China rules on terminating an employee

Terminating an employee’s contract in China is far from a straightforward process. China’s employment laws impose stringent regulations that require employers to navigate a complex legal framework. The repercussions of mishandling a China employee termination can be severe, ranging from costly legal battles to reputational damage.

This post outlines the key points employers need to understand regarding terminating a China employee’s contract.

The PRC Labor Contract Law allows employers to terminate labor contracts unilaterally (without the employee’s consent) under specific circumstances. The below is a breakdown of the grounds for termination, categorized by whether notice or compensation is required.

No notice or compensation required:

• Employee fails to meet employment conditions during probation.
• Employee commits a serious breach of company rules or regulations (e.g., repeated unexcused lateness).
• Employee commits a serious dereliction of duty or engages in corrupt practices causing substantial damage to the employer.
• Employee maintains another job that significantly hinders their ability to perform duties for the current employer and refuses to terminate the conflicting employment upon request.
• Employee uses deception or coercion to enter the employment contract or amend it against the employer’s true intent.
• Employee is convicted of a crime.

Termination with notice or compensation required (30 days written notice or one month’s salary):

• Employee becomes ill or injured (non-work-related) and cannot resume their original position after treatment or cannot take on another suitable position offered by the employer.
• Employee becomes demonstrably incapable of performing their job duties even with training or adjustments to the position.
• A major change in objective circumstances (beyond the employer’s control) makes fulfilling the original contract impossible, and consultations between employer and employee fail to reach an agreement on amending the contract.

Employee rights in wrongful termination

If an employee is terminated without meeting one of the statutory grounds, they have the right to demand reinstatement to their previous position. If the employee doesn’t wish to return to their job or continued performance is impossible, the employer must pay damages equal to double the severance pay the employee would have received in a lawful termination scenario.

The burden of proof lies with the employer in China. This means you as the employer should meticulously document any performance issues or misconduct as soon as they occur. This documentation will be crucial if the employee contests your termination decision.

Severance pay is mandatory in most termination scenarios, typically calculated as one month’s salary for each year of service. However, the specific amount can vary depending on the circumstances and the employment contract.

Protecting your business against a wrongful termination lawsuit

To minimize future legal risks, it’s highly recommended you as the employer obtain a full release agreement from the terminated employee. This agreement should be in Chinese and explicitly state that the employee has waived all claims against the company and relinquished their right to sue.

Even in situations where the law does not require severance pay or notice, it will usually make economic sense to pay a severance package and pursue a mutual termination agreement with your terminated employee. This approach typically offers several advantages:

• Reduced risk of legal challenges: A severance package demonstrates a good faith effort by the employer and discourages the employee from contesting the termination.
• Stronger legal position: A signed mutual termination agreement, drafted in Chinese, will strengthen your legal position by documenting the employee’s acceptance of the separation and waiver of potential claims against your company. My law firm’s China employment lawyers have facilitated tens of thousands of such agreements, resulting in zero lawsuits or claims for additional compensation from terminated employees — though negotiating these agreements often took a long time and required larger payments than our client hoped. Please also note that past performance is not a guarantee of future results — but it is a good indicator.
• Maintaining positive reputation: A negotiated settlement with severance can foster a more amicable separation and potentially minimize reputational damage, which is important in China’s business landscape. You do not want your local government official asking you what is happening with one of your terminated employees.

Key takeaway for employers

While China employees can terminate the labor contract relatively easily (with notice), employers face a more complex and regulated process. Understanding the statutory grounds for termination, the importance of documented justification, and severance pay obligations is crucial for navigating employee termination in China.

Additionally, for a more secure legal position and a smoother separation process, consider consulting with a China employment lawyer to explore severance options and a mutual termination agreement, even when the law doesn’t strictly require them.

Arlo Kipfer is an employment lawyer at Harris Sliwoski in Bogotá, where he specialises in Latin America and China business issues.