The Chinese Labour Law provides strong protection for employees. If an employer wants to terminate the employment contract, lay off employees or liquidate the company, employees have a right to be compensated and informed in advance in certain cases.

This guide will explain how you can terminate your employees in China.

Termination of labour contract

Mutual agreement

An existing contract may be terminated at any time through mutual agreement by the employee or employer. Employers and employees can mutually agree to terminate the contracts at any time, and if the employer initiates the termination, the employee is entitled to severance pay.

Employee decides to terminate

If the employee decides to terminate the contract, the required time to give notice depends on specific circumstances. If the employee is under probation, only three (3) days’ notice is needed, but in other cases, there must be a 30-day notice given.

Employer decides to terminate

If the employee is on probation and fails to meet the agreed job requirements, then the employer may terminate the employee without severance pay.

The employer can also terminate an employment contract if the employee commits misconduct listed in Article 39 of the Labour Contract Law. This includes but is not limited to:

• Seriously violates the rules and procedures set up by the employer
• Causes any severe damage to the employer because he seriously neglects his duties or seeks private benefits
• Establishes an employment relationship with other employing units and seriously affects his completion of the tasks of the employing unit, or the employee refuses to make ratification after the employer points out the problem
• Be held criminal liabilities, according to law

Causes for automatic termination

The employment contract may be terminated unilaterally by the employer in any of the following circumstances (in certain cases, the severance pay will be due):

• The employment contract expires
• The employee reaches retirement age
• The employee passes away
• The employer is declared bankrupt under the law
• The employer’s business license is revoked or liquidates the company

Termination under special circumstances

According to Article 40 of the Labour Contract Law, an employer may terminate the employment contract with a 30-day notice or payment instead of notice, and subject to severance pay  in any of the following circumstances:

• The employee reaches the end of a medical treatment period for a non-work-related injury and cannot take up the original work or maintain a new position
• The employee is incompetent for performing designated tasks and there is still no improvement after training or position adjustment
• The objective conditions used to conclude the contract have significantly changed so that it is impossible to perform the original labour contract, and no agreement on changing the content of the labour contract has been reached after consultation between the employer and employee

Situations where employment contracts cannot be terminated

Article 42 of the Labour Contract Law lists several circumstances where a company cannot terminate the employment contract based on the above special circumstances or the employment contract shall be extended upon its expiration. These circumstances may include but are not limited to:

• Being involved in operations that expose the worker to operational disease hazards, not receiving pre-departure occupational health examinations, being suspected of an occupational disease, being diagnosed or being under medical observation
• Suffering from occupational diseases or work-related injuries when working for an employer and confirmed to have lost or partially lost the ability to work
• The employee is on a medical treatment period or has lost the capacity to work due to a non-work-related injury
• The employee is pregnant, puerperal, or breast-feeding
• The employee has been working for the employer continuously for 15 years and is less than five years away from the retirement age

Illegal dismissal

If an employer unlawfully dismisses an employee (e.g. the dismissal is not based on legal grounds), the employee can submit a claim in labour arbitration for economic compensation (normally at two times the normal severance pay), or he/she can file a claim for reinstatement instead. The employee will receive 100% remuneration for the period from unlawful dismissal to reinstatement if they ask to be reinstated and doing so is possible.

Mass layoffs of employees

If a company experiences serious business losses or management challenges, it could cause a mass layoff of employees. If a mass layoff (10% or 20 employees, whichever is fewer) occurs, the company must give 30 days’ notice to the employees and labour union.

Three conditions will determine which employees will be retained by priority:

• Employees with fixed-term labour contracts for a relatively long time with the company
• Employees who have open-ended labour contracts with the company
• Employees who are the sole breadwinners in their families and employees who care for elders and minors.

If an employee meets none of these conditions or holds a lower position on the hierarchy, he or she is most in danger of losing their job in the event of a mass layoff.

Termination process

Employers are exposed to a number of legal and reputational risks resulting from wrongful termination, or not following due process. The process for terminating an employee consists of the following steps.

1. Gathering information and negotiating

The legal grounds for termination are exhaustive; when an employer dismisses an employee for cause and contests this decision, it will be the employer’s burden to produce sufficient evidence to prove its actions were justified. Therefore, the first step is to gather the information that can be used to support the case of legally valid contract termination.

2. Filing with the labour bureau (if necessary)

If the company is in economic difficulties, and it needs to cut its workforce by at least twenty workers or at least 10% of its total workforce, it may need to be subject to special conditions, including notifications and approval from the local labour department.

3. Negotiating to reach a mutual termination agreement or terminating with a unilateral termination notice

After collecting the evidence, the employer should decide on the strategy for the termination, to discuss the termination of the contract or inform the employee of the termination by written notice.

Normally the termination negotiation should be held individually instead of collectively to allow more freedom of expression and reduce conformity. Plus, it is advisable to handle easy cases first to minimise possible labour tribunal issues.

However, the termination process is only completed if both parties have signed a termination agreement or the termination notice is delivered.

4. After termination: handover office equipment and work files, impose surviving obligations

The employees should hand over any work documents, materials, keys, badges, laptops, phones, or other company property. If they do not have all that equipment with them, make a clear plan to get everything returned as soon as possible, perhaps requiring all company property to be returned before you issue a final paycheck. On the other hand, IT should revoke all computer and data permissions for the terminated employee.

If the post-employment non-compete was agreed upon in the employment contract or non-compete agreement, non-compete obligations might be imposed on the employee at the termination or expiration of the contract. This circumstance applies only to senior management, technical staff or other personnel with confidentiality obligations who would adversely affect the original employer if they worked for a competitor producing similar products or providing similar services to the competing company.

The non-compete obligation has a maximum of two years, and the employee is liable if the obligation is breached. But the company is also obliged to pay them compensation during this period.

Termination compensation

The severance compensation is calculated based on the years the employees worked for the company, normally at a one-month salary for each year of service (rounded up to the next half year) that the employee has worked for the company. A period of one day but less than six months should be compensated with a half-month; a period of six months or more will be compensated with a full month.

The normal rate of severance pay is as follows:

How Acclime can help with your HR needs

Companies have numerous responsibilities when it comes to their HR responsibilities in China. One of the most important of these is ensuring compliance with Chinese labour laws. In particular, companies must understand when mass layoffs are appropriate, how to terminate employees and how much compensation is due to the dismissed employee.

Acclime can help companies navigate these HR challenges through our HR administration services, including support for the process of employee deregistration. Beyond this, if you have further questions about HR, employer of record (EoR), or payroll, Acclime is here to help. Our team of experts can provide you with the guidance you need to ensure that your company is meeting all of its HR-related obligations in China.