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.*

*Severance pay is required.

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:

Mutually alignment

• Raised by employer with severance pay and 30-day notice*
  • Employee is sick and the medical period expires, employee cannot do the work or cannot be arrange to other roles.
  • Employee is proved to be unqualified and cannot be trained or transferred to other position.
  • Labour contract cannot be performed due to some objective condition changes and no mutual agreement after both parties consultation.
  • Economic lay-off with advance notification to government (no need of 30-day notice).

*30-day notice could be replaced by one month salary.

• Raised by employee
  • 3 days notice, in probation period
  • 30 days notice, in regular period
  • Immediate discharge if employer breaks the law*

• Raised by employer without severance pay
  • In probation period, employee is proved to be unqualified
  • Employee breaks the internal regulations or caused major damage
  • Employee set up employment relationship with other companies
  • Employee convicted of a crime

*Severance pay is needed.

Labour contracts cannot be terminated for the following reasons:

• When employees are diagnosed with occupational diseases or in the process.
• 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.

Calculating Severance Pay

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

                       Average Monthly Salary of last 12 months

x

Years of Service of current employer

Average Monthly Salary: In 12 months before the labour contract is terminated, with a cap of 3x the local monthly salary in the previous year, and a bar at local minimum salary.

Years of Service (YOS) definition:

• Less than 6 months = calculated as 0.5 month
• 6 months to a year = calculated as 1 month
• Over 1 year = calculated as 1 month for one 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: September 2025