fair and competitive working environment but will also equip employers to lawfully manage employees who are unable to adapt to the changes brought about by the AI era.

Jeanette Yu is a senior consultant at CMS China.

Chase Chen is an associate at CMS China.

As a top global law firm, CMS provides a full range of legal and tax services in over 50 countries, with more than 90 offices and 7,200 CMS professional legal and tax advisors worldwide. CMS China (Shanghai, Beijing, and Hong Kong) offers business-focussed advice tailored to companies’ needs.

[1] Explanation of several articles of the Labor Law, Xiamen Municipal Human Resources and Social Security Bureau, 5^th September 1994, viewed 29^th May 2026, <https://hrss.xm.gov.cn/xxgk/zfxxgkzl/zfxxgkml/zcfg/qtwj/201012/t20101209_1302204.htm>   

[2] Top Ten Typical Cases of Labor and Personnel Dispute Arbitration in Beijing in 2025, Beijing Municipal Bureau of Human Resources and Social Security, 26^th December 2025, viewed 26^th May 2026, <https://rsj.beijing.gov.cn/bm/ztzl/dxal/202512/t20251226_4366546.html>

[3] According to Chinese law, for a justified employment termination based on material change in objective circumstance, an employee is entitled to a statutory severance payment, which is generally calculated as one month’s average salary for each full year of service.

[4] The Hangzhou court released typical cases of protecting the rights and interests of AI enterprises and practitioners, Hangzhou Intermediate People’s Court, 28^th April 2026, viewed 26^th May 2026, <https://mp.weixin.qq.com/s/2Mmmy4j5O8kXQlnNpqzPmg>