Can an employer cut pay across the board through a democratic procedure when business is poor?

I. The negative view

Those who say collective pay cuts are unavailable argue that a democratic procedure cannot replace individual agreement. Even where a company reaches a resolution through a lawful democratic procedure with the support of the great majority of employees, it cannot be imposed on an individual employee who expressly objects.

On 28 April 2025 the Shanghai No. 2 Intermediate People's Court and the Shanghai Municipal Human Resources and Social Security Bureau published typical labor dispute case 4, "a company adjusting the pay of a single department through a democratic procedure". The company employing Mr Wang was hit by the pandemic, its results fell steadily, and a failed investment in mid-2023 dealt a further blow. With business volumes down and work in his department sharply reduced, the company decided to cut the pay of the whole department by 20 per cent to reduce costs. The decision was passed by the employees' representative meeting, approved by the trade union and announced at a general meeting. Mr Wang objected, saying the cut had not been agreed with him, and asked for the difference. Negotiation failed and he applied for arbitration, claiming the difference in wages for August to December 2023. The Putuo arbitration commission held as follows. First, the primary instrument binding employer and employee is the employment contract they have agreed, and the pay cut plainly departed from it. Internal rules and major matters affect the interests of the whole workforce, and adjusting only Mr Wang's department offended the principle that an employer must formulate its rules and management strategy openly, fairly and impartially, so the company's reliance on a democratic procedure was only formally, not substantively, compliant. Second, the pandemic-era guidance issued by the Ministry of Human Resources and Social Security — that enterprises whose operations were affected may stabilise employment by adjusting pay, rotating posts and reducing hours by agreement with employees, and should avoid or minimise redundancies — was a special policy to preserve employment and encourage both sides to weather the crisis together, and it ended when the special circumstances ended; it could not be extended indefinitely. The company's misuse of a special-period policy was improper, and it was ordered to pay the difference.

In (2024) Jing 03 Min Zhong No. 15514 the court stated expressly that a pay-cut resolution adopted at a staff meeting binds only the employees who agreed to it; even if adopted through a democratic procedure with majority support, it cannot bind an employee who expressly objects. (2025) Jing 01 Min Zhong No. 10907 takes the same view: remuneration is a core term of the employment contract, Mr Wang repeatedly refused the pay-cut proposal, and the Beijing company's unilateral cut without agreement had no basis, so the first-instance award of the wage difference was correct. In (2021) Jing 03 Min Zhong No. 4988 the company cut the pay of all managers and staff to secure its survival and growth. It produced a letter seeking comments, a reply from the trade union committee and a formal notice of the pay adjustment, and said it had explained the change level by level at regular meetings. The employee, Mr Peng, said that on receiving the notice he objected and did not accept a unilateral cut. The company began cutting pay in December 2018, and Mr Peng terminated his contract on the ground that the company had not paid remuneration in full and on time. The court held that pay is an important part of the employment contract and that a pay cut is a major change requiring agreement; the evidence did not show that the company had reached agreement with Mr Peng, so it could not be treated as having paid his wages in full, and the company was ordered to pay economic compensation.

II. The positive view

Those who accept collective cuts argue that an employer may determine its own wage distribution and wage levels according to its production and operational characteristics and economic results, provided that wages are not below the local minimum wage. Employees may object, but where the decision has the support of the trade union and the great majority of employees it applies to all of them. See, for example, (2024) Chuan 3401 Min Chu No. 3483, (2021) Yue 01 Min Zhong No. 5621 and (2023) Su 01 Min Zhong No. 14268.

In (2024) Hu 0151 Min Chu No. 7923 the court held that an across-the-board cut made because of serious operating difficulties must satisfy certain conditions: the cut must be formulated and adopted through a democratic procedure and the reduction must be reasonable. To prove the lawfulness and reasonableness of its cuts in 2023 and 2024, the employer produced audited accounts, financial statements and balance sheets showing losses from 2021 to 2023, minutes of the staff meeting, and the pay records and contracts of employees at the same level as the claimant. The first cut, of 33 per cent (from RMB 180,000 to RMB 120,000 a year), and the second, of 10 per cent, were found to be within a reasonable range. The court found that the defendant, loss-making throughout 2023, first negotiated further cuts individually with employees, then on 23 February 2024 announced the arrangement at a meeting of all staff; apart from the claimant, no employee objected, and the cut was applied to everyone, at 10 per cent for the claimant. The collective cut was reasonable and followed the statutory procedure, and it applied to the claimant as well. On the claimant's cost after the cut and the social insurance and housing fund contributions for January and February 2024, the defendant had paid his wages for those months in full, so that claim was not supported. As to the claim for damages, the termination notice and the parties' statements showed that the defendant had decided on an across-the-board cut because of operating difficulties and terminated when agreement with the claimant could not be reached; on the audit report, balance sheet and profit statement, the company's performance had deteriorated further in 2023 after a poor 2022 and it was loss-making. In those circumstances a collective cut followed by termination without agreement is a situation in which the employer must pay economic compensation, and the arbitration award of RMB 17,782.25, based on the claimant's years of service and the wages due in the twelve months before termination, was correct; the company had paid that sum after the arbitration.

The Qingpu District People's Court held in (2022) Hu 0118 Min Chu No. 21696 that, on the audio-visual record produced by the company, a staff meeting had been held on 17 May 2022 to consult employees, including Mr Liu, on a 60 per cent cut from 1 April 2022, and no one present objected, so the proposal was passed. The company had therefore carried out democratic consultation and notification, and the cut could apply to Mr Liu.

Among the ten typical labor and personnel dispute cases published by the Jiangsu High People's Court on 29 April 2024, the Nanjing Jiangbei New Area People's Court held that a collective contract concluded with the trade union in accordance with the law after equal consultation on adjusting pay because of operating losses is legally binding and must be observed by employees. There the 2023 pay adjustment plan was discussed and passed by a majority at the employees' representative meeting; the technology company concluded a special collective contract on the 2023 adjustment with its trade union, which took effect after review by the local labor administration, and both the company and Mr Yuan had to perform it. Paying Mr Yuan in accordance with the collective contract was not a failure to pay remuneration in full, and the court dismissed his claims that the company had withheld wages, that he had been forced to resign and that the company should pay economic compensation and a wage difference. The significance of the case is that a collective contract can vary individual contracts. Where an employer faces major external risks, an agreed across-the-board cut that allows both sides to weather the difficulties and leaves pay sufficient to live on is legitimate and reasonable; a collective contract approved by employee representatives, concluded with the company's trade union and cleared by the labor administration follows the statutory procedure and takes effect.

III. Minton's note

The law protects an enterprise's right to survive and an employee's right to remuneration, and in hard times it encourages both sides to pull together. An employer facing genuine operating difficulties that wishes to reduce pay should first reach agreement with employees and record the reduction in a written variation. If agreement cannot be reached, it may launch a democratic procedure for a collective cut, but that route is contentious and should be used with care; it requires genuine serious operating difficulties, an express basis in the employment contract, a plan formulated and adopted through the democratic procedure, a reduction kept within a reasonable range, and a cut that is not targeted at particular employees, together with a record of the process. Minton also suggests that employers may respond flexibly by adjusting performance assessment, reorganising the business, temporarily reducing benefits, cutting pay by tier, changing working hours, or suspending operations.

For employees: where the employer's difficulties are genuine, and an across-the-board cut is a temporary measure to reduce costs moderately and survive in a competitive market rather than action aimed at particular employees, and the reduction does not seriously affect their basic living standard, employees should understand and support the employer's difficulties. But where the employer is not in difficulty and is using improper means to force pay down, employees should object promptly, gather the relevant evidence and report the matter to the labor authorities or apply for arbitration.