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Termination and Severance Policies

Learn about the legal processes for employee termination and severance in China

Notice period

The Labour Contract Law of the People's Republic of China outlines the legal requirements for notice periods during employment termination. It's crucial for both employers and employees to understand these requirements.

Statutory Minimum Notice Period

The Labour Contract Law stipulates a statutory minimum notice period of 30 days. This applies to situations where the termination is initiated by the employer without fault on the employee's side, such as:

  • Employee illness or injury: When an employee becomes unable to work due to illness or injury (beyond a set period).
  • Employee incompetence: If, despite training and opportunity for improvement, an employee demonstrates continued incompetence for the assigned role.
  • Significant change in circumstances: In cases where unforeseen circumstances significantly alter the conditions upon which the employment contract was based, rendering its fulfillment impossible.

In these scenarios, the employer has two options:

  1. Provide the employee with written notice 30 days before the termination date.
  2. Pay the employee an equivalent of one month's salary in lieu of notice.

Exceptions to the Notice Period

The Labour Contract Law acknowledges exceptions where the notice period may not apply:

  • Serious misconduct: Employees who engage in severe misconduct can be subject to immediate termination without notice. This includes actions like violence, serious breaches of company regulations, or financial misconduct.
  • Mutual agreement: If both employer and employee reach a mutual agreement to terminate the contract, a notice period may not be required.

Probationary Period

The notice period during the probationary period can be shorter than the standard 30 days. However, the specific timeframe should be clearly defined within the employment contract itself.

Fixed-Term Contracts

The Labour Contract Law offers limited guidance on notice periods for fixed-term contracts. While the 30-day minimum often applies, some fixed-term contracts may stipulate a longer notice period within the agreed-upon terms. It's important to review the specific contract for details.

Importance of Following Notice Periods

Following the legal notice periods safeguards both employers and employees. Failing to do so can lead to legal repercussions. For instance, if an employer terminates an employee without proper notice, they might be liable to pay the employee's salary for the unserved notice period, along with an additional penalty of up to 30% of the salary.

Severance pay

In China, severance pay becomes a significant consideration when employment terminates. The Labour Contract Law of the People's Republic of China outlines the legal requirements for severance pay.

Entitlement to Severance Pay

Employees are entitled to severance pay under the Labour Contract Law if the termination is initiated by the employer without fault on the employee's side. This includes situations like employer-initiated termination, company closure or relocation, and employee illness or incapacity. However, specific limitations apply in such cases.

Calculation of Severance Pay

The severance pay an employee receives is calculated based on their average monthly salary for the preceding twelve months and their length of service. The formula is: Severance Pay = Average Monthly Salary x Number of Years of Service. However, there are important limitations to consider:

  • The minimum service period for severance pay is six months. For less than six months of service, an employee receives half a month's salary.
  • There's a maximum service cap of 12 months for severance pay calculations, even if the employee has worked for a longer period.
  • The average monthly salary used in the calculation is capped at three times the local average wage for employees as stipulated by the local government.

Exceptions to Severance Pay

The Labour Contract Law excludes some situations from mandatory severance pay. These include serious misconduct by the employee and mutual agreement between the employer and employee to terminate the contract.

Importance of Adhering to Severance Pay Regulations

Adhering to the legal requirements for severance pay protects employee rights and avoids potential legal disputes. Employers who fail to comply with severance pay regulations may be subject to penalties and required to pay the owed compensation to the employee.

Termination process

Terminating an employee in China is significantly different from common practices in countries with "at-will" employment. There are two main scenarios for termination: by mutual agreement and unilateral termination with lawful causes, as stipulated in Article 39 of the Labor Contract Law of the People's Republic of China.

Mutual Agreement

Both parties can agree to terminate the employment contract at any time. A written agreement outlining the termination date is recommended.

Unilateral Termination with Lawful Causes

Employers can only terminate unilaterally for specific reasons outlined in the law. These reasons fall under two categories:

Immediate Termination

This allows employers to terminate without notice in cases of severe misconduct by the employee, such as violence, serious negligence, or theft, as per Article 48 of the Labor Contract Law.

Termination with Notice

Employers must provide 30 days' written notice if termination is due to:

  • Employee illness or injury rendering them unfit for work (after a reasonable recovery period).
  • Employee incompetence despite receiving training or a job transfer.
  • Significant changes in objective conditions that make fulfilling the contract impossible (e.g., company closure).

This is according to Article 40 of the Labor Contract Law.

Additional Considerations

Probationary Period

Contracts can have a probationary period (maximum of 6 months for non-managerial and 12 months for managerial positions). During this time, termination is easier for both employer and employee, as per Article 39 of the Labor Contract Law.

Mass Layoffs

Specific procedures apply to mass layoffs, involving government notification. This is according to Article 47 of the Labor Contract Law.

Local Regulations

National law provides a framework, but some localities may have additional regulations.

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