Chinese Courts Rule Twice In 6 Months That AI Cannot Be Excuse For Layoffs

These rulings are significant for several reasons. Chinese acceptance of strict, one-party rule is predicated on the assumption that the trade-off is better a better socio-economic life for the majority of citizens. AI's potential threat to millions of jobs thus threatens Chinese Communist Party domination, which the government will not tolerate. No court would issue such an important opinion without the Party's approval, thus signaling that China has no intention of letting AI disrupt its peoples' lives so drastically. 

But the ruling also undercuts two core arguments about AI in the US: the first, that AI does lead to massive layoffs, which will increase corporate profits (and executive bonuses) and that the US cannot allow government regulation of AI because it will permit China to 'win' the AI race. The implication for AI in the US is that unfettered job destruction, which was already facing political headwinds, will probably have to proceed more prudently in order to avoid even more draconian regulation. JL

Aaron Mak reports in Politico and Lucy Buchholz reports in BusinessChief:

A Hangzhou court ruled last week that it was illegal for a company to demote, then dismiss a senior tech worker and replace him with AI, the second such decision to come from China’s courts since December. The decision underscores that AI-driven restructuring must be grounded in clear, lawful justification, rather than using automation as a rationale for demotions or dismissals. The rulings come as China faces economic challenges pushing it to move aggressively to stymie AI labor displacement. The country has long relied on acceptance of one-party rule to assure quality of life and prosperity, (so) AI threatens to upend the population’s well-being. (But) the rulings (also) undercut a core argument in the U.S. that forceful safeguards on AI will  cause it to lose the AI race with China. "China is being tougher on tech companies than the US, so the idea that America should not regulate tech because it’ll hurt (versus) China is completely negated by this.” 

Two legal rulings are undercutting a bedrock promise of the AI race with China and they did not come from the US.  

A Hangzhou court ruled last week that it was illegal for a company to demote then dismiss a senior tech worker and replace him with artificial intelligence, the second such decision to come from the country’s courts since December. The decision comes as China moves to disseminate the technology across several industries at breakneck speed, and as its companies look to automate their operations.  

China has recorded a significant win for labour rights, with the Hangzhou Intermediate People’s Court ruling that employers cannot cite AI as a pretext for dismissing staff.

The case centred on an employee surnamed Zhou, a quality assurance supervisor at a major tech company in Hangzhou, Zhejiang province – one of China’s leading AI hubs.

Hired in 2022 to oversee the firm’s AI output, Zhou was informed in 2025 that leadership intended to replace his role with a large language model, proposing a demotion and a 40% pay cut from his 300,000 yuan (US$43,900) salary.

Zhou rejected the proposal and contested the severance terms through a government arbitration panel. The company then terminated his contract, arguing a reduced need for staff due to the disruptive impact of AI on the position.

At a time when China’s central leadership is championing widespread AI adoption, legal scholars have hailed the judgment as a reassuring signal for the protection of labour rights.

According to NPR, the court ruled: “The termination grounds cited by the company didn’t 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.’”

For senior executives, the decision underscores that AI-driven restructuring must be grounded in clear, lawful justification and matched by responsible workforce strategies, rather than using automation as a blanket rationale for demotions or dismissals.

Some experts say the rulings undercut a core argument in the U.S. that implementing forceful safeguards on artificial intelligence will cause the nation to lose the AI race with China. 

“[The rulings] blow the China competition argument out of the water,” said Darrell West, a senior fellow at the Brookings Institution. “This is an example of China being tougher on tech companies than is the case in the United States, so the idea that America should not regulate technology because it’ll hurt us with China is completely negated by this legal action.” 

The rulings come as China faces political and economic challenges that are pushing it to move more aggressively to stymie AI labor displacement, according to Center for a New American Security research associate Ruby Scanlon. 

The country has long relied on citizens’ acceptance of one-party rule to assure their quality of life and prosperity, yet AI threatens to upend the population’s well-being. 

“[China] just can’t tolerate macro instability in the way that a democracy can,” Scanlon told DFD. “When the system is shaken even a little bit, it’s susceptible to break.” 

China’s labor market is already in a tough position, and AI threatens to make it worse. Deflation and general pessimism around economic opportunities have partly led the country’s young adult unemployment rates to surge. Government debt and flagging household spending have put the public on edge about the broader economy as well. 

“Because of the economic situation that China is already in with its debt, less consumer demand and high youth unemployment, [AI labor displacement] is just especially scary to them,” said Scanlon. 

The prospect of AI replacing workers is alarming Americans, given already dwindling employment numbers. So shouldn’t the U.S. also put a hard limit on companies’ ability to replace workers with AI? 

Well, making this a rule in the U.S. would require strong political will to overhaul longstanding employment laws. The country is an outlier in how much latitude it gives to employers over terminations. 

The default at the federal level and in every state except Montana is at-will employment, which allows companies to dismiss workers for almost any legal reason. Bargaining contracts often have just-cause provisions that narrow the circumstances in which companies can let workers go. Prohibiting AI-related layoffs would likely require legislation that applies these provisions more broadly, and that stipulates that the technology does not constitute just cause for dismissal, according to Cornell labor law professor Gali Racabi. 

“[Such legislation] is very, very far from where we are now,” said Racabi, who added that this kind of effort would take “extreme political will that is absent in most states and localities.” 

But if such legislation were to pass someday, it might be a boon for AI growth. Peter Michael Lazes, who works on labor issues as co-coordinator of Penn State’s Healthcare Partnership initiative, contends that such measures could actually accelerate AI adoption. He suggested that workers may be more willing to use AI tools if they know the technology isn’t going to replace them. Employers would also have an incentive to train workers in AI in order to place them in new positions, rather than laying them off, Lazes added. “If we had the political will to do this, it would harness the effectiveness of AI so that it is not only helpful to the stakeholders, but also to the shareholders,” he told DFD. “If China can do it, why can’t we?” 

How does the ruling impact the US?

China’s ruling lands as a timely signal for US HR leaders: regulators and courts abroad are beginning to scrutinise AI-driven job actions, while the American framework remains permissive and fragmented.

There is no federal protection against being replaced by AI in the US. Most states follow at‑will employment, allowing termination for any reason not expressly unlawful.

Montana is the notable exception; under its Wrongful Discharge from Employment Act, employers generally need good cause after a probationary period.

Even so, “replaced by AI” is not, on its own, a prohibited basis for discharge under federal or state law.

In Congress, momentum is limited. A Senate proposal to track AI‑related layoffs through quarterly Department of Labour reports has not advanced this session.

Policy energy remains concentrated at the state level. Illinois requires notice when AI is used in certain personnel decisions, and Colorado’s 2026 AI Act will mandate risk management programmes and annual impact assessments for high‑risk systems, including employment, beginning mid‑2026.

Neither framework adopts China’s principle that AI cannot be used to justify terminating human workers.

For senior HR executives, the contrast underscores a practical imperative: AI‑related restructurings in the US may be legally feasible, but they demand rigorous governance, transparent documentation of business necessity, bias and impact controls, and credible workforce strategies – reskilling, redeployment and fair process – rather than relying on “the AI made us do it".