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- Human Resources and Payroll in China 2016-2017 (5th Edition)
4.5 Termination Pay and its Tax Treatment
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 days’ notice.
• Termination upon bankruptcy/license revoking/permanent dissolution of the company.
• Termination in a mass lay-off.
• 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.
Calculation of Severance Payment
The formula of calculating the severance payment is:
Severance Payment=average monthly salary×years of service
Notes:
1. For the average monthly salary:
It is calculated at the employee’s average monthly salary during the last 12 months.
If the employee worked for less than 12 months, the average monthly salary shall be calculated
according to the actual work time.
2. 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 example, in Shanghai, the average local monthly salary of 2014was RMB 5,451, and three times this
amounts to RMB 16,353. Thus, an employee whose employment is lawfully terminated in Shanghai
can only receive up to RMB 16,353 as severance for each year of employment after January 1, 2008.