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Employee Termination in China, Part 1: Termination Procedures

By Richard Cant

As the Chinese economy shifts from production-based to consumption-based, increasing costs and  Employee_1456495801_87684  pressure mean that employers may need to terminate employees to optimize their business operations. Never an easy thing to do, termination has become a more complicated issue due in part to stringent regulations on employee termination that have been in place since 2008.

In order to better understand this process and avoid costly labor disputes, we will examine this issue as part of a two-article series. This month, we will look at the different termination procedures in China.

Types of Termination

There are two types of termination procedures in China:

  1. Termination upon expiration of contract—Companies operating in China are usually able to terminate employees upon expiration of a first fixed-term contract without providing a reason; however, they are required to provide severance payments. In case a second fixed-term contract is offered, and the employee requests an open-ended employment contract upon its expiration, according to Chinese labor laws, the employer must accept this request. 
  2. Early termination—In China, there is no concept of “at-will” employment as it exists in some other countries. Therefore, in cases of early termination, employers may only terminate employees in accordance with certain circumstances stipulated in relevant laws and regulations. Otherwise, termination is deemed unlawful and may trigger costly labor disputes and additional penalties. There are three types of early termination, all of which are described in detail below:
    1. Termination through mutual agreement: Generally speaking, termination through mutual agreement is the best choice to avoid burdensome and costly labor disputes. Termination through mutual agreement occurs when both employer and employee agree to terminate the employment relationship, but the employer generally provides severance payment to the employee to obtain his or her consent. The two may negotiate the date of termination, severance payment, and any other necessary details. 
    2. Unilateral termination: As mentioned earlier, Chinese labor laws do not allow employers to freely terminate employment contracts of their own accord. The employer must have termination grounds under at least one of the specified circumstances allowed by the Labor Law. If the employer intends to do so, it must first notify in advance the employee’s trade union, which may offer comments on the proposed termination. The employer must consider the recommendations made and amend the termination plan as appropriate.

Depending on the grounds for termination, unilateral termination can be divided into two types—Employee_1456495804_88559 termination for cause and termination without cause. 

  1. Termination for cause (Immediate Termination)—Termination for cause can occur if the employee:
    • fails to satisfy the specified recruitment requirements during the probation period; 
    • has substantially violated the labor discipline or internal rules of the employer; 
    • has caused substantial harm to the interests of the employer; 
    • has become subject to criminal liability;  or
    • has established an employment relationship with another employer that affects their responsibilities to the original employer. 

This type of termination takes effect immediately upon receipt of a termination notice and does not require the employer to provide a severance payment. 

  1. Termination without cause (Ordinary Termination)—Even if no type of misconduct that calls for immediate termination has been committed, the employer can still unilaterally terminate the contract. This can occur if:
    • the employee suffers a non-work-related illness or injury that leaves them unable to perform their original work or any alternative task assigned to them upon conclusion of medical leave; 
    • the employee is found incompetent to do their job, even after receiving training or transferring to another position; or 
    • there has been a change to the circumstances under which the contract was negotiated, and the parties have failed to reach an agreement.

It should be noted that in case of an ordinary termination, the employer is required to provide a 30-day written notice to the employee or compensate the employee the amount that they would have earned as salary during the notice period. The outgoing employee is entitled to statutory severance payment.

However, termination procedures can be legally blocked even when one of the above circumstances is satisfied. This can occur if the employee is suspected of having contracted an occupational disease or injury and is awaiting diagnosis; has completely or partially lost their labor capabilities due to an work-related disease or injury; is pregnant, on maternity leave or in a nursing period within a year of the birth; or has worked continuously for the company for more than 15 years and is less than five years away from retirement. 

  1. Wrongful termination: Beyond any of the legal termination grounds mentioned above, any other type of unilateral termination is considered wrongful.

Thus, it would require the employer to resolve the matter through arbitration, litigation, or settlement, which may involve high legal costs and settlement fees. If forced to enter dispute resolution, then it is useful to have issued formal warning letters to employees. Formal warning letters should be issued for any misconduct and should mention the misconduct, as well as the section in the employee handbook relating to the infringement. If possible, the warning letter should have the signature of the employee, the date issued, and be stamped with the company chop (seal or stamp of a corporation).

Additionally, the employee may request reinstatement, which is 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 litigation period, which may result in even higher settlement costs. 

Given the complications that can arise when terminating an employee, as well as all the different types of termination regulations, companies need to be knowledgeable about termination regulations. In the next issue, we will go over mass layoffs and severance payment guidelines.

Case Study: Unilateral Termination for Cause

Employee joined Business in Year 1 as a sales manager. In Year 2, employee entered into an agreementCaseStudy_1456941064_50777  with his sister to purchase products from his sister’s company without prior notice to his employer. One year later, employer found the problem and rescinded the labor contract with employee because he violated the terms of the Employment Handbook.

In the resulting arbitration case, employee claimed that the rescission was an illegal termination. He requested the employer to indemnify compensation on the basis of his service period and an additional payment of one month’s wage since the employer did not give written notice to him 30 days in advance.

Employer believed that the rescission was legal under the Labor Contract Law of P.R.C. and a specific rule in its Employment Handbook prohibiting conflicts of interest without prior notification, and thus did not need to pay any compensation to him.

The Arbitrator held that the rescission of employee’s labor contract was lawful. A specific rule in the Employment Handbook prohibited his conduct, and according to Labor Contract Law of P.R.C. Article 39(2), the employer can rescind a labor contract due to the serious breach committed by the employee.

In this situation, the burden of proof was on the employer. employers should keep track of all evidence that may be useful and relevant for a unilateral termination. Here, the employer was able to provide adequate and relevant evidence to prove the employee’s misconduct and showed that the Employment Handbook was legal and valid. The employer followed proper procedures in implementing the Employment Handbook, and the employee had actually signed the Handbook, showing receipt and prior knowledge of the rules. The employer also followed the proper termination procedure in notifying and providing documentation to the labor union before it took action. Lastly, because this was a serious breach of protocol, unilateral termination is allowed.

Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at [email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.