Heightened pressure in China’s labor market means that employers often find themselves having to let go of employees to optimize their business operations. This applies to finance as well, with CFOs having to terminate finance staff because their functions are being transferred to a Shared Services Center, for example.
However, legally speaking, this is by no means an easy thing to do, especially under the comparatively stringent regulations on terminating employment contracts in place since 2008.
Generally speaking, termination through mutual agreement is the best choice in China to avoid an onerous and costly labor dispute
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. They must also consider taking preventative measures from the start of the employment arrangement.
Termination upon expiration
When seeking to terminate an employment contract, an employer should first check whether the contract term is 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 that 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 but 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.
In China, there is no concept of “at will” employment as exists in 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.
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 disputes.
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.
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 above-mentioned faults or types of misconduct, the employer is still permitted to unilaterally terminate the employee under the circumstances outlined below.
Note, however, that 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 terminated employee is also entitled to statutory severance payment.
The circumstances under which an employee can be terminated without cause are:
- 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
- there has occurred a major change to the objective circumstances under which the employment contract was concluded, which makes the performance of the employment contract impossible and the parties failed to reach an agreement on the amendment to the employment contract
But 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
- the employee has continuously worked for the employer for more than 15 years and is less than five years from retirement
Beyond the above statutory grounds, any other type of unilateral termination would be considered wrongful, and requires 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
- 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.
The formula to calculate a severance payment is as follows:
Severance payment = One month’s salary × Years of service
Here, ‘one month’s salary’ is calculated by taking the average monthly salary earned by the employee over the previous 12 months.
However, following the enactment of the new Labor Contract Law on 1 January 2008, severance payments are capped at three times the average monthly salary in the given location. Note: This only applies where the terminated employee’s salary exceeds three times the average local salary, and does not apply to employment prior to 1 January 2008.
For example, in Shanghai, the average local monthly salary in 2012 was RMB5,036 (x 3 = RMB 15,108). Thus, an employee whose employment was lawfully terminated in Shanghai could receive up to RMB 15,108 only as severance for each year of employment after 1 January 2008.
An employment period of between six months and one year is counted as one year. The employee is entitled to a severance payment of one month’s salary.
An employment period shorter than six months is counted as half a year. The employee is entitled to a severance payment of half a month’s salary.
For example, an employee who has worked for 13 months for the same company will be seen as having worked one year and one month when calculating his/her severance payment.
For the 12 months, he/she will receive a severance payment of one month’s salary. The remaining one month will be regarded as half a year and the employee will be entitled to half a month’s salary in severance payment.
So in total, the severance payment will be one and a half months’ salary.
Step 1. Determine whether the termination is an early termination or not. If the employment contract is a first fixed-term contract that has expired and the employer chooses not to extend it, the employer will need to make a statutory severance payment.
If the employer chooses to terminate the employer prior to the expiration of the first fixed-term contract, this is considered ‘early termination’ and certain conditions must be fulfilled.
Step 2. In case of early termination, try to come to a termination agreement with your employee, negotiating the termination date, severance payment and any other necessary details. This is often the safer option even if there are grounds for unilateral termination.
If an employer unilaterally terminates an employee before the employment contract has expired, the case may end up in court, and the judge may hold that there were insufficient grounds for unilateral termination.
If you come to an agreement with an employee, he or she is less likely to take the matter to court. If the case does end up in court, the judge will then look at the validity of the termination agreement, not the termination itself.
Step 3. If you and your employee cannot come to an agreement on termination, consider whether there are grounds to support the immediate termination for cause or the 30-day notice termination without cause.
Do however keep in mind the statutory obstacles to such a termination. Under these circumstances, you should also give the labor union advance notice.
If the labor union believes the termination to be unjustified, it will put forward its opinion. If the termination violates laws, administrative statutes or the employment contract, the labor union has the right to demand that the employer rectify the matter.
The employer will then need to study the labor union’s opinions and notify the union in writing as to the outcome of the matter.
If none of the above measures can be adopted, then the termination is likely to be considered an unlawful termination.
About the Author
Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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