End of the Line: Terminating an Employee in China (Part 1)

By Zhou Qian

Heightened pressure in China’s labor market means that employers are commonly required to terminate employees to optimize their business operations. Legally speaking, this is by no means an easy thing to do, especially under the comparatively stringent regulations on terminating employment contracts since 2008.

To avoid the onerous and costly labor disputes that can arise from improper termination, foreign-invested enterprises in China must understand the governing framework and key issues behind employee termination and consider taking preventative measures from the start of the employment arrangement.

In Part 1 of this two-part article, we introduce the different types of employee termination in China; in Part 2, we detail the methods of calculating severance payments and provide practical guidance for FIEs.

Types of termination

(1) Termination upon expiration

When seeking to terminate an employment contract, an employer should first check whether the contract term is soon about to expire.

In the case of a first fixed-term employment contract, the employer has the right not to renew the contract upon expiration; however, the employer must pay economic compensation (hereafter “severance”) to the employee. If the contract term is not about to expire, then the employer must deal with a case of early termination.

Note: according to Chinese labor laws, upon the expiration of a second fixed-term contract and where the employee requests  an open-ended employment contract, the employer will have no other option than to accept such a request. However, these laws appear not to be uniformly applied, as in several cities (such as Shanghai), it is accepted practice that an employer may refuse to renew the contract after a second fixed-term contract has expired.

(2) Early termination

In China, there is no concept of “at will” employment as exists in some other countries. That is to say, in cases of early termination, employers may only terminate employees in accordance with certain circumstances stipulated in relevant laws and regulations. Otherwise, the termination shall be deemed unlawful and may trigger a costly labor dispute and additional penalties.

RELATED: Social Insurance Compliance in China

Lawful termination

Termination through mutual agreement

This type of termination occurs when the employer and employee mutually agree to terminate the employment relationship, but where the employer generally provides severance payment to the employee to obtain his/her consent. The two may negotiate the date of termination, severance payment and any other necessary details. Under these circumstances, the agreed-upon severance payment will normally fall somewhere between the minimum legal severance and the amount the employee is successfully able to claim. In case the amount of the severance payment was previously agreed upon in the original employment contract, the Chinese courts may also recognize this as legitimate.

Generally speaking, termination through mutual agreement is the best choice to avoid an onerous and costly labor dispute.

Unilateral termination

If the employer is unable to reach a mutual agreement with the employee, then he/she will be faced with a case of unilateral termination of the employment contract.

As stated, Chinese labor laws do not permit the employer to freely terminate employment contracts of its own accord. The employer must have grounds under at least one of the few specified circumstances under which the Labor Law permits the unilateral termination of an employment contract. If the employer intends to do so, it must notify the employee’s trade union in advance. The trade union may raise comments on the proposed termination, which the employer must consider and respond to, amending the termination plan as appropriate.

Depending on the grounds of termination, unilateral termination by the employer can be divided into two types—termination for cause and termination without cause. 

RELATED: A Complete Guide to Minimum Wage Levels Across China 2014

Termination for cause

“Termination for cause” refers to termination resulting from the fault or misconduct of the employee and takes immediate effect upon the employee’s receipt of a termination notice. This type of termination does not require the employer to provide severance payment to the employee and can be executed on any of the following legally recognized grounds:

• the employee fails to satisfy the specified recruitment requirements during his/her probationary period;
• the employee has substantially violated the labor discipline or internal rules of the employer (which are public knowledge of all employees);
• the employee has committed an action of serious dereliction of duty, and thereby caused substantial harm to the interests of the employer;
• the employee has additionally established an employment relationship with another employer which materially affects his/her responsibilities to the original employer, or he/she refuses to rectify the issue after it is brought to his/her attention by the employer;
• the employment contract has been invalidated due to the fault of the employee; or
• the employee is subject to criminal liability.

Termination without cause

When an employee has committed none of the abovementioned faults or types of misconduct, the employer is still permitted to unilaterally terminate the employee under the circumstances outlined below. However, the employer will be required to serve a 30-day prior written notice to the employee, or in lieu of this, pay the employee in the amount that he/she would have obtained as salary during the notice period. The outgoing employee is entitled to statutory severance payment.

• the employee suffers an illness or non-work-related injury and is unable to engage in the original work or any alternative task assigned by the employer to him/her upon the conclusion of statutory medical leave         
• the employee is deemed incompetent for his/her position and remains so after receiving training or being assigned to another position; or            
• there has occurred a major change to the objective circumstances under which the employment contract was concluded, which has caused the performance of the employment contract impossible and the parties have failed to reach an agreement on the amendment to employment contract

Even if the employer satisfies one of the above circumstances, the following are legally defined as “blocking” termination:

• the employee is suspected of having contracted an occupational disease and is waiting for diagnosis;  
• the employee has completely or partially lost his/her labor capability due to an occupational disease or work injury;  
• the employee remains within the legally defined medical treatment period for a non-work-related illness/injury;  
• the employee is pregnant, on maternity leave or in the nursing period; and 
• the employee has continuously worked for the employer for more than 15 years and is less than 5 years from retirement

RELATED: Foreigner Participation in China’s Social Insurance System       

Wrongful termination

Beyond the above statutory grounds, any other type of unilateral termination would be considered wrongful, and require the employer to resolve the matter through arbitration, litigation or settlement (which may involve high legal costs and settlement fees).

Wrongful termination also carries with it the following legal consequences:

• The employee can ask for reinstatement, which is very costly for the employer and mutually embarrassing; or
• Double severance payment: if the employee does not wish to continue working for the employer or if reinstatement is not possible

Furthermore, the employer may be liable for salary payments during the period in which the terminated employee cannot work, which may result in even higher settlement costs for the employer. 

For a consultation on the implications of China’s Labor Law on your business, or advice on managing employment contracts in China, please contact the HR and payroll professionals of Dezan Shira & Associates at dalian@dezshira.com.

Adapting Your China WFOE to Service China’s Consumers In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.

Payroll Processing Across Asia In this edition of Asia Briefing Magazine, we provide a country-by-country introduction to how payroll and social insurance systems work in China, Hong Kong, Vietnam, India and Singapore. We also compare three distinct models companies use to manage their payroll across various countries with external vendors, and explain the differences among three main models: country-by-country, managed, and integrated models while highlighting some benefits and drawbacks of each.

Social Insurance in China In this issue of China Briefing Magazine, we introduce China’s current social insurance system and provide an update on the status of foreigners’ participation in the system. We also include a comprehensive chart of updated average wages across China, which is used to calculate social insurance contribution floors and ceilings. We hope this will give you a better understanding of the system in China.

• Previous Article Second Cup? China’s Coffee Industry Revisited
• Next Article Investing in China’s Education Industry