Termination for Cause vs No-Fault Dismissal in China
China does not generally recognize at-will employment. An employer cannot lawfully dismiss an employee simply because the working relationship is no longer convenient or the employer has lost confidence in the individual. Compare the legal routes for terminating employees in China before selecting a dismissal ground.
Every unilateral termination must rely on a statutory ground, follow the correct procedure, and be supported by evidence. The chosen route determines whether the employee receives notice, payment in lieu of notice, statutory severance, or additional compensation.
For employers, the essential distinction is between:
- Fault-based termination under Article 39 of the Labor Contract Law
- Statutory no-fault termination under Article 40
- Economic redundancy under Article 41
- Termination by mutual agreement
- Expiry or non-renewal of a fixed-term contract
Employers should review these routes together with the broader requirements under China’s labor laws before making a dismissal decision.
Quick Comparison
Termination for cause
Termination for cause is generally based on serious employee misconduct or another qualifying fault under Article 39.
When Article 39 is properly established:
- No statutory 30-day notice is normally required
- No statutory payment in lieu of notice is required
- Statutory severance is generally not payable
- The employer must be able to prove the applicable ground
- Internal policies and disciplinary procedures must be legally enforceable
Statutory no-fault termination
Article 40 applies in limited situations where the employee is not necessarily guilty of misconduct, but the employment relationship cannot reasonably continue.
When Article 40 applies:
- The employer must give 30 days’ written notice or one month’s salary in lieu
- Statutory severance is normally payable
- The employer must prove the relevant statutory condition
- Special protections may prevent termination
The full statutory framework can be reviewed in the official English translation of the PRC Labor Contract Law.
When Can an Employer Terminate for Cause?
Article 39 permits immediate termination in several defined situations.
An employer may terminate an employee if the employee:
- Is proven not to meet the stated recruitment conditions during probation
- Seriously violates valid employer rules or policies
- Commits serious dereliction of duty or malpractice that causes substantial damage
- Maintains another employment relationship that seriously affects their work and refuses to correct the situation
- Causes the employment contract to become invalid through fraud, coercion, or exploitation of the employer’s difficulties
- Is held criminally liable
These grounds should be interpreted carefully. A minor workplace mistake, personality conflict, or ordinary underperformance does not automatically justify termination for cause.
Evidence is critical
The employer generally carries the burden of proving that the dismissal was lawful. Depending on the allegation, useful evidence may include:
- The signed employment contract and job description
- Recruitment conditions acknowledged during probation
- A legally adopted and communicated employee handbook
- Written warnings and investigation records
- Emails, attendance records, system logs, or financial documents
- Witness statements
- Proof of the loss or disruption caused by the employee
- Records showing that the employee received the relevant policy
A rule appearing in a handbook is not automatically enforceable. Employers should be able to show that the rule was reasonable, adopted through the required employee consultation process, and properly communicated.
Our China HR documentation requirements guide explains the records employers should maintain throughout the employment relationship.
Is Poor Performance Grounds for Immediate Dismissal?
Poor performance and serious misconduct are not the same.
An employee who fails to meet performance expectations does not ordinarily fall under Article 39 unless the conduct also constitutes a serious violation of a valid workplace rule.
A performance-based termination will usually require the employer to demonstrate that:
- The employee’s role and performance standards were clear.
- Performance deficiencies were recorded objectively.
- The employee received feedback and an opportunity to improve.
- The employer provided training or reassigned the employee.
- The employee remained unable to perform the role.
If these conditions are met, the employer may consider the incompetence route under Article 40. Notice or payment in lieu and statutory severance would normally apply.
A performance improvement plan can support the evidence file, but it does not create an independent right to dismiss an employee.
When Is No-Fault Termination Permitted?
Article 40 provides three main grounds for statutory no-fault termination.
1. Inability to work after medical treatment
After the employee’s statutory medical-treatment period has expired, the employer may be able to terminate if the employee cannot perform either:
- Their original role; or
- Another reasonably arranged position
The employer should document the expiry of the protected treatment period, the employee’s ability to work, and any alternative position considered.
2. Continued incompetence after training or reassignment
An employer may terminate an employee who remains unable to perform their job after receiving training or being transferred to another suitable position.
A simple statement that the employee “performed poorly” is not enough. The employer should maintain measurable performance records and evidence of the corrective steps taken.
3. Major change in objective circumstances
Termination may be considered when a major change occurring after the contract was signed makes continued performance impossible, and the parties cannot agree on an amendment.
Examples may include significant operational changes, regulatory restrictions, or elimination of a genuinely obsolete position. This ground should not be used as a generic justification for restructuring.
For a detailed explanation of the 30-day requirement, see our guide to the termination notice period and pay in lieu in China.
What Does “N+1” Mean?
“N+1” is commonly used to describe:
- “N”: statutory severance calculated according to service; plus
- “1”: one month’s salary paid instead of 30 days’ advance notice
However, N+1 is not an independent legal ground for termination. Paying N+1 does not make a dismissal lawful if the employer cannot establish a qualifying Article 40 basis.
Employers should first identify the legal ground and then calculate the corresponding payment.
Other Ways Employment Can End
Mutual termination
Under Article 36, the employer and employee may agree to end the contract.
A written separation agreement should clearly address:
- The final employment date
- Salary and outstanding benefits
- Severance or negotiated compensation
- Bonus and commission payments
- Unused annual leave
- Return of company property
- Confidentiality and continuing obligations
- Issuance of the termination certificate
When the employer initiates the agreement, statutory severance will generally apply. Employers sometimes offer additional compensation in exchange for a predictable and documented separation.
Economic redundancy
Article 41 contains a separate procedure for qualifying economic layoffs. It may apply when an employer needs to dismiss:
- At least 20 employees; or
- Fewer than 20 employees where the number represents at least 10% of the workforce
The employer must have a recognized statutory reason and follow consultation, reporting, and employee-selection requirements. Ordinary cost reduction does not automatically satisfy Article 41.
Fixed-term contract expiry
A fixed-term contract may end on its stated expiry date. Statutory severance is generally payable unless the employer offers renewal on the same or better conditions and the employee refuses.
Automatic expiry may also be delayed when an employee is within a legally protected period.
How Is Statutory Severance Calculated?
Under Article 47, severance is generally calculated as one month of the employee’s average salary for each full year of service.
Service periods are treated as follows:
- Six months or more but less than one year: one full month
- Less than six months: half a month
- Each completed year: one month
The monthly salary is normally based on the employee’s average monthly remuneration during the 12 months before termination.
Special caps may apply to high-earning employees. Where the employee’s salary exceeds three times the applicable local average salary, the statutory calculation base and compensable service period may be limited.
Employers should confirm the current local figures before completing the final calculation.
Which Employees Receive Special Protection?
Article 42 restricts the use of Article 40 no-fault termination and Article 41 redundancy for certain protected employees.
Protected categories may include employees who are:
- Pregnant, on maternity leave, or breastfeeding
- Within a statutory medical-treatment period
- Suffering from an occupational disease or qualifying work-related injury
- Undergoing an occupational health examination
- Long-serving employees approaching statutory retirement age
- Covered by another statutory protection
These protections do not necessarily prevent termination for a genuinely proven Article 39 violation. However, employers should apply especially careful legal and evidentiary review before dismissing a protected employee.
What Happens If a Termination Is Unlawful?
A termination can be unlawful because the employer lacks a valid ground, cannot prove its allegations, or failed to follow the required procedure.
Under Articles 48 and 87, an employee may seek:
- Reinstatement and continuation of the employment contract; or
- Compensation generally calculated at twice the statutory severance amount where reinstatement is not pursued or cannot be completed
Additional liabilities may include unpaid salary, overtime, bonus, annual-leave compensation, social insurance adjustments, and arbitration or litigation costs.
Where the employer has a trade union, Article 43 may also require advance notification of a unilateral termination.
Employer Termination Checklist
Before issuing a termination notice, employers should:
- Identify the exact statutory termination ground.
- Confirm that the evidence proves every required element.
- Review the employment contract and employee handbook.
- Check whether the employee belongs to a protected category.
- Complete training, reassignment, consultation, or union procedures where required.
- Calculate notice, pay in lieu, severance, and final compensation.
- Prepare a written termination notice stating the real legal basis.
- Retain evidence showing delivery of the notice.
- Issue the employment termination certificate.
- Complete payroll, social insurance, housing fund, tax, and personnel-file procedures.
Employers can use the China HR compliance guide to review related employment obligations.
Final Payments and Employee Rights
The final settlement should be reviewed for:
- Outstanding salary
- Approved commissions or bonuses
- Overtime compensation
- Unused statutory annual leave
- Statutory severance
- Payment in lieu of notice
- Reimbursable business expenses
- Lawful deductions and individual income tax
- Social insurance and housing fund administration
- The termination or separation certificate
The employee should receive a written explanation of the settlement calculation.
Conclusion
The practical question in China is not simply whether a dismissal is “for cause” or “without cause.” The employer must identify a specific statutory route and satisfy all of its evidence, notice, severance, and procedural requirements.
Article 39 may permit immediate termination for serious employee fault, while Article 40 applies only to defined no-fault circumstances and normally requires notice and severance. When the legal basis is uncertain, a properly negotiated mutual separation may offer a more predictable solution.
Employers should obtain advice based on the employee’s location, contract, protected status, and documented circumstances before taking action. For support with employment compliance and workforce management, contact HROne.
For the provider’s role in implementing the exit, read how an employer of record handles employee terminations.
This article provides general information and does not constitute legal advice.
Frequently Asked Questions
Can an employer dismiss an employee without cause in China?
Generally, no. Employers must rely on a statutory termination ground or reach a mutual separation agreement with the employee.
Does termination for cause require 30 days’ notice?
A valid Article 39 termination generally does not require 30 days’ notice or payment in lieu. The employer must nevertheless prove the qualifying misconduct or other fault.
Is poor performance considered cause for immediate dismissal?
Usually not. Employers generally need documented performance standards, training or reassignment, and proof that the employee remains incompetent before using the Article 40 route.
Is N+1 always enough to terminate an employee?
No. N+1 describes a payment structure, not a legal ground. The employer must still establish a valid statutory basis for unilateral termination.
Can a pregnant employee be dismissed?
Article 40 termination and economic redundancy are generally restricted during pregnancy, maternity leave, and breastfeeding. A proven Article 39 violation may be treated differently, but specialist review is strongly recommended.
