Termination Due to Fixed-Term Contract Expiration

Last updated: Jan 2021
The HR Regulations Guide for Foreign Companies in China

Laws that address employment termination are important for both employees and employers. That said, these laws are especially complicated. In China, it is forbidden by law for employers to dismiss employees without cause. Therefore, when approaching these issues, employers should always rely on professional, expert advice. Employers should always carefully examine the termination background, to make sure that the grounds for dismissal are valid and legitimate. If, for any reason, this may not be the case, reaching a settlement may be the best option.

Among our numerous fields of expertise, PTL Group specializes in HR solutions in China. We’d like to share our important knowledge with you. The following article discusses termination due to fixed-term contract expiration.

Termination Due to Fixed-Term Contract Expiration

Recruitment practices in China require knowledge in many areas – including fix-term contracts.

A fixed-term contract can be tricky in China. On one hand, employees, from their point of view, view it as risky and as an impediment to their job security. Employers, on the other hand, are trying to make recruitment in China more effective, and therefore sometimes seek to hire new employees on a fixed-term contract due to their unfamiliarity with a new employee’s real capabilities. Solving this contradictory situation can often be difficult, especially due to the lack of a national regulation system pertaining to this particular matter.

General note: Unless the labor of contract establishes different terms for foreign employees, the Chinese law applies to both Chinese and foreign employees.

Read more about the new Chinese Foreign Investment Law.

The 1st fixed-term contract

To begin with, let us refute a common myth in China: an employee who is hired on a fixed-term contract can still be terminated during the employment period. In other words, an employer who is not satisfied with the employee’s performance does not have to wait for his or her contract to expire. As long as supporting documents have been collected and the employee has been given a training period to demonstrate improvement, the employer can terminate an employee due to poor performance – and pay severance by law.

That said, it is important to remember that termination on this ground is extremely difficult in China, and that by and large, the Chinese law tends to be in favor of the employee. 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 worse. Therefore, it is always recommended to terminate by mutual agreement, in order to avoid future grudge between the parties.

In many cases, foreign companies in China hire employees on a fixed-term 3-year contract. This gives the employer the maximum probation period, which is 6 months, to assess the employee’s potential. When the contract is about to expire, the employer can choose one of two options:

  1. Renew the contract – with either an open or a fixed term proposal, and as long as the employment conditions are the same or improved
    /
  2. Terminate the contract – and pay severance as stipulated by law

The 2nd fixed-term contract

This is where things tend to get confusing. Since there is no national consensus on the interpretation of the law, when the second fixed-term contract expires, different localities implement different policies.

In some cities, like Beijing, the local regulation rules that after two consecutive fixed-term contracts the employer can either propose an open-term contract or negotiate for termination. A third fixed-term contract is completely unacceptable.

In other cities, like Shanghai, the employer has an option to terminate the contract, or, if both parties are satisfied, they can sign a third fixed-term contract.

Official notice

Once an employer has decided not to renew the contract with an employee, in most cases, an official early notice has to be made. In Beijing, for example, the law stipulates a 30-day early notice. However, in Shanghai, the law doesn’t require an early notice at all, but usually companies do provide an early notice about 1-2 weeks prior to the contract expiration. In general, our recommendation is to give early enough notice and not wait until the last minute.

Regulations in China change relatively frequently. For the most up-to-date regulations, please check in with us.