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Recent court rulings in China have established that artificial intelligence replacement is not a legitimate reason to terminate employees, thus imposing a critical balance between technological advancement and labor rights protection. The legal principle emerging from such cases sends a clear signal to both domestic and foreign enterprises: automation cannot become a shortcut to bypass employment law.
On April 30th, 2026, the Hangzhou Intermediate People's Court published a case where an AI technology company was found to have unlawfully dismissed a worker whose position had been replaced by AI large language models (LLMs). More specifically the employee, who had earned a monthly salary of 25,000 yuan, was offered a lower position with a 40% pay cut after the AI model implementation and, upon rejection the adjustment proposal, the employee was terminated[1]. The court ruled that AI replacement does not constitute a "major change in objective circumstances" under China's Labor Contract Law, a legal standard typically applied to events such as company relocations or mergers. The dismissal was then deemed unlawful, pointing out that the company's adoption of AI technology was indeed a voluntary move to stay competitive, effectively shifting the risks of technological iteration directly onto the employees. The court further ordered the company to pay over 260,000 CNY in compensation, reinforcing that worker protection cannot be sacrificed for efficient gains.
According to China’s Ministry of Industry and Information Technology, the country's core AI industry exceeded 1.2 trillion CNY in 2025, with more than 6,200 related enterprises. Additionally, a State Council guideline aims for AI penetration in key sectors to surpass 70% by 2027 and reach 90% by 2030. Such figures demonstrate both the scale and speed of automation in China, making the legal rulings even more relevant for millions of workers.
Even previous cases have reinforced such principle: for example, in December 2025, the Beijing Municipal Bureau of Human Resources and Social Security released a case involving a map data collector replaced by AI, with the arbitration panel ultimately ruling that AI replacement does not validate a dismissal. Experts further argue that companies adopt new technology on a voluntary basis, aiming at staying competitive, but cannot and should not shift foreseeable risks of technological iteration solely onto employees. Before resorting to termination, employers must prioritize skills training, together with internal reassignment options. This is particularly relevant as labor disputes have recently been on the rise. In 2025 alone, Hangzhou courts handled 12350 labor disputes (this being a 61.7% YoY increase) with AI-related conflicts becoming increasingly common.
The courts' rulings, however, do not reject automation; rather they urge companies to implement responsible restructuring, pushing businesses to find solutions balancing both productivity and worker protection. For foreign enterprises operating in China, compliance with employment law is of major importance, and AI should support workforces, not destabilize them. Companies are ultimately advised to review their human resources strategies, ensuring that corporate social responsibility remains a priority, especially in a landscape where technological upgrades are increasingly becoming a priority. Engaging professional tax and financial consulting advisors can also help multinationals navigate the interplay between labor compliance and digital transformation.
[1] Chinese court defends labor rights in new AI-replacement case
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