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Employee Termination and Severance Pay in China

employee termination China

The myriad of reforms that started in 1978, has fundamentally transformed the scale and structure of China’s overall economy. This, of course, has implied drastic changes in the Chinese labor legislation. A series of consecutive reforms have led to the liberalization of the economy and increasing integration with trans-national trade and investment.

One of the many dimensions of these changes has been a shift away from employment security also known as the “iron rice bowl” that guaranteed employment in state-owned enterprises. However, China has “boomeranged” in terms of employment security and protection in the last decade.

This return to a more balanced public policy regarding employment security has changed the way employee termination and severance pay works in China. In this article, we will give you an overview of the complex legal landscape of the regulations concerning termination and severance pay.

Employee Termination in China

China is now regarded as a mid-level protectionist state in terms of employee termination. The Chinese Labor Law does not establish any obligation on the part of the employer to state the reasons for to the dismissal to the employee. However, prior to dismissing a worker, the employer has to notify the labor union of the reasons and the conditions surrounding the termination will determine its ultimate lawfulness and the procedure to follow.

In general, termination can be classified as bilateral or unilateral:

  • Bilateral termination, also known as mutually consented termination, is when both the employer and the employee sign a document declaring that termination was born of their mutual will. Bilateral termination is always the best option, but we all know that it is the rarest.
  • Unilateral termination is when either the employer or the employee decides to end the labor contract of their singular volition. When it is the employee that wishes to unilaterally terminate the contract, they are required to hand in a formal resignation letter to their employer with 30 days notice.

It seems simple so far, right? However, things get complicated when it is the employer who wishes to terminate the employment contract unilaterally. The bulk of our article will describe the intricacies of this kind of unilateral termination.

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Terminating an Employee in China During a Probation Period

According to China’s Employment Contract Law (ECL), an employer may add a probationary period in employment contracts.

This law establishes that the maximum length of the probationary period cannot last more than;

  • 1 month in the case of an employment contract of one year or less
  • 2 months if the contract length is more than one year but less than three years and
  • 6 months where the contract’s term is more than 3 years or indefinite

When the probation period has concluded, terminating an employee in China almost always requires a good cause as well as severance pay.

If the termination is unilateral and initiated by the employee and they are still in their probation period, they only have to give in their letter of resignation with 3 days notice.

Employee Termination Through a Mass-Layoff

The ECL defines a mass-layoff as the collective termination of 20 or more employees or 10% of the employer’s total staff. For a mass-layoff to occur lawfully, it needs to be revised and vetted by a local labor inspector from an official labor bureau.

Inspectors usually consider many factors to approve collective terminations. These factors include the company facing difficulties in their business model (being in the red) if they have filed for bankruptcy and is currently undergoing a voluntary or imposed restructuring or the need for structural change in the company’s business model or operations. 

It’s important to mention that if the mass-layoff is approved, the employer still has to pay severance to all the employees who were terminated. The law also establishes that if the employer starts a hiring process before 6 months have passed since the layoff, the same employees must be given priority to be rehired.

Terminating Dispatched Employees in China

How is the termination of labor dispatched employees regulated in China?

The new Interim Regulations establish that a dispatched employee may terminate the labor contract by giving a written notification to the labor dispatch agency with 30 notice. During the probation period, such notification may be given three days in advance, just like direct employment contracts.

On the employer side, the regulations stipulate that the host entity may return the dispatched employees back to the dispatch agency due to:

  1. a major and objective change in the company’s business model
  2. duly approved mass layoffs
  3. the host entity being dissolved or discontinuing its operations
  4. the term of the dispatch concludes.

If the dispatched employee is returned because of these reasons, the agency is responsible for redistributing the employee.

The labor dispatch agency may only terminate the employee’s contract if the employee refuses a new dispatch offering equal or greater conditions.

What Happens when Fix-term Employment Contracts Conclude?

Due to the fact that they contemplate an end date, fix-term contracts have more relaxed regulations. A common practice is to not renew the said contract if the employer is not happy with the employee’s behavior and performance.

When the employer opts for this strategy, he has to pay severance to the employee. These rules change when it is the second fix-term contract that has expired. In this case the employee can request a renewal.

Lawful Unilateral Termination

Chinese law establishes reasons for lawful termination during an employment contract that is in force. The employee can have his/her labor contract revoked if they are found to incur in any of the following circumstances:

  1. Being proved unqualified for recruitment during the probation period;
  2. Seriously violating the rules and regulations of the employing unit;
  3. Causing major losses to the employing unit due to serious derelictions of duty or engagement in malpractices for personal gain;
  4. Concurrently establishing a labor relationship with another employing unit, which seriously affects the accomplishment of the task of the original employing unit, or refusing to rectify after the original employing unit brings the matter to his attention;
  5. Invalidating the labor contract as a result of the conclusion or modification against a party’s true intention by means of deception or coercion, or when a party is in precarious situations
  6. They are being investigated for criminal responsibility in accordance with law.

Employees who are Protected from Unilateral Termination

There are specific situations in which employees have further protection and employment security granted by the law. The ECL establishes a list of circumstances.

Be careful to learn these protected employees and situations since terminating an employment contract in force when they apply means a slam-dunk labor dispute against you if you are the employer:

  1. A worker who is engaged in operations exposing him to occupational disease hazards and has not undergone a pre-departure occupational health check-up, or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation;
  2. A worker who has been confirmed as having lost or partially lost his capacity to work due to an occupational disease contracted or a work-related injury sustained with the Employer
  3. A worker who has contracted an illness or sustained an injury, and the set period of medical care therefore has not expired;
  4. A female employee in her pregnancy, confinement or nursing period; 
  5. A worker who has been working for the Employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age; 
  6. A worker who finds himself in other circumstances stipulated in laws or administrative statutes.
  7. Dismissal based on trade union activities is prohibited.
  8. Termination due to ethnic origins, race, sex, and religious belief and disability is not listed as unlawful grounds for dismissal in the ECL. 
  9. A  worker who is engaged in operations exposing him to occupational disease hazards and has not undergone a pre-departure occupational health check-up, or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation; 
  10. If the labor contract of a worker or staff member is terminated due to his participation in trade union activities, the administrative department for labour shall order that the victim be reinstated, his remuneration payable during the period of the termination of the labour contract be made up, or that a compensation two times the amount of his annual income be given.

Bilateral Termination in China

When possible, it is far better to pursue bilateral termination. This is a mutual agreement between the parties, typically at the end of the employment relationship. Bilateral termination may provide the following benefits:

  • Less conflict between the parties since they have reached an amicable solution
  • Avoids costly litigation or intervention from local labor authorities
  • Can provide for termination in situations where the requisite level of behavior for unilateral termination was not reached
  • Gives the parties more control over the outcome of their dispute 

Best practices dictate that the agreement between the parties should be formally documented and signed by the employer and employee. Failing to have these terms specifically provided for in a written document can subject the employer to possible liability. 

Severance Pay in China

In China, severance pay amounts to one month’s pay per year of service.

For the purpose of calculating severance pay, an employment period ranging from 6 months to 1 year is to be counted as one year. If the employee has worked for less than 6 months, him/her are entitled to half a month’s pay.

If the monthly wage of a worker exceeds three times the average monthly wages of employees in the municipality where the employer is located, severance pay is to be paid to him/her at the rate of three times the local average monthly wages and cannot be for more than 12 years of work.

For any period after 1 January 2008 – the date of the enactment of the Employment Contract Law – where the employee’s average monthly salary is more than three times the average monthly salary in the location of employment, the latter will be used to calculate severance pay.

It is important to add that severance pay can also be negotiated between the employer and the employee, and is considered what is called a “negotiable” right. The following chart summarizes the proportion of severance pay with regard to tenure in the company.

Tenure ≥ 6 months:1 month(s)
Tenure ≥ 9 months:1 month(s)
Tenure ≥ 1 year: 1 month(s)
Tenure ≥ 2 years:2 month(s)
Tenure ≥ 4 years:4 month(s)
Tenure ≥ 5 years:5 month(s)
Tenure ≥ 10 years:10 month(s)
Tenure ≥ 20 years: 20 month(s)

This article is a publication of Horizons. The purpose of this article is to inform our clients/readers of a changing legal landscape. It is not intended, nor should it be used, as a substitute for specific legal advice or professional legal counsel.