A Chinese court has ordered a tech company to pay more than £28,000 in compensation to a former employee who was illegally fired after being replaced with an AI system.

The quality assurance professional, identified only as Zhou, was demoted and forced to take a 40 per cent pay cut after his work at the company in the eastern city of Hangzhou was replaced by AI. When Zhou refused to accept the demotion, he was fired.

The company said that it was undergoing organisational restructuring, which reduced staffing needs, and offered Zhou, who had joined the company in 2022, about £33,500 in severance.

He refused to take the deal and went to an arbitration panel, which ruled his dismissal “unlawful” and backed his claim for higher compensation.

The unnamed company went to a district court but lost. It then appealed to the Hangzhou Intermediate People’s Court, which again ruled in Zhou’s favour.

The court said companies could not terminate employees just to replace them with AI systems.

“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,’” it said.

It also said that companies could not unilaterally lay off staff or reduce salaries due to technological progress.

The ruling comes at a time when tech workers across the world are under pressure due to companies racing to implement cheaper AI systems. More than 78,000 tech jobs have been lost worldwide so far this year, with nearly half attributed to AI.

Chinese companies have been racing to implement AI systems as part of a national push to dominate the new technology. At the same time, government planners have signalled a willingness to prioritise labour market stability as the country grapples with a slowing economy and high youth unemployment, with 17 per cent of people aged 16 to 24 out of work, according to the latest data.

Chinese state media welcomed the latest ruling, saying it sends a “reassuring message to labour rights protection efforts in the age of automation”.

Wang Xuyang, a Zhejiang-based lawyer not involved in the Hangzhou case, told Xinhua news agency that the adoption of AI didn’t automatically give companies grounds to terminate labour contracts in order to reduce costs.

The ruling comes on the heels of a legal precedent set in another case involving a mapping company replacing a long-serving manual data collector with an AI-powered system.

The company argued the shift from the manual data collector to an automated tool amounted to a “material change in objective circumstances” under Chinese labour law, a legal standard that could justify terminating an employment contract.

However, an arbitration committee and courts rejected that argument, ruling that even though the company was entitled to incorporate AI into its business model, this did not constitute a “significant change in objective circumstances” to justify terminating an employment contract.

“While enjoying the benefits of technology, employers should simultaneously assume corresponding social responsibilities,” the committee said.