Many foreign companies will find that China’s employment termination law prioritizes employee job security, making contract termination more difficult than in other countries. While national guidelines are presented here, it is important to remember that the regional labor administration may have additional guidelines, as rules can vary considerably between jurisdictions.
Chinese employment law allows an employer to set a probation period, during which it is simple to terminate the contract if the employee is unable to meet the requirements of the position (Please refer to our guide on Probation Period in China). The employer may terminate the contract without paying severance if the employee is demonstrably incompetent for the position. Nevertheless, the employee is still under contract and is, by no means, considered an at-will employee. Moreover, the only substantive difference regarding termination between probation period and post-probation is the ease of contract termination if the employee is unable to carry out the duties of the position or deemed incompetent.
If the employer and employee mutually agree to terminate the contract, and the employer initiates the termination, the employee is entitled to severance payment. The employer may offer additional payment of any amount, with the intention of obtaining consent from the employee.
From the employer’s perspective, this is a favorable outcome as it prevents the termination from becoming an onerous and costly dispute as well as possibly resulting in intervention from local labor authorities. For the employee, this will probably also be viewed favorably (if the compensation is generous enough) because the compensation amount is guaranteed and there is lengthy dispute anticipated.
Terms and conditions of termination: The employer should formally document and communicate the terms and conditions of the termination. Without written documentation and confirmation of the terms and conditions, the employer will be liable in the future for the same issues clarified in the terms and conditions.
There are several circumstances in which an employer can immediately terminate the employee without offering severance or any other compensation apart from his/her wages owed until that point:
In the following cases, the employer must provide both severance payment and either 30-days notice or a full months salary.
Before terminating the contract, the employer must investigate to ensure that further training would not suffice. If training of some kind would allow the employee to continue to fulfill his/her duties, this is not grounds for termination. It is also recommended that the employer verify that a job transfer would not be an adequate solution before termination. A judge may wish to see that the employer has attempted to transfer the employee to another acceptable position prior to termination.
If the company’s needs for which the employee was hired in the first place are no longer pertinent, the employer is within its rights to bring the position to a close. A drastic change in market conditions may necessitate such a decision. Prior to terminating the employee, however, the company must first attempt to change the duties of the position to meet the company’s needs while maintaining a role for the individual that was hired. An employer should be prepared to show a judge or official evidence that they have sought to change the position to fit other needs of the company or transfer the employee prior to termination.
In this case, on top of severance payment, the employer must offer no less than 6 months wages as a medical care subsidies. The employer must also ensure (be prepared to prove) that further training is insufficient to render the employee capable of performing his or her duties.
A mass layoff is defined as either of the following two situations:
A mass layoff requires the pre-approval of the local labor bureau. The bureau may permit the move in the following circumstances:
The employer must provide severance to each of the laid-off employees. If the employer is rehiring with 6 months, the reduced employees should be notified and given priority.
The following special categories of employees may not be terminated in mass-layoffs or the aforementioned reasons requiring 30 days notice. Additionally, they may not be terminated at the expiration of a fixed-term contract. However, they can still be terminated under mutual agreement or immediately terminated for prohibited behavior.
In the event that the company must shut down (due to bankruptcy, revocation of business license, or otherwise ordered to cease operations), the employer must pay severance to terminated employees.
The employee is required to submit a formal resignation letter to HR and must give at least 30 days notice. During probation period, however, the employee is only required to give 3 days notice.
Part-time contracts are at-will and can be terminated at any time by either party.
Terminating an employee at the end of the first fixed-term contract is much simpler than terminating a live employment contract. If the employer is unsatisfied with the employee, it simply does not need to offer a second contract. If the employer does not renew the contract, however, it must provide severance payment.
Expiration of second fixed-term contract: Following an employee’s second fixed-term contract with an employer, the company is required to make a new employment contract upon the employee’s request.
In most cases, the terminated employee is entitled to severance payment (as mentioned above). There are only two circumstances in which the employee is not entitled to severance payment following termination:
The statutory minimum severance payment is calculated as:
Average monthly wages during the previous 12 months * years of service for the company
The Individual Income Tax burden for severance payment is much lower than otherwise. If the payment is lower than 3 times the local annual average salary, it is tax exempt. If the lump sump payment exceeds the local annual average salary, the exceeding amount will be subject to individual income tax.
It is important to plan for the long term when hiring, as terminating employment contracts is not always quick and simple for the employer. As the local labor ministries will often give preference to the employee, it is important to avoid basic mistakes such as failing to pay the minimum statutory severance. Always make sure that any agreement made with the employee is very clearly documented (in Chinese) and include the company chop and employee’s signature.