Companies can’t fire employees and replace them with AI, Chinese court rules

issued Sunday, May 3, 2026 · 04:03 PM

Chinese companies cannot legally fire employees simply to replace them with cost-cutting artificial intelligence, a court in the country has ruled, setting an important precedent for workers’ rights as automation increases in high-tech sectors.

A technology company’s efforts to reassign employees and slash their salaries because their jobs could be automated by AI ultimately led to the employees being fired, but a Hangzhou court deemed the dismissals illegal.

On April 28, the Hangzhou Intermediate People’s Court released a summary of typical cases regarding AI companies and worker rights protection. One high-profile case focused on a labor dispute between a technology company and an employee named Zhou.

Chou worked in a quality assurance role at a technology company, checking the accuracy of sentences generated by AI language models. Citing the impact of AI advances on the project and the need for optimization, the company sought to reassign Mr. Zhou and reduce his monthly salary from 25,000 yuan (US$3,655) to 15,000 yuan. When Mr. Chou refused to take a pay cut, the technology company fired the employee.

Mr. Zhou immediately filed for labor arbitration, demanding compensation for his unfair dismissal. The arbitration panel sided with the worker, prompting the tech company to file a lawsuit in Yuhang District Court.

China requires labor disputes to undergo arbitration before going to court. According to the country’s Labor Dispute Mediation and Arbitration Act, parties must first submit their differences to a mediation and arbitration committee. If you are dissatisfied with the judgment, you can file a lawsuit.

The Yuhang District Court pointed out at the trial that replacing workers on the basis that AI can essentially complete the job cheaper does not fall under legally recognized grounds for dismissal, such as business closure or poor management.

Furthermore, the court found that the legal standard for an “objectively material change” that would make performance of the contract impossible was not met. Because the proposed new role featured a significant reduction in salary, the court ruled that it did not constitute a reasonable bargaining offer, declared the dismissal unlawful, and ordered the company to pay compensation.

On appeal, the Hangzhou Intermediate Court upheld the original judgment.

Protecting workers from algorithms

Under Chinese labor law, employers and employees can change contract terms by mutual agreement. Unilateral dismissal by an employer is primarily limited to cases of mutual consent, employee misconduct, or employee incompetence. In addition, if a company becomes unable to perform due to an unforeseen material change in purpose, it may terminate the contract by giving 30 days’ written notice or by providing one month’s severance pay.

In explaining the significance of the ruling, the Hangzhou Intermediate Court pointed out that AI integration is an active business strategy to maintain companies’ competitiveness. Although such technology upgrades may change the operating structure of a company, they do not constitute a legally binding objective major change that would inherently justify the invalidation of a labor contract.

The court stated that “artificial intelligence should be used to free up labor, promote employment, and benefit livelihoods.” Although the law allows companies to make technology-driven transitions, they still need to protect the legal rights of their employees.

The court advised that if AI needs to be reengineered, companies should prioritize reskilling staff for more advanced roles that require human intervention, creating a win-win scenario in terms of productivity and job security. If employee redeployment is unavoidable, companies must make a reasonable offer and compensate for additional commuting and housing costs. Alternatively, workers will be encouraged to proactively upskill to adapt to the AI ​​era.

deliberate business choice

The Beijing Human Resources and Social Security Administration also highlighted a similar AI-related employment dispute on December 26, 2025.

In an earlier case, a data collector named Liu joined the tech company in July 2009 and was responsible for manually entering maps. In early 2024, the company pivoted completely to automated, AI-driven data collection to adapt to market changes. The manual navigation department and Mr. Liu’s role were abolished.

In late 2024, the technology company fired Mr. Liu, claiming that significant changes in objective circumstances made it impossible to enforce the labor contract and that the two companies were unable to agree on new terms. Mr. Liu challenged this decision through arbitration and won compensation for his unfair dismissal.

The controversy primarily revolved around whether the elimination of jobs due to the introduction of AI constitutes a major change in the objective situation under China’s labor contract law.

The guidelines jointly issued by the Beijing High Court and local arbitration committee define such major changes as unforeseen events outside the employer’s control, such as natural disasters, government policy changes, or forced reassignments, that make the continuation of the labor contract financially ruinous or impossible. The defining characteristics are uncontrollability and unpredictability, which are outside the scope of everyday business risks.

The Beijing Labor Bureau pointed out that the company’s transformation to AI was a deliberate decision by management. Although this commercial strategy predictably changed structural staffing needs, it lacked the necessary unpredictability. The authorities reasoned that by firing Mr. Liu, the company unlawfully transferred the risk of anticipated technology iterations to its employees. caixin global