Employee Termination in China: Employer’s Guide

First of all, what is employee termination?

Employee termination can be defined as a “unilateral declaration of intent requiring reception”. This means that it only takes one party in the employment contract (either the employer or the employee) to terminate the employment relationship for the dismissal to be considered effective. In principle, the notice of cancellation is all that is required.

That being said, when it comes to employee termination in China, things tend to become more complicated for employers who wish to abide by China labor law. Therefore, it is important to understand the different kinds of (and consequences of) termination and how to comply with various criteria such as severance pay obligations and, notice periods.

The Labor Contract Law of the People’s Republic of China

The Labor Contract Law of the People’s Republic of China was adopted on January 1, 2008, becoming the first national legislation to regulate labor relations and establish a legal framework for the formation, performance, and termination of labor contracts.

The law applies to all enterprises, units, and individuals employing workers in China, as well as Chinese-foreign joint ventures, wholly foreign-owned enterprises, and foreigners working in China.

In general, the law establishes and protects the legitimate rights and interests of employees, and sets forth the obligations of employers.

Since its enactment, the law has significantly improved the legal protection of employees’ rights and interests in China and has played an important role in promoting social stability.

What are the Different Types of Employee Termination in China?

Generally speaking, there are two overarching types of termination. Termination may be bilateral or unilateral. When termination is bilateral, the end of the employment relationship is mutually agreed upon by the employer and the employee (Art 36). In such cases, only a document affirming that the termination was mutually agreed is needed, and the employer is typically responsible for providing severance pay. This is considered the best-case scenario. 

When termination is unilateral, the employer or the employee may end the employment relationship unilaterally, provided that they adhere to statutory procedural requirements and give the other party reasonable notice. Reasonable notice is typically 30 days but may be extended to 60 days in certain cases. If an employer fails to provide reasonable notice, they will be liable to pay the employee their salary for the period of notice that should have been given, plus an additional amount equal to 30% of the salary.

Unilateral Termination Initiated by the employee (Articles 37-38)

According to Art. 38 of the Labor Contract Law of the People’s Republic of China, a Chinese employee can terminate his employment contract if:

• The employer does not provide employment protection or working conditions as defined in the employment contract;
• The employer does not pay the full amount of the remuneration in good time;
• The employer does not pay social security contributions for employees;
• The rules and procedures established by the employer are contrary to laws and regulations and affect the rights and interests of employees.
• The employer forces the employee to conclude the employment contract against the employee’s wishes by illicit means such as fraud, coercion, or taking advantage of the employee’s unfavorable position;
• Other circumstances stipulated by laws and regulations.

If the employee wishes to rescind the employment contract, they should notify the employer with a 30 days written notice. If this occurs during the probationary period, then only a 3 days notice is required (Article 37).

If an employer forces an employee to work by force, threat or unlawful restriction of personal freedom, or if an employer violates safety regulations to instruct or compel an employee to perform hazardous activities that endanger the employee’s private life, the employee may terminate the employment contract immediately without prior notice to the employer.

Unilateral Termination Initiated by the Employer

In order to understand what rights an employer has and what it needs to bear in mind in the event of termination, one needs to distinguish between two different types of employees in China: employees with an “open-ended contract” and those with a “fixed-term contract.”

An open-ended employment contract has no predetermined end date and continues until either the employer or the employee terminates the contract. A fixed-term employment contract, on the other hand, has a predetermined end date and will terminate automatically on that date, unless it is renewed by the employer and the employee.

In principle, termination clauses must be carefully documented in a written employment contract and agreed ex-ante by both parties. An indefinite employment relationship can be terminated by mutual agreement or under certain circumstances.

The following are the most common reasons for an employer to rescind an employee’s employment contract unilaterally:

• Unilateral termination due to fault or misconduct;
• Unilateral termination without fault;
• Unilateral termination due to economic layoff.

Unilateral Termination due to Fault or Misconduct (Article 39)

Employers may unilaterally terminate an employee’s contract due to fault or misconduct in the following circumstances:

• The employee is not able to complete the employment requirements during the probationary period (disqualification);
• The employee commits serious violation(s) of company policy;
• The employee commits gross negligence in duties, misappropriation, or use of personal benefits at the expense of the employer, thus causing the employer serious harm;
• The employee is simultaneously employed with another employer without the consent of the current employer, thus seriously affecting the fulfillment of their obligations to the current employer;
• The employment contract was signed fraudulently or under pressure;
• The employee has violated laws or regulations and thereby committed a criminal offense.

If the employer has sufficient evidence that the employee’s actions fall under one of the above categories of errors or misconduct, the employer may terminate the employment contract with immediate effect without compensation.

Unilateral Termination Without Fault (Article 40)

The employer may also rescind the employment contract with 30 days advance written notice to the employee or, if notice is not possible, by paying the employee an additional 1-month income. Termination without fault may occur under the following circumstances: 

• If the employee is sick or has sustained a non-work-related injured and, after the stipulated medical period, they can not satisfy the original employment assignment or other work assigned by the employer;
• The employee is incompetent;
• The circumstances of the employment contract have significantly changed, making the performance of the employment contract impracticable, and the employer and the employee can not arrive at a mutual agreement after negotiation.

Unilateral Termination due to Economic LayOff (Article 41)

If more than 20or over 10% of all employees are to be laid off, the employer is required to report the case to the labor union or to all the employees 30 days in advance. The labor unions or the employees shall provide their opinions and the employer shall report the retrenchment plan to the labor administrative authority. This may occur in any of the following scenarios:

• The employer undergoes restructuring as per the Enterprise Bankruptcy Law;
• The employer faces difficulties in production or operation;
• The employer switches modes of production, changes technology or mode of operation, and still finds the need for reduction;
• The economic circumstances for the employment contract have changed, making the performance of the employment contract impracticable.

When economic offs occur, the employer should give priority to the following people:

• Those with fixed-term contracts who have worked for the employer for a relatively long term;
• Those with open-ended contracts working with the employer;
• Those whose families depend on them (are the sole employed individual within the familial unit) or have an elder or minor within their care.

If the employer goes on to recruit new employees within 6 months of the layoff, notice should be given to those previously laid off to receive priority over new recruits.

Furthermore, certain people are protected against termination.

Who is Protected From Dismissal?

According to Article 42 of the Labor Contract Act of the People’s Republic of China, an employer may not terminate an employment contract if the employee belongs to a certain group of employees or if special circumstances apply. This applies if the employee is a member of a certain group of protected people who: 

• are under medical supervision or under treatment for an occupational disease;
• can prove a loss or partial loss of working capacity due to an occupational disease or an accident at work during employment with the employer;
• have suffered an illness or non-work-related injury and the agreed sick leave has not expired;
• are a woman who is pregnant, giving birth, or breastfeeding;
• have worked continuously for the employer for at least 15 years and are less than 5 years from the statutory retirement age.

In addition, there are a number of other circumstances in which an employer cannot terminate the employment contract in accordance with other relevant laws, regulations, or administrative provisions.

Termination Procedures and Obligations

A. Notification requirements

1. Timelines for notice periods

Timelines for notice periods play a crucial role in employee termination procedures in China. According to Chinese labor laws, employers are generally required to provide advance notice to employees before terminating their contracts. The notice periods vary depending on the circumstances and duration of employment. For fixed-term contracts, the notice period typically ranges from 30 to 90 days, while for open-ended contracts, it can be as short as 30 days for probationary employees and up to six months for long-term employees.

However, in cases of serious misconduct or violation of company policies, immediate termination without notice may be possible. It is essential for employers to adhere to these timelines to ensure compliance with the law and avoid potential legal repercussions. Consulting with legal professionals and staying updated on labor regulations is crucial to understanding and implementing the appropriate notice periods in employee terminations in China.

2. Written communication and documentation

Written communication and documentation are vital aspects of employee termination in China. Employers must provide written communication to employees regarding the termination, stating the reasons, notice period, and other relevant details. This written notice serves as a legal record and helps establish clear communication between the employer and employee. Additionally, maintaining comprehensive documentation throughout the termination process is essential. This includes documenting any performance issues, misconduct, or policy violations leading to the termination.

Adequate documentation can protect employers from potential legal disputes and provide evidence of fair and justified terminations. Employers should ensure that all written communication and documentation adhere to the requirements of Chinese labor laws, including language clarity and compliance with data protection regulations. By prioritizing written communication and maintaining accurate documentation, employers can navigate employee terminations in China more effectively and mitigate risks associated with legal challenges.

B. Severance pay and other benefits

1. Calculation of severance pay

The calculation of severance pay is a critical aspect of employee termination in China. Severance pay is the financial compensation provided to employees whose contracts are terminated, either due to the expiration of fixed-term contracts or other valid reasons. In China, the calculation of severance pay depends on various factors, including the employee’s years of service, monthly average salary, and local regulations. Generally, the formula for calculating severance pay involves multiplying the number of years of service by a specific ratio of the monthly average salary.

However, there may be regional variations and specific rules in certain cities or provinces. It is crucial for employers to consult relevant labor laws and local regulations to ensure accurate calculation of severance pay. By adhering to the appropriate calculation methods, employers can fulfill their legal obligations and provide fair compensation to terminated employees in China.

2. Obligations regarding unpaid wages, bonuses, and benefits

Employers in China have specific obligations when it comes to unpaid wages, bonuses, and benefits upon employee termination. It is essential to settle any outstanding payments promptly and in accordance with labor laws. Unpaid wages, including salary and any accrued overtime, must be fully compensated to the employee. Similarly, if the employment contract includes provisions for bonuses or other incentives, employers must fulfill their obligations and ensure timely payment.

Additionally, employers need to address any unpaid benefits, such as vacation leave or unused sick leave, and provide appropriate compensation. Failure to meet these obligations can lead to legal consequences, including fines and potential legal disputes. Employers should carefully review employment contracts, consult labor laws, and work closely with their HR departments to ensure all financial obligations are met upon employee termination in China. By fulfilling these obligations, employers demonstrate fairness and compliance with labor regulations, fostering positive employee relations.

In What Cases Should the Employer Compensate the Employee?

The Dismissal Protection Act states that employers have the option of offering an employee’s severance pay in the letter of dismissal – that is if the employee decides not to file an action against the dismissal. In certain situations, this may be helpful to avoid labor court proceedings. In general, however, it is difficult for the employer to terminate unilaterally as they must prove that the above-described circumstances for unilateral termination apply. Therefore, the most common way for the employer to terminate the employment is to raise a mutual negotiation. If the employee accepts the raised amount of compensation, both parties will sign the employment termination agreement, ending the employment upon mutual consent.

In this way, the employer does not have to prove the reason for the termination of the employment, whether with or without the employee’s fault. Further information is given in Art 46 of the Labor Contract Law of the People’s Republic of China.

Overall, there are a few scenarios in which compensation is not required, as detailed in the table above.

If the employee raises the idea of bilateral termination, and an agreement is reached with the employer, the employer is not responsible for severance payments. Furthermore, if the employee resigns, retires, or passes away, there shall be no severance payments. Finally, if the employee is unilaterally terminated due to fault or misconduct, they shall not receive compensation. 

What is Wrongful Termination?

Wrongful termination may occur if the unilateral termination breaches any of the above-mentioned examples. If this occurs, the employer may attempt to resolve the matter through arbitration or litigation, although these may result in costly legal fees. Otherwise, the previously terminated employee may seek reinstatement. If reinstatement is not possible, the employer is responsible for paying double the severance amount of what the employee would have been owed if they had been lawfully terminated. The employer may also be responsible for salary payments during the period in which the wrongfully terminated employee was not able to work.

How can we help?

Employee lay-offs are never easy, but they can become even more complicated when done incorrectly.

With our many years of experience in China’s HR industry, we can help to avoid any potential pitfalls and ensure that the process is as smooth as possible.

First, we can help to navigate and understand the local laws and regulations surrounding layoffs to draft a detailed plan and ensure that the process is conducted fairly and in accordance with the law. This should include everything from who will be affected to how severance will be calculated.

Second, we can support the development of a communication plan to ensure that employees are given clear and concise information about the layoff and its impact on them.

Finally, help navigate the emotional fallout of a layoff. This can be a difficult time for everyone involved, and it’s important to provide support and resources to help employees through it. This may include coaching managers on how to deliver the news sensitively.

By taking these steps, we can help to mitigate the consequences of an employee layoff in China and minimize the impact and risks on the business especially on delicate operations such as company closure in China.