In Chinese civil law, compensation refers to a monetary payment that is provided to make up for a financial loss, and is mainly found in the employment law regime. Compensation is different from damages, as damages is a payment for a breach or other wrong. In Chinese employment law, financial compensation is paid where the employer terminates a full-time employment contract or declines to renew it.

Where the employee voluntarily terminates the contract or declines to renew an expiring contract, no compensation is owed. Compensation is also owed where the employer upon renewing an employment contract offers worse terms than under the prior employment contract that the employee does not accept.

In this case, compensation liability can be avoided by ensuring the contract is the same or better than the existing one.  The amount of financial compensation owed increases by the equivalent of one month’s salary for each additional year of service under the Employment Contracts Act.