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Terminating an employee in China is more difficult and often more expensive than in many other countries, as the Chinese Labor Contract Law offers a high degree of protection to workers’ job security.

In the remarks below, we will only discuss terminating fixed-term and non-fixed term contracts. Part-time contracts can be terminated at will by both parties. For job contracts, the same rules for termination apply as for fixed-term contracts.

Terminating Staff in China - An Overview

Type of termination

Admissible grounds

Type of employee

Severance payment

During probation

  • Employee doesn’t meet the job requirements stated in the job description
  • Serious violation of company rules
  • Serious loss attributed to employee
  • Fraud to reach the labor contract
  • Criminal offense during employment
  • Employee taking second job, and harming the employer
  • Incompetent for the position
  • Employee unable to work after sickness or injury
  • Fixed-term
  • Non-fixed term

No

Mutual agreement

  • Agreed with employee
  • Fixed-term
  • Non-fixed term

Yes (if the termination is put forward by the employer )

Immediate (unilaterally)

  • Serious violation of company rules
  • Serious loss attributed to employee
  • Giving false information to employer
  • Criminal offense during employment
  • Employee takes up second job, harming first employer
  • Fixed-term
  • Non-fixed term

No

30 days’ notice (unilaterally)

  • Employee incompetent for position
  • Employee unable to work after sickness/injury
  • Job cannot be performed due to fundamental change in objective circumstances
  • Fixed-term
  • Non-fixed term

Yes

Not renewing contracts

  • After one or two fixed-term contracts, differs per city
  • Fixed-term

Yes (unless the employee refuse to renew the contract upon maintaining or raised provision proposed by the employer)

Mass layoff

  • Company being restructured under the PRC Enterprise Bankruptcy Law
  • Serious difficulties in productions or operations
  • Company changes production method, making staff unnecessary
  • Objective economic situation makes employment impossible
  • Fixed-term
  • Non-fixed term

Yes

Automatic

termination upon bankruptcy/revoke/dissolution

  • The employer is declared bankrupt pursuant to the law
  • The employer’s business license is revoked
  • The employer is ordered to close down or revoked by government bureaus
  • The employer has decided to dissolve prematurely
  • Fixed-term
  • Non-fixed term

Yes

Termination with 30 days’ notice and mass layoff not allowed for

  • The employee is suspected of having occupational disease(s) and waiting for diagnosis;
  • The employee has completely or partially lost labor capability due to occupational disease(s) or work-related injury;
  • The employee is still in the legal recuperation period for non-work-related illness/ injury;
  • The employee is pregnant, on maternity leave or in breast-feeing period; and
  • The employee has continuously worked for the employer for more than 15 years and is less than five years before retirement.

Note: When unilaterally terminating an employee, the employer needs to notify the labor union if there is one.

Termination During the Probation Period

During the probation period, the employee can resign at will by giving three days’ notice. However, the employer can only terminate the employee with admissible grounds, such as:

  • Employee doesn’t meet the job requirements stated in the job description;
  • The employee is deemed to commit a serious violation of the company rules;
  • The company suffers a serious loss that can be attributable to the conduct of the employee;
  • Labor contract signed by employer under false assumptions or coercion from the employee;
  • The employee is convicted of a criminal offence during the term of the labor contract;
  • Employer’s interests harmed due to the employee taking up a post at a separate entity;
  • The employee is incompetent for the position, even after training or a job transfer; and
  • Employee unable to work after sickness or injury.

To be noted, the burden is on the company to prove that an employee has not been able to meet the requirements of the position they were hired to fill.

To terminate an employee on probation period, the company is not required by law to pay severance payment if the termination is based on the admissible grounds.

Termination Through Mutual Agreement

This type of termination occurs when the employer and employee mutually agree to terminate the relationship. If the termination is put forward by the employer, then the employee is entitled to severance payment. More often than not, the employer will provide additional money to the employee to obtain the employee’s consent on separation, and there is no mandatory limit to this additional money.

Immediate Termination for Inappropriate Behavior of the Employee

The employer can terminate its employee immediately for the employee’s inappropriate behavior. No severance payment is required in this case. But the employer need to inform the labor union in advance when there is one.

Generally, immediate termination without compensation can only happen under five circumstances, detailed as follows:

  • The employee is deemed to commit a serious violation of the company rules.
  • The company suffers a serious loss that can be attributable to the conduct of the employee.
  • The employee is convicted of a criminal offence during the term of the labor contract.
  • Labor contract signed by employer under false assumptions or coercion from the employee.
  • Employer’s interests harmed due to the employee taking up a post at a separate entity.

Termination with 30 Days’ Notice and Compensation Payment

Under the following three circumstances, an employer is allowed to terminate an employee unilaterally with 30 days’ notice or an additional month’s salary:

  • The employee can no longer work after becoming sick or injured.
  • The employee is incompetent for the position, even after training or a job transfer.
  • The objective situation on which the employment was originally based has changed considerably. As a result, the labor contract can no longer be fulfilled.

The terminated employee is also entitled to severance payment. And the employer is required to inform the labor union in advance when there is one.

Automatic Termination upon Bankruptcy/License Revoking/Permanent Dissolution of The Company

Upon the following circumstances, the employment relationship shall be terminated automatically, and the employer is required to pay severance payment to the affected employees:

  • The employer is declared bankrupt pursuant to the law;
  • The employer’s business license is revoked;
  • The employer is ordered to close down; and
  • The employer has decided to dissolve prematurely.

Mass Layoff

Where an employer needs to reduce 20 or more employees or where the number of employees to be reduced is less than 20 but comprises 10 percent or more of the total number of employees, it is considered a mass layoff. Due to the potential negative social effects, the law imposes higher requirements and stricter procedures on mass layoffs.

Mass layoffs can be done under the following circumstances:

  • The employer undergoes restructuring pursuant to the provisions of the PRC Enterprise Bankruptcy Law;
  • The employer has serious production and business difficulties;
  • The enterprise undergoes a change of production, significant technological reform, or change of mode of operation - upon variation of labor contracts, there is still a need for mass layoff; or
  • The objective circumstances have undergone significant changes and, as a result thereof, the labor contract can no longer be performed.

 

To be noted, the following personnel shall be given priority to be retained in a mass layoff:

  • An employee who has entered into a fixed-term labor contract of a longer period with the employer;
  • An employee who has entered into a non-fixed term labor contract with the employer; and
  • An employee whose family members are not employed or who needs to support aged or under-aged family members.

If an employer that carried out a mass layoff is re-hiring employees within six months of the mass layoff, the reduced employees need to be noticed and shall be given priority for employment under the same conditions.

The detailed procedures of mass layoffs are subject to local variances. Companies are suggested to pay close attention to these procedures. If failing to fulfill these requirements, the company may be confronted with onerous labor disputes or even potential penalties from the labor bureau in charge.

Termination at the End of a Fixed-Term Contract

The expiry of a fixed-term contract provides an important opportunity for the employer to evaluate the contribution of the employee and come to a decision on whether or not to renew it. It is relatively straightforward for an employer to terminate an employee at this stage. The employer does not need to give the employee a reason for the company’s decision. However, employers should bear in mind the following points:

  • If the employer does not provide a new contract to the employee by the end of the contract term, and the employee still works in the company after this point, the labor relationship effectively continues - that is to say, the employer shall take liability for absence of the labor contract;
  • If the employer decides not to renew the contract at the end of the period, the company must still pay severance payment to the employee; and
  • If the employer offers the employee a renewed contract on equal or better terms to the expired contract but the employee refuses to accept it, the employer is not required to pay any compensation to the employee.

To be noted, upon expiration of the second fixed-term contract, where the employee raises the request to renew the employment contract, the employer will have no other option but to accept such a request in most cities, unless the circumstances of ‘immediate termination’ or ‘termination with 30 days’ notice’ apply.

Employees Not Allowed to Be Terminated

Under the current labor law system, certain groups of people are specially protected, including:

  • Employees who are suspected of having an occupational disease and waiting for diagnosis;
  • Employees who have completely or partially lost labor capability due to occupational diseases or work-related injury;
  • Employees who are still in the legal medical treatment period for non-work related illness/ injury;
  • Employees who are pregnant, on maternity leave, or in nursing period; and
  • Employees who have worked for the employer continuously for more than 15 years and are less than five years away from retirement.

These groups of employees mentioned above cannot be terminated for reasons listed under ‘termination with 30 days’ notice’ and ‘mass layoff’. Additionally, upon expiration of their labor contracts, they are not allowed to be terminated until the corresponding circumstances extinguish, except where the employee has completely or partly lost labor capability due to occupational diseases or work-related injury - this kind of employee shall be terminated and treated in accordance with the provisions on work-related injury insurance.

Nevertheless, the employer can still terminate these specially protected employees by mutual agreement or if any circumstance under ‘immediate termination for inappropriate behavior of the employee’ exists.

Severance Payment

As mentioned in the above sections, an employer is required to make severance payment to employees for:

  • Termination by mutual agreement and the proposal is put forward by the employer;
  • Termination upon 30 day’s notice according to Article 40 of the Labor Contract Law.
  • Termination upon bankruptcy/license revoking/permanent dissolution of the company;
  • Termination in a mass layoff; and
  • Termination upon the expiration of the labor contract, except where the employer offers the employee a renewed contract on equal or better terms to the expired contract, but the employee refuses to accept it.

Besides, the employee can get severance payment for termination put forward by himself/herself under the following circumstances:

  • Where the employer fails to provide labor protection or labor conditions pursuant to the provisions of the labor contract;
  • Where the employer fails to promptly pay labor remuneration in full amount;
  • Where the employer fails to contribute social security premiums for the employee pursuant to the law;
  • Where the rules and system of the employer violate the provisions of laws and regulations and are prejudicial to the employee’s rights and interests; and
  • Where the labor contract is rendered void because it is concluded by use of fraudulent or coercive tactics or by taking advantage of employee’s unfavorable position thus against the real intention of the employee.

The formula of calculating the severance payment is:

SEVERANCE PAYMENT= AVERAGE MONTHLY SALARY x YEARS OF SERVICE

  • For the average monthly salary: It is calculated as the employee’s average monthly salary during the last 12 months preceding the termination. If the employee worked for less than 12 months, the average monthly salary shall be calculated according to the actual work time.
  • Three-time restriction: For any period after January 1, 2008 – the date of the enactment of the PRC Labor 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. This rule does not apply to the period prior to the enactment of the PRC Labor Contract Law.
  • For the counting of the years of service: For a working period that is less than six months, it shall be counted as half a year, and half a month’s salary must be paidas severance payment. If a working period is over six months but less than one year, it shall be counted as one year, and one month’s salary shall be paid as severance payment.
  • Total amount restriction: For employee whose average monthly salary is more than three times the average monthly salary in the location of employment, the severance is limited to a maximum of 12 month’s average salary, even if he/she worked for a company for over 12 years.

The calculation method provided above is only the minimum amount an employer is required to pay by law. In practice, however, employers often pay a higher amount than the statutory minimum amount.

 

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