Chinese court rules firing employee to replace him with AI was unlawful

A Hangzhou court ruled that an employee's termination was unlawful when the company decided to transfer his work to AI. For the Chinese market, this is an important signal: automation by itself is not considered sufficient grounds for terminating an employment contract.

What the Court Decided

The story began with an employee named Zhou, who in November 2022 joined a technology company in Hangzhou as a quality control director. He worked with large language models: helping improve responses, matching user queries, and filtering sensitive or prohibited content. His salary was 25,000 yuan per month.

In 2024, the company decided that its own AI systems already handled this work better and more cheaply. After that, Zhou was offered a new, lower-level position with a 40% salary cut — down to 15,000 yuan. He refused, after which the company terminated him, citing changed circumstances.

But first arbitration, and then the courts, ruled that such termination was unlawful. Their logic is simple: implementing AI is a voluntary business decision by the employer, not an external force majeure that makes contract execution impossible. The court specifically noted that the company was trying to save money at the worker's expense.

Second Similar Case

This is not about a new special law against AI-related terminations, but about judicial interpretation of existing labor law. The key was the approach to an article of Chinese law that allows contract termination if objective circumstances have changed so drastically that continued execution becomes impossible. Normally, this basis covers things like company relocation, mergers, production shutdowns, or other factors outside the employer's direct control. The technology itself does not eliminate obligations under the existing contract.

A similar decision was already issued by Chinese authorities at the end of 2025 in Beijing. There, an employee named Liu was engaged in manual data collection for a mapping service, and then the company transferred this process to AI systems and closed the division. In this case too, arbitration and courts reached the same conclusion: if a business chooses automation itself, it cannot simply shift its costs to workers.

"If companies gain all the benefits from technological change while

workers suffer only losses, the balance of interests is disrupted."

Where Automation's Boundaries Are

The court's decision does not prohibit companies from implementing AI and restructuring processes. But it sets an important framework: automation does not release the employer from obligations to employees. If a company changes its structure due to AI, it still needs to act within labor law, not simply declare a position unnecessary.

From published materials and legal commentaries, several practical conclusions emerge. Otherwise, the dispute will almost certainly move from the HR department to arbitration and court.

• you cannot use the mere fact of AI implementation as a universal basis for termination;
• you cannot impose a sharp demotion and salary cut on an employee without consent;
• it is safer for the employer to offer retraining, transfer to a comparable role, or reasonable compensation;
• technological modernization is considered part of the company's business risk, not a problem the worker should pay for;
• courts consider it important whether the change was truly unpredictable, rather than simply profitable for the business.

For China, this is a particularly sensitive issue because the country is simultaneously accelerating AI deployment and trying to avoid a hit to employment. The Hangzhou court essentially showed that the state is not planning to slow down automation, but is also not ready to recognize it as justification for unilateral terminations. This makes local judicial practice noticeably stricter regarding AI-related layoffs than in many other jurisdictions.

Against the backdrop of explosive growth in the AI industry, this balance becomes both politically and economically important.

What This Means

Chinese courts have not yet introduced an absolute ban on AI-related layoffs, but have drawn an important line: a company cannot first automate a function by its own will, and then present this as lawful grounds for termination. For employers, this is a signal to think ahead about retraining, transfers, and compensation, and for employees, it means understanding that disputes over AI replacement can already be won in court.