Employee Termination in China

Legal Grounds for Termination

In China, a labour contract can be either terminated or discharged.  It is critical to note that Employment Law is relatively employee friendly in China and employers need to be very careful when terminated or discharging labour contracts in China to avoid the risk of an employment dispute. Once the employee is past probation, separations tend to be mutually agreed upon between the employer and employee. and include an element of severance payment based on the employee’s years of service.

• Termination of Labour Contract

Circumstances for terminations are limited and reasons include the following:

• • The terms of the contract have expired.
  • The employee has retired and is receiving a pension.
  • The employee has passed away.
  • The employer is bankrupt or must close the business.

In the case where the terms of contract have expired, the employer maintains or increases the conditions in the labour contract to renew the labour contract, but the employee does not agree to renew the labour contract. OR in the case, employer is bankrupt or must close the business, a severance pay must be given by the employer.

• Discharge of Labour Contract

A labour contract can be discharged due to the following reasons:

• Mutual agreement between employer and employee.
• Raised by the employee
  • Must give 3 days’ notice if under probation.
  • Must give 30 days’ notice if under regular working period.
  • Immediate discharge in the event the employer breaks the law – Severance pay must be given in this instance.
• Raised by employer without severance pay
  • Employee proves to be unsuitable/unqualified during probation.
  • Employee has broken internal regulations or caused major damage.
  • Employee has fostered an employment relationship with another company, which has a serious impact on the completion of the work tasks of the employer, or refuses to make corrections after the employer raises the issue.
  • Employee has been convicted of a crime.
• Raised by the employer with severance pay and a 30-day notice*
  • Employee is sick, and the medical period has expired. The employee can no longer work, or can’t be transferred to other roles.
  • Employee proves to be unqualified and cannot be qualified after training or transferring to other positions.
  • The labour contract cannot be performed due to change in its condition and both parties cannot come to a mutual agreement after consultation.
  • An economic layoff where a notification has been sent to the government in advance. In this case, there is no need for a 30-day notice.

*Employers have the option of offering one month’s salary instead of adhering to a 30-day notice.

Labour contracts cannot be terminated for the following reasons:

• When employees are diagnosed with occupational diseases.
• Partial or totally disability from a work injury.
• Sicknesses that crop up during their medical leave period.
• Pregnancy, childbirth and breastfeeding.
• The employee has worked over 15 years in the company and is less than 5 years away from retirement.
• The employee who is engaged in the operation exposed to the occupational-disease-inductive hazards has not received the occupational health examination before leaving the post, or the suspected occupational-disease-inductive patient is under diagnosis or medical observation.

Calculating Severance Pay

Severance pay upon termination or discharge of a labour contract can be calculated using the following formula:

                       Average Monthly Salary x Years of Service of current employer

Average Monthly Salary definition: 12 months before the labour contract is terminated, with a cap of 3x the local monthly salary in the previous year – The maximum period of payment of severance pay shall not exceed 12 years.

• Years of Service (YOS) definition:
• • Less than 6 months = 0.5 month’s pay
  • 6 months to a year = 1 month’s pay
  • Over 1 year = 1 month’s pay for each year

Example of Severance Pay:

• Employee started to work on 1 January 2018 in Shanghai. On 31 July 2024, employer decided to terminate the contract because of the low performance employee acknowledged.

• • YOS from 1 January 2018 to 31 July 2024 counted as 7 years
  • Base pay = employee’s average monthly salary income of past 12 months. i.e. 2023-7 to 2024-6
    • * Base pay celling = local average monthly salary of last year * 3
      • If the average salary of employee A is CNY 12,000, Severance Pay = CNY 12,000 * 7 = CNY 84,000
      • If the average salary of employee B is CNY 50,000, Severance Pay = CNY 36,921 * 7 = CNY 258,447
        • * CNY36,921 is the base pay celling of Shanghai for year 2023.

Please note that all the information listed below are to be used as a general guideline. For more detailed accounts of China employment laws and regulations, please visit the official governmental websites.

Updated on: 8^th August 2024