Replacing an employee because technology can cut costs does not fall within the legally permitted grounds for dismissal
Chinese companies cannot fire employees simply to replace them with artificial intelligence in order to reduce costs, the country’s courts have ruled, setting a significant precedent for labor rights in the face of increasing automation in the technology sector.
A technology company’s attempt to relocate and drastically reduce an employee’s salary by arguing that his work could be automated by AI — which ultimately led to the worker’s dismissal — was ruled an illegal dismissal by Hangzhou courts.
On April 28, the Hangzhou Intermediate People’s Court released a series of cases involving AI companies and the protection of workers’ rights. One closely watched episode revolved around a labor dispute between a technology company and an employee surnamed Zhou.
Zhou worked in the technology company’s quality assurance department, checking the accuracy of sentences created by AI language models. Citing the impact of AI advances on the project and the need for optimization, the company attempted to reassign Zhou and reduce his monthly salary from 25,000 yuan ($3,655) to 15,000 yuan ($2,190). When Zhou rejected the pay cut, the technology company fired him.
The worker immediately sought labor arbitration and demanded compensation for unfair dismissal. The arbitration panel found in favor of the employee, which led the technology company to file a lawsuit in the Yuhang District Court.
In China, labor disputes must be submitted to arbitration before reaching trial. According to the country’s Law on Mediation and Arbitration of Labor Disputes, the parties must first take their differences to the mediation and arbitration commissions; If they are dissatisfied with the verdict, they can then appeal to the courts.
During the trial, the Yuhang District Court noted that replacing an employee essentially because AI can perform the job at a lower cost does not fall within the legally permissible grounds for dismissal, such as company closure or mismanagement.
Furthermore, the court considered that there was no legal threshold for a “substantial objective change” that makes performance of the contract impossible.
As the proposed new role featured a drastically reduced salary, the court ruled that it was not a reasonable negotiation offer, declaring the dismissal illegal and ordering the company to pay compensation. After the appeal, the Hangzhou Intermediate Court upheld the original sentence.
PROTECTING ALGORITHM WORKERS
Under Chinese labor law, employers and employees can modify the terms of the contract by mutual agreement. Unilateral termination by the employer is largely restricted to cases involving mutual consent, worker misconduct, or situations in which the worker is deemed incompetent.
Companies can also terminate a contract if an important and unpredictable objective change makes compliance impossible, as long as they notify the employee in writing 30 days in advance or pay compensation equivalent to 1 month’s salary.
In explaining the importance of the decision, the Hangzhou Intermediate Court noted that AI integration is a proactive business strategy aimed at maintaining a company’s competitiveness.
While these technological upgrades may alter a company’s operating structure, they do not inherently qualify as a legally binding objective major change that justifies voiding employment contracts.
“Artificial intelligence must be used to liberate work, promote employment and benefit livelihoods”the court stated. The law allows companies to undergo technology-driven transitions, but they must still safeguard employees’ legal rights.
The court advised that if AI restructuring is necessary, companies should prioritize training their employees for more advanced roles that require human intervention, creating a win-win scenario in terms of productivity and job security.
If employee relocation is unavoidable, companies must offer reasonable proposals and compensate for additional commuting or housing costs. Alternatively, workers are encouraged to proactively upskill to adapt to the AI era.
A DELIBERATE BUSINESS CHOICE
The Beijing Human Resources and Social Security Bureau also highlighted a similar AI-related labor dispute on December 26, 2025.
In this previous case, a data collector surnamed Liu joined a technology company in July 2009 to handle manual map entries. In early 2024, the company completely switched to automated, AI-driven data collection to adapt to market changes. It eliminated its manual navigation division and Liu’s role.
In late 2024, the technology company fired Liu, saying that a major objective change in circumstances made the employment contract impossible to fulfill and that the two parties were unable to agree on new terms. Liu challenged the decision through arbitration and obtained compensation for unfair dismissal.
The dispute revolved around the question of whether the elimination of a job due to the adoption of AI constitutes an objective and significant change in circumstances under China’s Labor Contract Law.
Guidelines issued jointly by the Beijing High Court and local arbitration courts define these significant changes as unpredictable events beyond the employer’s control – such as natural disasters, changes in government policies or forced relocations – that make the continuation of an employment contract financially ruinous or impossible. The defining characteristics are uncontrollability and unpredictability, placing them outside the scope of everyday business risk.
The Beijing Labor Department noted that the technology company’s shift to AI was a deliberate management decision. Although this business strategy predictably changed structural staffing needs, it lacked the necessary unpredictability.
In firing Liu, authorities argued that the company illegally transferred its own expected risks of technological iteration to the employee.
This report was originally in English by Caixin Global on April 30, 2026. It was translated and republished by Poder360 under mutual content sharing agreement.
