How to Legally Approach Employee Termination in China? 3 Pro Tips

May 8, 2023
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As the name of this post implies – employee termination in China is backed by a comprehensive and intricate legal framework. So, simply put, employers can’t just terminate employees unliterally or on a whim. Instead, they are bound to strict national and local regulations that determine when and in what conditions employees can or cannot be terminated. Sadly, too many international managers doing business in China learned this the hard way, when realized that labor courts tend to rule in favor of the employees. Statistics show that when a termination case is brought to the arbitrator’s table, companies win in only 3% of the cases, and in Beijing it’s even lower.

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Unlawful termination

If there is one thing you should take with you after reading this post is this – Employers are not allowed to dismiss their employees unilaterally and without a substantial reason. Therefore, employers should carefully examine the grounds for termination and collect supporting evidence before notifying employees of their dismissal. If the termination’s legitimacy is deemed unreasonable, we recommend that the two parties negotiate and settle on termination by mutual agreement.

Furthermore, there are special circumstances under which it is illegal to terminate an employee’s contract, for instance, a pregnant woman or during her maternity leave, an employee on sick leave, an employee who has been exposed to occupational hazards and has not undergone a medical check-up, etc.

Termination with immediate effect & no severance payment

Usually, termination with immediate effect (without prior notice) and without severance payment can occur as a result of an employee’s misconduct or based on the type of employment.

An employee’s fault or misconduct can definitely serve as a solid ground for legitimate termination (once proven with relevant evidence). Therefore, given the damage caused to the employer, the latter is exempt from providing early notice of the termination and severance payment. Such behaviors include:

  • When the employee has committed a crime
  • When the employee materially breaches the employer’s rules and regulations
  • When the employee has neglected their duties or misbehaved, resulting in substantial damage to the employer
  • When the employee has simultaneously established an employment relationship with other employers (dual employment), which affects the completion of their tasks
  • When the employee uses means of deception or coercion against the employer’s interests

* Note that while this is the official regulation, our experience shows that even if such behavior is proven, the court might still demand the employer to provide at least 30 days’ advanced written notice, and impose severance payment.

As for the type of employment, part-time employees can be terminated with immediate effect by either of the parties and without severance payment. This regulation also extends to probationary employees, but as long as the employee fails to meet the set conditions required for employment.

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Termination without fault

When the reason for termination is unrelated to an employee’s prohibited behavior, employers are required to (A) provide at least 30 days prior notice, or pay a one-month salary, and (B) pay severances, based on the accumulated years of service of the terminated employee with the employer. Some of the common cases of termination without fault include:

  • Termination upon the expiration of a fixed-term contract, and the employer chooses not to renew the contract
  • If the employee remains incompetent after training or adjustment of their position
  • If the cause of dismissal is re-organization, bankruptcy, business license expiration, mass layoffs, and liquidation

How to calculate the severance pay?

The rule of thumb is one-month salary for each full year worked (a full year is defined as employment between 6-12 months), and to a maximum of 12 years. Employment for a continuous period of less than six months is equivalent to half a month’s pay in severance.

For example, an employee who has worked for five years and ten months is eligible for six months’ worth of severance pay. Alternatively, an employee who has worked for four years and three months is eligible for 4.5 months’ worth of severance pay.

Termination by mutual agreement

Termination by mutual agreement is always the ideal solution. According to Chinese labor law, the settlement agreement between the parties must be written in Chinese and include the date of the employment termination and the amount of compensation (if the termination is by the employer). In addition, the agreement will explicitly mention that the employer releases the employee from any future obligation.

Severance pay in such termination isn’t mandatory, but it is common for employers to offer severance in order to get the terminated employee’s consent and end the relationship on good terms. Sometimes employers even offer extra payment in addition to the severance to avoid costlier termination. Remember, labor courts, in the vast majority of cases, tend to rule against companies…

Three top tips to avoid “messy” termination

One of the biggest risks in employee termination is turning your terminated employees into “enemies,” which can happen if the process escalates into a labor dispute or lawsuit. Here are three tips that will help you avoid such situations:

  • Have the employees sign The Employee Handbook – The Employee Handbook is a legally valid labor document. Its purpose is to prevent vagueness by adding another layer of protection to the company in the event of a work dispute. Hence, the Employee Handbook specifies supplemental rules and regulations pertaining to the company’s code of conduct and operation, including termination processes. In addition, an effective Employee Handbook can be used as supporting evidence to justify termination decisions.
  • Sign labor contracts with an end date Labor contracts with an end date will allow you to terminate the employment more easily, simply by not renewing the contract.
  • Consult with an expert – The unfamiliarity with China’s local regulation system puts employers at a disadvantage. This is why it is highly encouraged not to make decisions alone and consult with a professional team who can assist and back you up.

PTL Group’s proficient HR teams offer a wide range of HR services in China, throughout the entire employee lifecycle. Get in touch today for China business support.

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