China Blocks AI-Driven Layoffs - How Will the West Respond?

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.

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".

How does the ruling impact European businesses?

In Europe, there is a similar story.

The European Union's AI Act requires businesses to label when AI has been used for hiring, performance reviews and discharge as “high-risk.” 

Under the EU’s AI Act, employment-related AI systems classified as high risk must meet stringent human oversight and worker notification requirements by August 2026.

The regime, however, is aimed at how AI is designed and deployed, not at prohibiting its use to replace human roles.

When the legislation was introduced, Paul Cardno, Global Digital Automation & Innovation Senior Manager at 3M, noted: “With nearly 80% of UK adults now believing AI needs to be heavily regulated, the introduction of the EU’s AI Act is something that businesses have been long waiting for.”

While European labour unions have floated a European AI Social Compact to support displaced workers, no such protections have been enacted to date.

As Cardno added: “While the EU Act isn't perfect, and needs to be assessed in relation to other global regulations, having a clear framework and guidance on AI from one of the world's major economies will help encourage those who remain on the fence to tap into the AI revolution.”

For senior leaders, the signal is clear: the EU sets a high compliance bar on process, transparency and accountability, but leaves workforce design choices – and their social and reputational implications – squarely with the executive team.