No, China hasn’t made it illegal to fire humans and replace them with AI—but yes it’s made it much more expensive for companies to do so

China’s State Council has published a state media report through its Information Office concerning a recent legal case about a worker whose role was (at least partially) replaced by AI. The worker, identified by their surname Zhou, was hired for a tech role in quality assurance, before their employer began using AI to cover some of their responsibilities and subsequently offered Zhou a demotion and a salary decrease.

Zhou rejected the offer, which would have seen them take a 40% pay cut, and the firm instead ended their contract, citing the disruption being caused by AI and the company’s reduced staffing needs as a result. Zhou challenged this decision in Hangzhou Yuhang District People’s Court, which found in their favour, before the Hangzhou Intermediate People’s Court upheld the decision in the face of the company’s appeal.

This decision has previously been reported and shared online as China making it illegal to replace workers with AI bots, though this is not quite the case. The dispute here concerned whether Zhou was laid off in the right way and the amount of compensation the company should be on the hook for.

“The termination grounds cited by the company did not fall under negative circumstances such as business downsizing or operational difficulties, nor did they meet the legal condition that made it ‘impossible to continue the employment contract,'” said the court’s ruling.

In other words, what the Chinese courts have ruled is that simply citing AI as a reason for layoffs is not acceptable grounds for rationalising a ‘negative circumstances’ or ‘lawful’ dismissal. Zhou’s arbitration claim was all about receiving higher compensation for the dismissal being ‘unlawful’, with the court also ruling that the alternative position offered was not reasonable due to the significant salary cut.

Ironically enough, Zhou’s job apparently involved working with AI LLMs and checking the answers they provided to users for accuracy and appropriateness. They’re also not the first Chinese worker to dispute a job loss involving AI: a tech worker in Beijing won a similar case last year.

The Chinese State Council’s report says that this establishes a legal principle that using AI to replace a worker does not automatically justify terminating a contract, though it’s important to note firms will still be able to replace workers with AI. But doing so represents a business choice and not something a company can claim is ‘inevitable’ or otherwise, and firms either need to offer reasonable alternative employment or significant compensation.

There are obvious points to make here, some of which rub up against one another. Hangzhou itself is an AI hub, and the Chinese Communist Party is encouraging the widespread adoption of AI across industries. This decision is about existing Chinese employment law and whether it was used correctly in the context of AI (which it obviously wasn’t). This decision also has to be viewed in the context of a country which has a population of 1.41 billion and an economy that is in the middle of a notable slowdown: it can ill-afford a bunch of bots suddenly being used as justification for mass layoffs.

So no: China hasn’t made it illegal to fire workers and replace them with AI. But courts have decided that companies cannot simply fire people with basic redundancy packages and hand-wave it away by saying “AI is the future, baby!” Essentially the Hangzhou courts are saying that replacing people with AI isn’t an inevitability: it’s a company and management decision. And if firms want to be the one to make it then they can rock on—but will be paying through the nose for it.