Navigating employment termination in China requires a thorough understanding of the country's complex labor laws. Both employers and employees are protected by regulations that dictate the conditions under which an employment relationship can be ended, the required notice periods, and the calculation and payment of severance. Non-compliance with these rules can lead to significant legal challenges, including costly disputes and mandatory reinstatement of the employee.
Ensuring a lawful and smooth termination process is crucial for foreign companies operating in China. This involves adhering strictly to procedural requirements, correctly calculating entitlements, and having proper documentation in place. Understanding the nuances of "with cause" versus "without cause" termination and the specific protections afforded to employees is fundamental to minimizing risk and maintaining good labor relations.
Notice Period Requirements
The required notice period for terminating an employment contract in China depends on who initiates the termination and the reason for termination.
- Employee Resignation: An employee must provide the employer with 30 days' written notice. During the probation period, the notice period is reduced to 3 days.
- Employer Termination with Cause: Generally, no notice period is required when an employer terminates an employee for serious misconduct or other legally defined "with cause" reasons.
- Employer Termination Without Cause: If an employer terminates an employee without cause (e.g., due to redundancy, inability to perform after training/transfer, or significant change in circumstances), the employer must provide either:
- 30 days' written notice, OR
- One month's salary in lieu of notice.
| Scenario | Notice Period Required |
|---|---|
| Employee Resignation | 30 days' written notice |
| Employee Resignation (during probation) | 3 days' written notice |
| Employer Termination (with cause) | Generally no notice required |
| Employer Termination (without cause) | 30 days' notice OR 1 month's salary in lieu |
Severance Pay Calculations
Severance pay, also known as economic compensation, is typically required when an employer terminates an employee without cause or in certain "with cause" situations (e.g., employer's bankruptcy). The calculation is based on the employee's length of service and average monthly wage.
The formula for severance pay is:
Severance Pay = (Average Monthly Wage) x (Number of Years of Service)
- Average Monthly Wage: This is calculated based on the employee's average wage over the 12 months preceding the termination date. It includes basic salary, bonuses, allowances, and subsidies.
- Number of Years of Service: Service is calculated in full years. For service periods less than one year but more than six months, it is counted as one year. For service periods of six months or less, it is counted as half a year.
- Maximum Wage Cap: If the employee's average monthly wage is three times higher than the average monthly wage of employees in the local municipality, the severance pay calculation is capped. In this case, the average monthly wage used in the calculation is limited to three times the local average, and the maximum number of years of service counted is limited to 12 years.
| Service Period | Calculation Factor |
|---|---|
| Each full year | 1 month's wage |
| > 6 months but < 1 year | 1 month's wage |
| <= 6 months | 0.5 month's wage |
Note: The maximum wage cap and 12-year service limit only apply if the employee's average monthly wage exceeds three times the local average wage.
Grounds for Termination
Chinese labor law specifies the legal grounds under which an employer can terminate an employment contract. These are broadly categorized as termination with cause and termination without cause.
Termination With Cause (No Severance Typically Required):
An employer can terminate an employee without severance pay if the employee:
- Is proven to have failed to meet recruitment conditions during the probation period.
- Seriously violates the employer's rules and regulations.
- Commits serious dereliction of duty or practices graft, causing significant damage to the employer.
- Establishes an employment relationship with another employer, which seriously affects the completion of the tasks assigned by the original employer, and refuses to rectify after being notified by the employer.
- Causes the invalidation of the employment contract due to deceptive or coercive means, or by taking advantage of the other party's difficulties.
- Is investigated for criminal liability.
Termination Without Cause (Severance Required, Notice or Pay in Lieu Required):
An employer can terminate an employee with severance pay and notice (or pay in lieu) under specific circumstances, such as:
- The employee is unable to perform the work after completing medical treatment for an illness or non-work-related injury, and is unable to take on other work arranged by the employer.
- The employee is incompetent for the job and remains incompetent after training or adjustment to a different position.
- The employment contract is no longer performable due to a significant change in the objective circumstances upon which the contract was based, and the employer and employee fail to reach an agreement on amending the contract.
- Mass layoffs (reduction in force) due to the employer's financial difficulties or significant changes in production/operation.
Situations Where Termination is Restricted:
Employers are generally prohibited from terminating employees under certain conditions, including:
- Employees suffering from occupational diseases or work-related injuries.
- Employees receiving medical treatment for non-work-related illnesses or injuries within a prescribed period.
- Female employees during pregnancy, maternity leave, or breastfeeding period.
- Employees who have been working for the employer continuously for 15 years and are less than 5 years away from their legal retirement age.
- Employees participating in collective bargaining activities.
Procedural Requirements for Lawful Termination
Strict adherence to procedural requirements is essential for a lawful termination in China. Failure to follow the correct process can render the termination illegal, even if a valid ground exists.
Key procedural steps typically include:
- Gathering Evidence: For termination with cause, collect clear and sufficient evidence of the employee's misconduct or failure to meet standards. Ensure company rules allegedly violated were properly communicated to the employee.
- Notification to Labor Union: If the employer has a labor union, the employer must notify the union in advance of any proposed termination (except for employee resignation or termination during probation). The union has the right to raise objections.
- Written Termination Notice: Provide the employee with a formal written termination notice. This notice should clearly state the reason for termination and the effective date. For termination without cause, provide 30 days' notice or payment in lieu.
- Meeting with Employee: Conduct a meeting with the employee to communicate the termination decision and explain the reasons and process.
- Issuing Termination Certificate: Provide the employee with a written termination certificate within 15 days of the termination date. This document is crucial for the employee to register for unemployment benefits and find new employment.
- Final Payment: Pay all outstanding wages, accrued but unused annual leave, and severance pay (if applicable) to the employee upon termination.
- Transfer of Personnel File: Transfer the employee's personnel file to the relevant government authority or the employee's new employer.
- Social Insurance and Housing Fund: Complete the necessary procedures to cease the employee's social insurance and housing fund contributions.
| Step | Description | Notes |
|---|---|---|
| Evidence Gathering | Collect proof for "with cause" termination. | Ensure rules were communicated. |
| Labor Union Notification | Notify union in advance (if applicable). | Union can raise objections. |
| Written Termination Notice | Provide formal notice stating reason and date. | Include 30 days' notice or pay in lieu for "without cause". |
| Employee Meeting | Communicate decision, explain process. | Professional and respectful. |
| Termination Certificate | Issue within 15 days of termination. | Essential for employee's future employment/benefits. |
| Final Payment | Pay outstanding wages, leave, severance (if applicable). | Must be paid upon termination. |
| Personnel File Transfer | Transfer file to relevant authority or new employer. | Required by law. |
| Social Insurance/Housing Fund | Complete cessation procedures. | Ensure contributions are stopped correctly. |
Employee Protections Against Wrongful Dismissal
Chinese labor law provides strong protections against wrongful dismissal. If an employer terminates an employee illegally (e.g., without valid grounds, without following proper procedure, or while the employee is in a protected status), the employee has the right to seek remedies.
The primary remedies for wrongful dismissal are:
- Reinstatement: The employee can demand reinstatement to their position with the employer. If reinstated, the employer may be required to pay back wages for the period of wrongful termination.
- Double Severance: If the employee does not request reinstatement, or if reinstatement is deemed impossible, the employer must pay the employee compensation equivalent to double the amount of statutory severance pay.
Common pitfalls leading to wrongful dismissal include:
- Insufficient evidence for "with cause" termination.
- Failure to notify the labor union.
- Incorrect calculation or non-payment of severance.
- Terminating an employee in a protected status (e.g., during medical leave or pregnancy).
- Lack of proper documentation throughout the process.
Employers must exercise caution and ensure full compliance with the law to avoid the significant costs and legal consequences associated with wrongful dismissal claims.
