TL; DR
Chinese courts in Hangzhou and Beijing have ruled in two separate cases that companies cannot fire workers simply to replace them with AI, and found that adopting AI is a strategic business choice rather than an unexpected change in circumstances under China’s Labor Contract Law. The rulings come as a sharp contrast to the US and EU, where 78,000 tech workers are out of a job globally by the start of 2026, around half of which are related to AI, and which lack equivalent legal protection.
A quality assurance supervisor identified only as Zhou joined a technology company in Hangzhou in November 2022. His job was to work with artificial intelligence on a wide range of language models, optimize their results and filter out sensitive content. He earned 25,000 yuan a month, about $3,640. In 2024, the company decided that its artificial intelligence systems had advanced to the point where Zhou’s role could be automated.
He took a 40 percent pay cut and reassigned him to a lower-level position, reducing his salary to 15,000 yuan. Zhou refused. The company fired him. Zhou filed for arbitration. The arbitration board considered the dismissal illegal. The company applied. The Hangzhou Intermediate People’s Court upheld the verdict.
The court found that a company’s decision to implement artificial intelligence was a strategic business choice, not an unforeseeable change in objective circumstances, and therefore did not constitute a legal basis for rescission under this statute. China Labor Contract Law. The company was ordered to pay compensation. The decision published this week is the second Chinese court decision in six months to establish the same principle: In China, you can’t fire a worker because artificial intelligence is already doing its job.
Precedent
The first case was decided in Beijing. The employee, Liu, had worked as a data collector at the technology company since 2009, and was responsible for the traditional manual collection of map data. In early 2024, the company switched from fully manual collection to AI-driven automated data collection, liquidated the navigation products department, and terminated the contract with Liu, citing a major change in objective circumstances that made the contract unenforceable.
The Beijing Municipal Bureau of Human Resources and Social Security published this case as one of the ten most significant labor arbitration decisions of the year in December 2025. The arbitration panel ruled that the application of artificial intelligence falls within the scope of an employer’s autonomous business decisions and represents a technological innovation proactively implemented to adapt to market conditions.
According to the panel, such decisions may require adjustments to work structures, but these adjustments relate to risks reasonably foreseeable by the employer in the course of normal business operations. The company sued to set aside the arbitration. Both the court of first instance and the court of appeal upheld the verdict.
In both cases, the legal rationale is based on Article 40 of China’s Labor Contract Law, which allows termination when objective circumstances change significantly and render the contract unenforceable. The provision usually applies to events beyond the employer’s control: force majeure, government-mandated layoffs, and work stoppages due to regulatory changes.
Chinese courts have now found that AI adoption in two separate jurisdictions does not meet this standard. Technology is not imposed on companies. It was chosen by them. Courts have distinguished between an external shock that makes a case impossible and a domestic decision that makes a case unnecessary. The first is the legal basis for termination. Not the second.
Context
The decisions come as the global technology industry cuts jobs at a pace not seen since the post-pandemic adjustments of 2022 and 2023. More than 78,000 tech workers were laid off in the first four months of 2026, and nearly half of those layoffs were directly attributable to AI replacing human roles. Meta cut nearly 8,000 positions in May alone, with every major restructuring announcement citing AI as a key driver.
Oracle laid off 20,000-30,000 workers in March. Block’s CEO said the company’s downsizing from 10,000 employees to 6,000 is due to increased AI capabilities. Rebuilding Meta is the most obvious example of this: traditional roles are being eliminated, savings are being channeled into AI infrastructure, and the remaining workforce is being redirected around building and operating AI systems rather than performing the tasks these systems are replacing.
China is closing the gap with the US in AI performance While spending a fraction of what American companies invest in computing. The country is not interested in slowing down the introduction of artificial intelligence in its economy. China has launched a month-long enforcement campaign against the misuse of artificial intelligence in 2026Deepfakes has introduced mandatory labeling standards for AI-generated content and new rules governing AI chatbots and virtual human services, targeting fraud and misinformation.
The government’s approach is not to limit AI, but to regulate its applications, ensuring that economic benefits do not come at the expense of social stability. China’s urban youth unemployment rate hit 15.3 percent in March, and in an economy already struggling with deflation, a property crisis and weak consumer demand, the political sensitivity of mass layoffs has forced court rulings to interpret contract law as much as it is about maintaining order.
Comparison
The US has no such protection. American employment law is at-will in every state except Montana, meaning employers can fire workers for any reason not specifically prohibited by law, and AI replacement is not a prohibited reason.
A Senate bill has been introduced to require companies to submit quarterly reports to the Labor Department to determine how many workers have been laid off as their functions are automated by artificial intelligence, but the legislation has not passed and is not expected in the current Congress. Illinois requires employers to notify employees if artificial intelligence is used in hiring, disciplinary or firing decisions. Colorado’s AI law, which takes effect in mid-2026, requires risk management policies and an annual assessment of the impact of AI on employment decisions. No state has adopted anything similar to what the Chinese courts have established: a legal principle that says AI replacement alone is not grounds for firing someone.
The European Union’s AI Act addresses artificial intelligence in employment by classifying AI systems used for hiring, screening, performance evaluation, and other workplace decisions as high-risk, subject to requirements for human oversight, employee notification, and access. High-risk liabilities come into full force in August 2026. But the AI Act does not prohibit the firing of AI-based workers. It’s not that a company can’t eliminate jobs because of AI, but rather it regulates how AI is used in employment decisions.
The European Trade Union Confederation has called for stronger protections, and lawyers have proposed a European AI Social Compact that would combine employment support, training and social protection to reduce displacement. None of these proposals have been implemented. The gap between China’s position and that of the West is not that Europe and America are unaware of the problem. It is that they have so far chosen to address it neither judicially nor legislatively.
Tension
China’s rulings create a legal framework that is appropriate on its own terms, but creates real tension for companies operating in the country. If AI adoption is a strategic business choice rather than an unanticipated change in circumstances, and strategic business choices cannot justify discontinuation, then companies investing in AI systems that automate existing roles must either retrain the workers replacing those systems, reassign them to equivalent positions at equivalent pay, or continue working in positions no longer needed by the company.
Courts have said that the costs of technological transformation should not be borne by employees alone. The bottom line is that they must be borne by the companies that have chosen to transform.
What AI actually does to jobs is more complicated than the titles suggest. Some 71 percent of European firms are revising their job responsibilities due to AI, but revising is not the same as eliminating. Klarna laid off 700 customer service staff and replaced them with an AI chatbot in 2024, but began hiring human agents in 2026 after repeat contacts increased by 25 percent and customer satisfaction during complex interactions worsened. The CEO publicly admitted that the strategy had failed.
The pattern among early adopters is that AI replaces tasks more effectively than it replaces jobs, and the companies that cut the most deeply are often the first to discover that the remaining human labor, judgments, escalations, contexts that a model can’t capture are more valuable than they anticipated when they decided to automate.
Chinese courts have not said that companies cannot use artificial intelligence. Companies can’t use AI to fire people, they said. Differentiation is important because it forces specific organizational behavior: if you automate a role, you must find another comparable role for the person who occupies it. This is expensive. This is the law decided by the courts.
Whether this makes Chinese companies less competitive or more sustainable will depend on whether AI actually replaces workers or simply changes what workers do. From Klarna to the courts in Hangzhou and Beijing to the 78,000 layoffs, early evidence suggests that the answer is not yet clear, and that China has decided to err on the side of so many workers.
