Many foreign entities in China fail to terminate their employees correctly, exposing the company to costly complications and serious legal consequences. Just because the employment contracts don’t have any specifications about severance, it does not mean that the company doesn’t need to pay.
When it comes to employee rights, China is a semi-protectionist state. Once a person is hired in China, it is generally difficult to terminate that employee during his or her contract term and doing it wrong carries serious consequences.
The Employment Contract Law (ECL) of China was adopted in 2008, becoming the first national legislation to regulate labor relations and establish a legal framework for the formation, performance, and termination of labor contracts.
The law applies to all enterprises, units, and individuals employing workers in China, as well as Chinese-foreign joint ventures, wholly foreign-owned enterprises, and foreigners working in China.
In general, the law establishes and protects the legitimate rights and interests of employees and sets forth the obligations of employers. It significantly improved the legal protection of employees’ rights and has played an important role in promoting social stability.
There are two main types of termination in China: bilateral or unilateral. When termination is bilateral, the end of the employment relationship is mutually agreed upon by the employer and the employee (Art 36). In such cases, only a document affirming that the termination was mutually agreed is needed, and the employer is typically responsible for providing severance pay.
When termination is unilateral, the employer or the employee may end the employment relationship unilaterally, provided that they adhere to statutory procedural requirements and give the other party reasonable notice (typically 30 to 60 days). If an employer fails to provide reasonable notice, they will be liable to pay the employee their salary for the period of notice that should have been given, plus an additional amount equal to 30% of the salary.
Foreign employers often assume that they do not need to pay their terminated employee any severance, especially when the termination happens at the end date of a fixed term employment contract.
Statutory severance does not depend on the contracts, but on the rules in the region the company is located and the circumstances of the termination. If the employee wishes to renew their contract, and the employer refuses, the employer is usually required to pay statutory severance.
If the employer wants to renew on terms not as good as the employee’s previous terms and the employee refuses the renewal, the employer is usually required to pay statutory severance. These are general rules. However, in some places (Beijing) the employer must notify the employee in writing 30 days before the expiration of the current contract of its intent to end it or renew it.
Chinese law establishes reasons for lawful termination during an employment contract. The employee can have his/her labor contract revoked if they are found to incur in any of the following circumstances:
Being proved unqualified for recruitment during the probation period;
Seriously violating the rules and regulations of the employing unit;
Causing major losses to the employing unit due to serious derelictions of duty or engagement in malpractices for personal gain;
Concurrently establishing a labor relationship with another employing unit, which seriously affects the accomplishment of the task of the original employing unit, or refusing to rectify after the original employing unit brings the matter to his attention;
Invalidating the labor contract as a result of the conclusion or modification against a party’s true intention by means of deception or coercion, or when a party is in precarious situations;
They are being investigated for criminal responsibility in accordance with law;
Employees who are protected from unilateral termination.
Even if the employee resigns, it is important to enter into a termination/settlement agreement to protect you from being accused of having failed to comply with Chinese labor laws. If your employee’s departure has nothing to do with your wrongdoing, you should document that and even then, you may want a signed agreement that releases you from any future claims.
As an employer in China, you should have most of your employee-related documents formally chopped. Your legal representative’s signature and your company chop are not enough if the employee’s signature is not there. Along the same lines, your employee agreements should specify their date of execution. If the document is long, it is a good idea to stamp your company chop across all the pages and have the employee sign all pages.
There are specific situations in which employees have further protection and employment security granted by the law. Terminating an employment contract when they apply could mean a serious labor dispute. The following are some of these situations:
A worker who is engaged in operations exposing him to occupational disease hazards and has not undergone a pre-departure occupational health check-up, or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation;
A worker who has been confirmed as having lost or partially lost his capacity to work due to an occupational disease contracted or a work-related injury sustained with the Employer
A worker who has contracted an illness or sustained an injury, and the set period of medical care therefore has not expired;
A female employee in her pregnancy, confinement or nursing period;
A worker who has been working for the employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age;
A worker who finds himself in other circumstances stipulated in laws or administrative statutes;
Dismissal based on trade union activities is prohibited.
Termination due to ethnic origins, race, sex, and religious belief and disability is not listed as unlawful grounds for dismissal in the ECL.
A worker who is engaged in operations exposing him to occupational disease hazards and has not undergone a pre-departure occupational health check-up or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation may not be terminated.
When possible, it is better to pursue bilateral termination. This is a mutual agreement between the parties, typically at the end of the employment relationship.
In China, severance pay amounts to one month’s pay per year of service. An employment period ranging from 6 months to 1 year is to be counted as one year. If the employee has worked for less than 6 months, he or she is entitled to half a month’s pay.
If the monthly wage of a worker exceeds three times the average monthly wages of employees in the municipality where the employer is located, severance pay is to be paid to him/her at the rate of three times the local average monthly wages and cannot be for more than 12 years of work.
Severance pay can be negotiated between the employer and the employee, and is considered what is called a “negotiable” right.
If a wrongful termination occurs, the employer may attempt to resolve the matter through arbitration or litigation, although these may result in costly legal fees. Otherwise, the previously terminated employee may seek reinstatement.
If reinstatement is not possible, the employer is responsible for paying double the severance amount of what the employee would have been owed if they had been lawfully terminated. The employer may also be responsible for salary payments during the period in which the wrongfully terminated employee was not able to work.
Employee terminations in China must always be done legally to avoid being sued for not having completed the separation correctly. Foreign companies should plan for employee terminations pretty much from the day they start hiring.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.