To begin with, what does employee termination entail?
Employee termination refers to the unilateral termination of an employment contract, requiring acknowledgment from the other party. It means that the employment relationship can be effectively ended by either the employer or the employee alone, simply by giving notice of cancellation.
However, when it comes to employee termination in China, the process becomes more intricate for employers who aim to adhere to Chinese labor laws. It is crucial to comprehend the various types of termination, their implications, and how to comply with criteria such as severance pay obligations and notice periods.
The Labor Contract Law of the People's Republic of China
On January 1, 2008, the Labor Contract Law of the People's Republic of China was enacted, marking the first nationwide legislation to regulate labor relations and provide a legal framework for the establishment, execution, and termination of labor contracts.
This law applies to all entities, organizations, and individuals that employ workers in China, including Chinese-foreign joint ventures, wholly foreign-owned enterprises, and foreign individuals working in the country.
Generally, the law aims to protect the lawful rights and interests of employees while outlining the responsibilities of employers.
The law has significantly improved employee rights and interests in China and played a crucial role in promoting social stability since its implementation.
What are the Different Types of Employee Termination in China?
In general, there are two main types of termination: bilateral and unilateral. Bilateral termination occurs when both the employer and the employee mutually agree to end the employment relationship (Article 36). In such cases, a document confirming the mutual agreement is usually sufficient, and the employer is typically responsible for providing severance pay. This is considered the ideal scenario.
On the other hand, unilateral termination can be initiated by either the employer or the employee, as long as they follow the procedural requirements mandated by law and provide reasonable notice to the other party. Generally, reasonable notice is set at 30 days, but it may extend to 60 days in specific situations. If an employer fails to give reasonable notice, they will be obligated to compensate the employee with their salary for the notice period, along with an additional amount equivalent to 30% of the salary.
Unilateral Termination Initiated by the employee (Articles 37-38)
According to Article 38 of the Labor Contract Law of the People's Republic of China, a Chinese employee has the right to terminate their employment contract under the following circumstances:
- The employer fails to provide the agreed upon employment protection or working conditions as stated in the employment contract.
- The employer does not pay the full compensation in a timely manner.
- The employer does not contribute to social security for their employees.
- The employer establishes rules and procedures that go against laws and regulations, negatively affecting the rights and interests of employees.
- The employer coerces the employee into signing the employment contract against their will through fraudulent means, coercion, or exploiting the employee's vulnerable position.
- Other circumstances specified by laws and regulations.
If an employee wants to end their employment contract, they must provide written notice to the employer at least 30 days prior. However, during the probationary period, a notice of only 3 days is sufficient (Article 37).
In cases where the employer uses force, threats, or unlawfully restricts the employee's personal freedom, or if the employer violates safety regulations by instructing or compelling the employee to engage in hazardous activities that put their lives in danger, the employee has the right to terminate the employment contract without prior notice to the employer.
Unilateral Termination Initiated by the Employer
To understand the employer's rights and obligations during termination in China, it's crucial to distinguish between two categories of employees: those with an "open-ended contract" and those with a "fixed-term contract."
1. Open-ended contract: This type of employment contract has no set end date and continues until either the employer or employee terminates it.
2. Fixed-term contract: In contrast, fixed-term employment contracts have a predetermined end date and unless renewed by both the employer and the employee, it will automatically terminate on that date.
Termination clauses should be clearly outlined in a written employment contract and agreed upon by both parties in advance. An open-ended employment relationship can be terminated through mutual agreement or in specific circumstances.
The following are the most common reasons for unilateral termination by an employer:
- Unilateral termination due to fault or misconduct on the part of the employee.
- Unilateral termination without fault, which may arise from factors such as restructuring or changes in business needs.
- Unilateral termination due to economic layoffs, which occurs when the employer needs to reduce the workforce for economic reasons.
Unilateral Termination due to Fault or Misconduct (Article 39)
Employers have the right to unilaterally terminate an employee's contract due to fault or misconduct in the following circumstances:
- Inability to fulfill employment requirements during the probationary period, leading to disqualification.
- Serious violations of company policies by the employee.
- Gross negligence in carrying out duties, misappropriation of company resources, or personal gain at the expense of the employer, resulting in significant harm to the employer.
- Simultaneous employment with another employer without the consent of the current employer, seriously affecting the employee's ability to fulfill their obligations.
- The employment contract was either signed fraudulently or under duress.
- Violation of laws or regulations, constituting a criminal offense.
If the employer has sufficient evidence that the employee's actions fall under any of the aforementioned categories of fault or misconduct, they have the right to terminate the employment contract immediately and without compensation.
Unilateral Termination Without Fault (Article 40)
The employer also has the option to end the employment contract without fault by providing the employee with a 30-day written notice of termination. In cases where giving notice is not possible, the employer must compensate the employee with an additional month's income.
Termination due to fault may occur in the following situations.
- If the employee becomes ill or sustains a non-work-related injury and after the specified medical period, they are unable to fulfill their original job assignment or other tasks assigned by the employer.
- The employee is deemed to be incompetent in their job responsibilities.
- Significant changes in the employment contract's circumstances make its performance impossible, and after negotiations, the employer and employee are unable to reach a mutual agreement.
Unilateral Termination due to Economic Layoff (Article 41)
When an employer plans to lay off more than 20 employees or over 10% of the total workforce, certain procedures must be followed. The employer is required to report the case to the labor union or all employees at least 30 days in advance. The labor union or employees have the right to provide their opinions, and the employer must report the retrenchment plan to the labor administrative authority. This requirement applies in the following scenarios:
- The employer undergoes restructuring according to the Enterprise Bankruptcy Law.
- The employer faces difficulties in production or operation.
- The employer changes the production mode, technology, or operation mode, resulting in a need for workforce reduction.
- Economic circumstances change, making it impractical to continue the employment contract.
In cases of economic layoffs, employers should prioritize the following individuals:
- Employees with fixed-term contracts who have worked for the employer for a relatively long period.
- Employees with open-ended contracts working for the employer.
- Employees who are the sole earners in their families or have dependents such as elderly or minors under their care.
If the employer proceeds to recruit new employees within six months of the layoff, they must notify previously laid-off employees first, giving them priority over new recruits.
Additionally, certain individuals are protected from termination under specific circumstances, which may include disabled employees, employees on maternity leave, or those who are on medical leave due to occupational diseases, among others. The specific protections may vary depending on the laws and regulations in place.
Who is Protected From Dismissal?
As per Article 42 of the Labor Contract Law of the People's Republic of China, an employer is not allowed to terminate an employment contract under certain circumstances or for specific groups of employees. These protected individuals include:
- Employees under medical supervision or receiving treatment for occupational diseases.
- Employees who can provide evidence of a total or partial loss of working capacity resulting from an occupational disease or work-related accident during their employment with the employer.
- Employees who are suffering from an illness or non-work-related injury and have not exceeded the agreed-upon sick leave duration.
- Women who are pregnant, giving birth, or breastfeeding.
- Employees who have worked continuously for the employer for at least 15 years and are under 5 years away from the statutory retirement age.
Furthermore, there may be additional laws, regulations, or administrative provisions that prevent an employer from terminating an employment contract.
Termination Procedures and Obligations
A. Notificationrequirements
1.Timelines for notice periods
The timelines for notice periods play a critical role in the termination procedures of employees in China. According to Chinese labor laws, employers are generally obligated to provide advance notice to employees before terminating their contracts. The duration of the notice period varies depending on factors such as the circumstances surrounding the termination and the length of the employment. For fixed-term contracts, the notice period is typically 30 to 90 days, while for open-ended contracts, it can range from a minimum of 30 days for probationary employees to as long as six months for long-term employees.
However, in cases of severe misconduct or violations of company policies, immediate termination without notice may be possible. Adhering to these specified timelines is essential for employers to ensure compliance with the law and avoid potential legal consequences. Seeking advice from legal professionals and staying updated on labor regulations are important steps for employers to understand and properly implement the appropriate notice periods in employee terminations in China.
2. Written communication and documentation
Written communication and documentation play a crucial role in the termination process of employees in China. Employers are required to provide written communication to employees regarding termination, including reasons for termination, notice period, and other relevant information. This written notice serves as a legal record and helps ensure clear communication between the employer and employee. It's crucial to have comprehensive documentation throughout the termination process, including any instances of poor performance, misconduct, or policy violations that led to the termination decision.
Effective documentation can protect employers from potential legal disputes and provide evidence of fair and just terminations. Employers must ensure that all written communication and documentation comply with Chinese labor laws, including using clear language and adhering to data protection regulations. By prioritizing written communication and maintaining accurate documentation, employers can handle the employee termination process in China more effectively and reduce the risks associated with legal challenges.
B. Severance pay and other benefits
1.Calculation of severance pay
Determining the appropriate severance pay is a crucial aspect in terminating employees in China. Severance pay refers to financial compensation provided to employees whose contracts are terminated, whether due to the expiration of fixed-term contracts or other valid reasons. In China, the calculation of severance pay takes into account various factors such as the employee's length of service, average monthly salary, and local regulations. Generally, the calculation involves multiplying the number of years of service by a specified ratio based on the monthly average salary.
However, it is important to note that there may be regional variations and specific rules in different cities or provinces. Employers should refer to relevant labor laws and local regulations to ensure accurate severance pay calculation. Employers can fulfill their legal obligations and provide equitable compensation to employees whose contracts are terminated in China by following appropriate calculation methods.
2. Obligations regarding unpaid wages, bonuses, and benefits
Employers in China have specific duties when it comes to unpaid wages, bonuses, and benefits after employee termination. It is vital to settle outstanding payments in accordance with labor laws as soon as possible. Unpaid wages, including salary and overtime, must be fully compensated to the employee. Similarly, employers must fulfill their obligations regarding bonuses or other incentives outlined in the employment contract, ensuring prompt payment.
Furthermore, employers are responsible for addressing any unpaid benefits, such as unused vacation or sick leave, and providing appropriate compensation. Non-compliance with these obligations may result in legal consequences, including fines and potential legal disputes. Employers should carefully review employment contracts, consult labor laws, and work closely with their HR departments to ensure compliance with all financial obligations upon employee termination in China. By fulfilling these responsibilities, employers demonstrate fairness and adherence to labor regulations, fostering positive employee relations.
In What Cases Should the Employer Compensate the Employee?
The Dismissal Protection Act provides employers with the option to offer severance pay in the dismissal letter, provided the employee chooses not to contest the termination. This approach can be useful in certain cases to avoid labor court proceedings. However, it is generally challenging for employers to unilaterally terminate an employee unless they can demonstrate the specific circumstances outlined for unilateral termination. As a result, the most common approach for employers is to engage in mutual negotiations with the employee. If both parties agree on a compensation amount, they will sign an employment termination agreement, thereby ending the employment by mutual consent.
By following this process, the employer is not required to provide a reason for the termination, regardless of whether it was due to the employee's fault or not. Additional information regarding this can be found in Article 46 of the Labor Contract Law of the People's Republic of China.
Overall, there are certain situations in which compensation is not necessary, as outlined in the table provided. Compensation is not required if the employee initiates bilateral termination and reaches an agreement with the employer. Furthermore, no severance payments are required if the employee resigns, retires, or passes away. Finally, if the employee is unilaterally terminated due to fault or misconduct, they are not eligible for compensation.
What is Wrongful Termination?
If unilateral termination goes against any of the previously mentioned examples, it could be considered wrongful termination. In such cases, the employer may attempt to resolve the issue through arbitration or legal proceedings, which can be expensive due to legal fees. Alternatively, the terminated employee may seek reinstatement. If reinstatement is not feasible, the employer is obligated to pay twice the severance amount that would have been owed if the termination had been lawful. Furthermore, the employer may be responsible for salary payments during the period in which the wrongly terminated employee was unable to work.
How can we be of assistance?
Employee lay-offs can be complex, but with our extensive experience in China's HR industry, we can assist in navigating the process smoothly and avoiding potential challenges.
First, we can provide guidance on local laws and regulations regarding lay-offs, leading to the creation of a comprehensive plan that adheres to legal requirements. This involves determining the extent of the lay-off and establishing fair methods for calculating severance packages.
Secondly, we can help develop a clear and effective communication strategy to ensure that affected employees receive transparent and concise information about the lay-off and its impact on them.
Lastly, we can help mitigate the emotional impact of the lay-off by offering support and resources to both employees and managers. This may involve coaching managers conveying news with empathy and offering support to affected employees during this challenging transition.
By following these steps, we can help mitigate the consequences of employee lay-offs in China, minimizing risks and ensuring a smoother process, even in sensitive situations like company closures in China.
ChaadHR, being a native Employer of Record (EOR) in China, provides complete support in setting up and managing your international workforce in China. With a professional team that has extensive experience in the local market, we are highly familiar with Chinese labor laws, tax and social security systems, and employment regulations. This enables us to ensure compliance and help you avoid pitfalls throughout the entire employment life cycle of your staff in China.