Terminating an employee in China is extremely complicated and factually specific, which can create a headache for businesses. If you want to know how to handle common situations, you’ll have to pay an attorney thousands of dollars for some basic answers.

The legal content writing team at CBL is here to help with this problem, and have assembled a list of 23 common client questions and provided answers in American English.  If you are just learning about the basics of Chinese labor law, read this article on terminations and this FAQ to get a general overview of China’s law.

For an in-depth exploration of this topic, keep reading below.

Contents

1. How can staff be laid off in China’s recessionary climate?
2. Is prior notice required when firing an employee?
3. How do Chinese courts view human resources termination documentation?
4. How is employment termination handled in business bankruptcy?
5. Is lack of trustworthiness grounds for termination in China?
6. Are quarantined workers protected from job loss?
7. What do cases on forced ranking terminations say?
8. How should I deal with resume fraud in China?
9. Can employees be fired for poor performance?
10. Can a fired employee demand reinstatement?
11. How can I fire an employee who breaks the code of conduct?
12. How can an employer defend against reinstatement demands?
13. How much severance payment is owed after job separation?
14. Can redundancies be made if there is a change in the market environment?
15. What can I do about employees who fake attendance records?
16. Can I take disciplinary action against employees who break rules?
17. How can I document severe company policy violations by workers?
18. What policy can be used to prevent sales representative reimbursement fraud?
19. How should employers respond to sexual harassment claims?
20. How can theft by employees at China sites be stopped?
21. Termination following severe disciplinary violation.
22. How can kickbacks and corruption by managers be prevented in China?
23. Can employees who quit change their mind?

 

1. How can staff be laid off in China’s recessionary climate?

Short Answer:

Staff can be laid off in China’s recessionary climate by implementing carefully structured, legally compliant cìtuì programs that combine multiple termination methods, such as negotiated termination, termination for major business changes, and redundancy due to economic hardship. Employers must prepare a detailed layoff plan that includes precise employee data, well-calculated severance packages, and clear documentation of the objective business reasons for the layoffs. This process entails forming a dedicated team with both HR and outside legal counsel to ensure negotiations are fair, avoid coercion, and adhere strictly to Employment Contracts Act provisions, including necessary notifications to labor unions and regulatory bodies, thereby mitigating potential legal risks.

Discussion:

Since 2021, layoffs among major internet companies in China have received widespread attention on social media. It is evident that following the COVID-19 outbreak at the end of 2019, an increasing number of companies have faced operational difficulties due to disrupted supply chains, rising costs, and shrinking demand.

In this challenging environment, reducing costs and maintaining business operations have become top priorities, prompting many businesses to consider layoffs. However, executing layoffs without proper procedures carries significant legal risks. This article outlines a process to help businesses manage employment relationships in compliance with the China Labor Law framework.

In everyday Chinese, the term cìtuì is analogous to being fired or being laid off, although newspapers frequently use it to refer to major layoffs. In Chinese law, however, the term does not exist. Instead, the Employment Contracts Act establishes six lawful methods for terminating an employee: negotiated discharge, worker resignation, unilateral termination for cause by the employee, termination due to employee fault, termination for poor performance, and termination resulting from a major change in business conditions.

Contemporary workforce reduction plans in China, known as cìtuì programs, are employer-led initiatives that combine various employment termination techniques to achieve the desired staff reductions. Typically, the three primary methods used in a cìtuì project are negotiated discharge, termination resulting from a major change in business conditions, and redundancy prompted by economic difficulty. A successful cìtuì program requires combining all available options based on each employee’s unique circumstances rather than relying on a single legal mechanism applied uniformly. Therefore, the human resources department must develop a well-structured plan that thoroughly documents the legal basis used for each employee. While the law imposes different requirements for notice, procedures, and conditions on each approach, all three options remain viable solutions.

Mutual termination agreements are considered the best option by businesses when discharging employees and mitigating risk, even though a credible release form may not be as strong as in common law jurisdictions. Under Chinese labor law, employment contracts are increasingly recognized as a joint exercise of the employer’s and employee’s autonomy to enter into agreements. China’s courts often interpret labor law through existing statutes to benefit employees. According to China Supreme Court Civil Dispute Adjudication Law Interpretation 26 c.35, an agreement to end an employment contract reached between an employee and an employer is valid as long as no mandatory legal provision is violated and the consent of each party was not secured through coercion or fraud. This approach has made courts more willing to enforce agreements between the parties, and freedom of contract now greatly mitigates the likelihood of subsequent disputes.

In addition, a mutual termination agreement is highly flexible and can include any worker, including the previously unfireable gao-lao-huang-you, referring to especially protected classes that are older, infirm, disabled, or female and pregnant. In practice, terminations involving these protected classes typically include a special compensation plan built into the negotiations to mitigate risks associated with unfair or inhumane treatment.

Although there are no procedural requirements for preparing a negotiated termination plan, taking the time to set up the deal structure and support team is critical to its success. Human Resources should gather the necessary data for calculating compensation amounts accurately, including salary information, length of service, hire date (with particular attention to those employed before 2008), and remaining paid leave balance. This information is essential for determining the amounts due under the law and structuring a fair compensation offer to help avoid disputes during negotiations.

A typical team will consist of the company’s HR department and outside legal counsel. The HR team is responsible for collecting employee data and designing a reasonable compensation package, while attorneys draft the legal documents, evaluate inherent legal risks in the termination plan, and participate in negotiations with the employee if necessary.

Legal precision and reasonableness contribute to reducing legal risk when negotiating termination agreements and establishing a list of affected employees. Employment Contract Act section 20, item (4) stipulates that a negotiated employment termination contract is valid only if it complies with all mandatory provisions of local, regional, and national laws and does not involve any fraud, duress, or undue influence; otherwise, the agreement is subject to cancellation. Accordingly, companies should ensure that their negotiated termination plans are reasonable and not excessively one-sided, and they should retain all necessary evidence from the negotiations to prevent employees from alleging fraud or duress as a basis for cancellation.

The terms of a negotiated termination agreement must be designed to conclusively settle any remaining rights in the employment relationship and therefore require a comprehensive and forward-looking approach. The agreement must fully address the settlement of all existing rights and obligations between the parties, as well as anticipate any ongoing matters related to their rights and obligations after termination. Insights from law firm practice indicate that a negotiated termination agreement should include, at a minimum, provisions for the termination date; dates on which employee salary, severance, Social Security, and housing fund payments are due; the specific amount, method, and timing of all monetary payments; arrangements for work transition; a waiver and release of claims; and non-compete (if applicable) and confidentiality requirements.

Establishing robust procedures for negotiated exits is essential for ensuring compliance and minimizing risks. In China’s best practice approach to employee release policies, managers do not have discretion to set severance terms; instead, these terms are determined by principles reflecting a fair and reasonable process. Temporarily higher severance amounts are consistently applied in cases such as promotions or pay raises. All steps in the termination process should be standardized so that maintaining proof and ensuring lawful compliance become routine.

Many companies in the post-coronavirus era cite economic changes resulting from the pandemic as a basis for layoffs, according to human resource managers. Although courts have upheld layoff claims in specific circumstances, most judges view these claims as ambiguous and uncertain.

Layoffs as an employment relationship termination event are governed by the China Employment Contracts Act §40, which means that employers must pay a cash lump sum as compensation. Generally, while the law does not clearly define the types of events that justify a layoff, the China Employment Act Interpretations of Certain Provisions §26 (Labor Circular 284 (1996)) recorded by the Ministry of Labor include force majeure, corporate relocation, and divestitures.

Because the statutes do not define or restrict the terminology, the level of deference courts give when applying changing circumstance law may vary by location. This variation can lead to unusually diverse outcomes that create significant uncertainty for employers operating in multiple jurisdictions.

The procedure for terminating a China employee based on major changes in objective circumstances is more complicated than negotiating an agreed termination and requires higher preparation standards. A human resource headcount reduction plan in China should anticipate two alternative outcomes, as negotiations are often successful. In cases where negotiations succeed, a compromise may include a reduction in wages, a change in work location, or an adjustment in positions, all executed as an amended contract that continues the employment relationship. If no agreement is reached, the employment contract must be severed and financial compensation provided. Therefore, the compensation calculation should incorporate both the negotiated changes and the statutory compensation, ensuring adjustments cover the costs of any alternative position, work location, or salary.

It is important to establish the project team, which typically includes both in-house and outside counsel. Compliance with Employment Contracts Act §43 requires notifying the labor union of the reasons for major changes in objective circumstances affecting a particular employee before finalizing the severance plan.

The basis for canceling an employment contract must strictly rest on the reasoning provided in the cancellation notice. Once a termination progress plan is developed, the employer should ensure that the facts justifying the layoff are clearly documented in an internal report detailing all provisions related to local legal exemptions from layoffs.

Under Employment Contracts Act §§21 and 42 and 2020 PRC Ministry of HR Circular No. 5, workers who may not be laid off, despite a major change in objective circumstances, include employees who have an occupational illness while at the enterprise, employees who have partially or fully lost the ability to work due to an on-the-job injury, employees who are currently on medical leave, employees in the probationary period, pregnant female employees, and employees diagnosed with COVID-19.

First, companies must consider that courts in different provinces may have significantly different standards for what constitutes a material change in operating conditions. For example, Shanghai court judges generally approve layoffs for business strategy changes, whereas Beijing judges typically hold that no material change exists. When preparing an employee layoff termination, ensure that the local judiciary accepts the stated reasons for the layoff.

Instead of citing reasons such as improving profitability or reorganizing the organizational structure, the focus should be on objective factors, such as changes in laws or regulations or shifts in market conditions caused by unforeseeable events. Corporate governance documentation should treat a material change as an extraordinary event that may affect various aspects of the business. Archival materials should include an official resolution from the empowered body, such as the board of directors or an extraordinary shareholders meeting, executed in full compliance with the procedures stated in the articles of incorporation and other governance documents.

It is crucial that negotiations over contract modifications be conducted properly. China’s Employment Contracts Act requires genuine negotiations over modifications following a material change in the company’s circumstances; otherwise, administrative judges may treat the change as an unlawful employment contract termination. Some companies adopt an inefficient approach by negotiating termination by mutual consent or reaching a mutual agreement on financial compensation in lieu of conducting the legally mandated negotiations, an approach that carries a high risk of being declared invalid if judicially reviewed and potentially resulting in higher compensation awards.

In contrast, compliance with proper procedures tends to favorably influence the outcome of any dispute. Chinese courts evaluate the reasonableness of proposals regarding job position, location, and salary. Therefore, any offer to an employee must be made in the utmost good faith, objectively considering the employee’s background and capabilities without using the negotiation process as a tool to reduce pay and benefits.

Six distinct processes under the China Employment Contracts Act result in the lawful termination of an employee, but some of these processes, such as release or termination for cause, are unsuitable for large-scale events. The primary process for large terminations is a mass layoff, defined under the Act as the termination of more than 20 employees or more than 10% of the workforce, which requires a report describing the plans and reasons to be submitted to the union or employee representative at least 30 days before taking effect.

This process overlaps with the major objective change process, which also mandates a report to the labor regulatory agency; however, mass layoffs are not considered an objective change under the Act and therefore require both a report to regulators and consultation with employee representatives. The statutory procedures in China aim to curb widespread terminations in favor of protecting employees by ensuring they receive notice and have an opportunity to secure new employment, with the 30-day notice period reflecting this commitment to preserving employee rights.

Below is a summary of action items a China business operator engaging in layoffs must prepare prior to making any public announcement concerning its intended action. The necessary actions include organizing the materials for reporting to affected personnel, the labor union, and associated members; providing these materials to the appropriate employees and labor union representatives in compliance with the procedural requirements; forming a team to meet and negotiate with labor unions and employee representatives; and preparing all necessary documentation to be filed with the local labor administrative agency.

Although the specific organization requirements for preparing materials are imposed by local ordinances and vary across China, compliance with China Employment Contract Act §41 requires demonstrating one of the following grounds with supporting documentation. The grounds include the intention to reorganize under the Enterprise Bankruptcy Code or facing substantial financial difficulty, product lines, major technical improvements, and operational adjustments that necessitate the cancellation of employment contracts, or any other reasonable explanation that justifies the layoff plan. For each category, the required documentation includes bankruptcy court orders, balance sheets, valuation reports, tax filings, and audit reports that demonstrate the business’s current financial situation.

The announcement must be issued at least 30 days in advance and include a statement of the grounds for the layoff. During that period, an explanation must be provided to either the union or all employees, and their feedback must be solicited. Unlike the requirement for changes to objective conditions, this process cannot be abbreviated by providing an additional 30 days of salary in lieu of notice. Although this explanation and feedback requirement is significantly weaker than in collective bargaining jurisdictions—with unions having no right to object—a legally valid record of the communication process must be maintained, including written communications, on-site sign-ins, and video or audio recordings that are admissible in court.

Management must also report the process to the labor department, as requirements among local governments may vary. At a minimum, companies should plan to provide documentation regarding the explanation given to the union or employees, the feedback received, and the complete written redundancy plan. For example, Shanghai requires that companies furnish evidence and documentation to confirm that the layoff process is lawful and appropriate given the economic conditions. This documentation must include the positions and specific employees to be laid off, the remaining workforce after the layoff, and the grounds for selecting the affected employees. It should also provide a detailed description of how the layoff will be implemented, including notice periods, redundancy allowances, social security, and any outstanding wage payments, along with an analysis of the statutory grounds for the layoff.

The company must strictly comply with legal requirements when selecting employees for layoff and limit such actions to individuals who meet statutory criteria. In a mass layoff, priority must be given first to employees on fixed-term contracts, then to employees on indefinite-term or at-will employment, and finally to those who are the only working individuals in their households and who are responsible for dependents such as children or elderly family members.

The plan explanation meeting and opportunity for comment are legally required procedures. These meetings can create risks of protest or collective actions if employees feel that their livelihood is under existential threat. When presenting and receiving comments at workforce or union gatherings, it is vital to have an emergency plan that covers all potential outcomes to help maintain control over the situation. The team should be trained to avoid stoking emotions, and adequate security should be present to maintain order. It is also recommended that local police be notified in advance so they can assist in maintaining public safety and minimizing potential losses.

Many local labor boards in China may consider the action points and documentation outlined above as prerequisites, noting that labor law disputes are a national priority. Accordingly, they may exercise their discretionary authority to reject a filing based on the company’s reputation, insufficient documentation of layoff grounds, or if the business appears to have excess profits.

It is important to ensure absolute legal compliance for your layoff and maintain thorough documentation for at least two years. Retaining an experienced attorney with a proven track record to evaluate legal risks and prepare necessary documentation is recommended. Organizations with strong local connections and guanxi, and that have established relationships with regulators, typically have a more detailed understanding of what the local labor department requires to approve a request.

For a company with more than 30 employees, a second requirement applies to a major employee discharge. The employer must pay a financial assistance package equal to one month’s wage based on the employee’s average earnings for the preceding 12 months, including pension contributions. For an employee with five years of service, discharge assistance must be calculated on this basis and provided for up to five months; however, if the employee’s tenure exceeds five years, the monthly wage will continue until the cumulative total equals 3,540,000 JPY.

Layoffs continue to be a leading issue in local human resources and employment relations. Japan, however, relies on a strict cultural system to maintain morale among intact teams, supported by a legal framework that offers ample protection for workers. In situations where a layoff appears to be the only option, Japan strongly favors alternatives such as no-recall policies and changes in job roles. When a layoff is implemented, judiciary-created norms must be strictly followed and redundancy packages exceeding the minimum must be paid for the plan to be acceptable.

2. Is prior notice required when firing an employee?

Short Answer:

Prior notice to the labor union is legally required when an employer terminates an employee if a labor union is established at the workplace, as mandated by the China Employment Act, the China Labor Union Act, and the China Employment Contracts Act, which ensure that the union can review and provide input to safeguard employee rights. However, if no internal labor union exists within the company, many courts maintain that no notice is required to an in-house union, though employers may need to notify an external or local union based on local regulations; failure to follow these procedures when applicable can lead to significant legal disputes and liability risks.

Discussion:

Notifying the labor union before discharging an employee from their employment contract is a basic requirement understood by most employers in China. However, many organizations struggle with how to notify labor unions, including what information to provide, who to notify, and how the business and the union should interact, particularly in cases where there is no formal union.

Despite the importance of these procedures and the legal risks involved, many employers fail to comply adequately. Analysis of a large dataset of Chinese court cases, current statutes, and judicial precedents highlights both the legal risks and effective compliance procedures related to labor union notifications for discharges, alerting readers to the substantial risks involved.

Labor disputes over terminations that lack proper notice to the labor union are increasing, according to legal analytics performed using a leading research tool[1]. A chart shows a marked rise in disputes linked to layoff notices in recent years, partly because of improved procedural justice in Chinese courts. An analysis of representative cases reveals that these disputes most frequently occur in the manufacturing, retail, business services, transportation, and real estate sectors, although no sector is completely immune.

In nearly all cases, judicial reviews found that disputes had undergone the entire process, including labor dispute arbitration and an appeal to the trial courts where a judgment was issued. More than 50% of these cases are appealed, and over 90% of those appeals are affirmed. Consequently, an employer in China can expect substantial awards and damages in unemployment disputes, and human resources managers should take these legal liabilities very seriously.

Employer terminations of employment contracts must notify the labor union pursuant to China Employment Act §30 [2], China Labor Union Act [3], and China Employment Contracts Act §43 [4]. These laws collectively aim to ensure strict compliance with employees’ procedural rights. Under the China Labor Union Act, unions have the authority to protect the rights and interests of their members, and the union must be notified of any intention to terminate an employment contract so it can review the applicable contractual, trade, or statutory rights. Without such a review, an employee’s livelihood may be jeopardized.

Chinese lawmakers have emphasized that a major policy goal is to eliminate arbitrary or capricious terminations of employment contracts. The union’s authority to oversee employer procedures includes reviewing all documentation to evaluate any issues. Notably, procedural violations and failure to provide notice are unlawful, a finding supported by a Supreme People’s Court official who stated that China’s judicial system increasingly acknowledges procedural justice.

A business with an on-site labor union can easily notify the union of planned employee terminations. However, many foreign-owned businesses and privately held entities in China have not established a local labor union, raising the legal question of whether they, too, are required to notify a union of employment terminations. Chinese judges have expressed divergent opinions on the matter, though two perspectives predominate.

The prevailing interpretation holds that the notice requirement under the Employment Contracts Act §43 applies only when a union has been established at the location; without an established union, no valid notice requirement exists. This interpretation is not only based on logical reasoning but is also supported by the Supreme People’s Court’s Labor Dispute Case Law (Major Work) Interpretation No.47 (OCR link), which states that the notice requirement attaches only if a union has been set up; otherwise, notice is not required.

From a practical perspective, disputes over collective employer terminations primarily revolve around whether the termination procedures are proper, especially regarding labor union notification when no such union exists for the employer. In Employment Case 03-cv-01702 (2020), the Beijing Third Intermediate Court set a precedent involving a technology company that terminated an employee and provided notice to the superior union in the jurisdiction rather than to a nonexistent company-specific union; despite this, the company was sued for unlawful termination on the grounds that the statutory process was not followed.

The employer lawfully terminated Hung because the factual evidence for the termination had been provided to the relevant labor union. The court held that the statutory process was generally followed even when the entity could not give notice to a non-existent labor union, making it clear that the absence of an organized union does not, by itself, constitute a procedural defect in the termination.

When a termination decision should involve the labor union as required by statute, the legislative purpose is to allow the union to investigate and negotiate to prevent arbitrary terminations. Local union members must be notified even if an in-house union has not been organized, ensuring that local regulatory officials have the opportunity to negotiate on behalf of workers. Local regulations in some jurisdictions support this position.

For example, the Jiangsu High Court ruled that a company unlawfully discharged an employee because it failed to notify a labor union of its decision to fire Mr. Qiao. On appeal, the company argued that notification was unnecessary because its offices and place of registration were located outside of Jiangsu and no labor union existed, but its appeal for a retrial was denied.

In this case, the Jiangsu court determined that the jurisdiction’s labor law specifically required that notice be given to the appropriate labor union when terminating an employee. Even when a labor union is not formally organized within the company, the company must still provide this notice, and failure to do so violates the law; as a result, the termination was deemed unlawful.

This case exemplifies the clear local legal requirements in Jiangsu, where the court interpreted the law as mandating that employers notify an appropriate labor union even if no internal union exists. In jurisdictions without explicit judicial interpretation, local courts are likely to enforce laws that require union notification regardless of the company’s established union status. Therefore, employers should examine the local labor ordinance in their province and city to determine whether unions must be notified of terminations, and in the absence of such ordinances, review local court precedents regarding failure to provide such notification.

The party issuing the notice, its recipient, the contents of the notice, and the method of service should be considered separately to ensure compliance. The law requires that the employer provide the notice, which means the letterhead must be embossed with the legal entity’s statutory representative seal. Although Chinese HR personnel may be delegated responsibility for this task, the employer must ensure that notifications are not issued by a different company affiliated with the corporate group or by an individual operating under the actual or apparent authority of the entity.

The law further requires that the notice be served on the Labor Union. In Chinese companies, the labor union typically takes the form of a union committee, meaning the grassroots union committee at the company is the appropriate recipient for notices. If the company does not have its own union, the employer must follow the statutory process to serve the local neighborhood or district labor union as appropriate. Some companies may choose to issue notices to the labor union’s president or vice president, a method accepted by Chinese courts in certain judicial precedents as appropriate. However, the statute requires that the notice be served on the union as an organization rather than on any specific person, so giving notice solely to the labor union president is insufficient for full legal compliance.

China’s Employment Contracts Act requires that a terminated employee be provided with the specific facts and legal basis for the discharge. If termination occurs under §40, the notice must include the following details: the job position the employee was expected to perform; the results of evaluations comparing actual performance to expectations; the reassignment and retraining efforts undertaken by the company; and the tasks at which the employee remains incompetent, supported by relevant dates, numbers, and documents.

Local rules may specify the form and medium of the termination notice, but generally acceptable methods include letter, email, or SMS text message. However, Chinese courts tend to invalidate non-paper notifications as ineffective, so it is advisable to use a formal letter.

Labor union notification requirements

The process for legally discharging an employee must include providing advance notice to the labor union. Employment Contracts Act §43 requires that the labor union be notified in advance of a unilateral termination, ensuring that union members receive notice and have time to respond before the employee is informed. The Supreme Court has stipulated that notice to the labor union must precede notification to the courts, meaning that until a case is filed, terminations will not be deemed unlawful solely for a failure to notify the union; however, once an employee files a lawsuit, any subsequent notice to the labor union is considered untimely.

In practical terms, if an employer terminates an employee without notifying the union, a remedial plan must be implemented. This plan should ensure that all required documentation and verifications are completed before a court case is filed and well in advance of filing for arbitration.

Local regulations in some provinces and cities set clear requirements for employer notification to labor unions, specifying the lead time required for notifications. For example, Section 11 of the Hubei Trade Union Law Implementation Measures requires that unilateral termination be notified to the labor union in writing and that the union be given seven days to respond with its opinion, including the option to demand that the employer correct or reverse its decision.

The first step in planning a notification to a labor union is to determine whether local law mandates a specific timing requirement. Otherwise, the notification should occur prior to issuing the Termination Notice and should be provided as soon as the employee files a lawsuit against the employer. Failure to make the required notification may expose the employer to liability, including damages associated with the unlawful discharge of an employee.

Although the law outlines explicit procedures for an internal meeting, in practice labor unions in China do not typically hold formal meetings or issue detailed resolutions. Instead, they provide implied confirmation in a less formal manner. In Jabil Circuit (Shanghai) Co., Ltd. v. Bu, a dispute arose concerning the method by which the union provided acknowledgment and whether this receipt constituted proper notification.

The employer delivered a copy of the termination letter to the union, which responded by writing in red ink in the top-right corner, Received December 28, 2020, along with the words Union Use Only, and affixed a seal bearing the title Union President. The central question was whether this receipt indicated union consent. The court held that the manner in which Jabil delivered the notice did not state the union’s consent but did not indicate disagreement either, and there was no additional evidence of any opposition or demand for a correction. Therefore, the court found that the union’s approval to end the employment was implicitly given.

There are no provisions in Chinese law permitting a labor union to overrule or veto a company’s decision regarding termination without the employee’s consent. However, the company has established a well-documented process for responding to labor union input in a reasonable manner. Once the labor union has provided its feedback, a committee should be convened to review the union’s comments and reach a decision. The level of detail for this meeting depends on organizational policy, and the law does not mandate a specific procedure.

The committee’s decision should take into account the labor union’s statements recorded in its minutes as well as its proposed solution. A common question arises regarding what to do if a genuine dispute emerges between the company and the labor union about the legality of the proposed decision. A recurring issue in China is that employees may have informal relationships with labor union officials, which can lead to instances of disguised favoritism. Although the Chinese labor union statute does not grant veto rights to labor unions concerning employment contract terminations without employee consent, the obligation to provide notice to the labor union is purely procedural and should not result in endless disputes between the company and the union.

3. How do Chinese courts view human resources termination documentation?

Short Answer:

Chinese courts require that the grounds for termination be explicitly stated in the termination notice and rigorously examine only the reasons documented at the time of the decision, rejecting any later evidence or additional justifications. The documented grounds, which must adhere to the principles of good faith and be supported by available facts and evidence, are the sole criteria for evaluating the legality of an employee’s discharge. Courts will deem a termination unlawful if the notice is vague, incomplete, or if the employer attempts to rely on additional or post-notice explanations, thereby emphasizing the necessity for clear, comprehensive, and factually supported termination documentation.

Discussion:

Evidence supports both the legality of the termination and the resulting trade secret damages. Sun signed an employment contract with the staffing agency that managed courier services. In 2017, Sun was disciplined for alleged violations of the employee code of conduct, although the staffing agency did not retain records that could establish the specific dates and times of each violation.

On October 30, 2017, the agency’s onsite manager confirmed that Sun had engaged in unauthorized absenteeism without leave and provided notice of contract termination on that basis. Sun contended that the termination violated the law and initiated labor arbitration, arguing that the proper grounds for termination under company policy were failing to wear a uniform, clocking in on behalf of others, and using inappropriate language on public company platforms. The local court reviewed the claim, determined that Sun’s termination was unlawful, and awarded damages.

Judicial precedents demonstrate that Chinese courts currently scrutinize the lawfulness of an employment termination based solely on the reasons stated in the notice provided to the employee. An employer is not permitted to introduce additional reasons during judicial review to justify the termination.

In Shanghai, the reviewing judge provided two reasons for this rule. First, the material basis for an employer’s unilateral termination must be the facts, evidence, and law as they existed at the time of the decision. Second, the employer’s notice of termination expresses the intent to terminate and legally binds the employer. Therefore, the court may not consider any facts or grounds beyond those stated in the notice, as doing so could conflict with a grievance or affect the rights of one of the parties. If an employee contests the grounds for termination, the court is limited to reviewing only the grounds included in the notice.

Based on an examination of contemporary judicial practices in four major jurisdictions, the legal standard is grounded in the duty of good faith, which includes assessing whether the grounds for terminating an employment contract are genuinely supported. In all jurisdictions, courts determine that the grounds detailed in a termination notice alone establish the legality of discharging an employee; it is expected that all supporting facts and legal justifications be fully disclosed in that notice.

The approach in Beijing is typical, as courts will not consider an employment termination lawful if reasons beyond those contained in the termination notice are invoked. Additionally, the law mandates that all reasons for termination be explicitly set forth in the termination notice, and providing inadequate detail is viewed as a violation of the duty of good faith, leading courts in Beijing to deem the termination unlawful.

In Beijing Appeal 02-cv-6437, Ma’s conduct resulted in significant damages to the employer. The decision to terminate Ma was based on allegations that he failed to ensure compliance with on-site safety and quality assurance standards, mismanaged staff deployment, and neglected to communicate properly with local governments. These actions led to substantial economic and reputational harm and constituted a serious violation of the Employee Handbook.

At trial, the employer claimed that Ma had committed even more serious misconduct, including absenteeism, document forgery involving a false seal, and embezzlement of company funds. However, these additional allegations were never provided to Ma in writing.

The employer must explicitly state the grounds for terminating the employment contract and be prepared to provide supporting evidence in any subsequent legal action. In Ma’s case, the grounds of absenteeism, falsifying company documents, and embezzlement were not included in the notice, and the judge noted that grounds not included in the notice are legally ineffective; consequently, as Ma was fired for reasons given orally but not in writing, the termination was deemed unlawful.

In instances of severe ambiguity, the termination letter itself may be invalidated as a lawful basis. In the 2021 case Li v. ABC Company before the Beijing Appeals Court (Appeal No. 01-cv-657), an employee’s employment was terminated for nonperformance, and although the termination letter listed three types of nonperformance, the court found that unspecified management policy guidelines were inadequate to constitute a lawful termination. The court explained that failing to identify explicit policy provisions violated the duty of good faith performance by introducing interpretive uncertainty into the decision-making process, thereby undermining the validity of the termination.

Shanghai courts do not review arguments, regardless of supporting evidence, that claim additional justifications beyond those stated in the termination notice. Employers are advised to pursue dispute resolution through other means.

According to a case reported by Westlaw China, a Shanghai company issued a termination notice to an employee named You, citing absenteeism in violation of internal company policy and clearly stating that the employee was not entitled to monetary compensation. The court held that the termination notice established a fixed barrier to any additional grounds for termination and that no alternative explanation would be legally considered. In this instance, the evidence failed to demonstrate that absenteeism had occurred, resulting in the court ruling the termination unlawful.

In Guangzhou, courts exclude any evidence supporting termination that is discovered after the termination notice has been sent. Under existing rules, the grounds for termination must be expressly reflected in the warning or disciplinary action record, so any subsequent issues with documenting the grounds are severely restricted.

For example, in Cheng Labor Dispute Appeal (Guangdong 01-cv-26115), a termination notice was served on Cheng on March 11 stating, Certain inappropriate reimbursements and falsifications have occurred during the 20XX year; thus, employment is formally terminated, effective immediately. The factfinder determined that the inappropriate reimbursements were the actual basis for termination because the company did not provide adequate documentation of the falsifications. Although the employer asserted that Cheng had abetted other employees in falsifying their expense reports—a basis for termination if proven—such evidence could not be considered because it was not included in the termination notice, which remains enforceable even if the misrepresentation was discovered afterward.

A reasonable amount of time must be provided for the employee to negotiate modifications to the employment contract. If the employer and employee fail to reach an agreement on the amendments within a reasonable period, the law will consider the employer’s action a unilateral termination of the contract, and any dispute arising from that failure will require the employer to prove that its termination meets legal requirements.

An employer’s unilateral termination or cancellation of an employment contract may constitute an unfair practice if any part of the contract or supplemental documentation is missing, inaccurate, or falsified. Section 3 of this title states that pervasive abuses of the right to terminate are not legally protected, including misrepresentations in documentation issued to the employee such as performance improvement plans or evaluations, as well as delay tactics incorporated into policy. Significant violations of company policy may be deemed gross negligence under the China Employment Contracts Act §39 and associated administrative rules, except in cases involving job rotation systems with inter-departmental cooperation obligations as described in §40. A serious violation of company policy remains grounds for termination even if the existing policy does not fully support the termination decision. Employers must hold consultations to discuss proposed company policy with all employees or their representatives and, in certain instances, with labor unions. Although lawmakers generally do not require the adoption of employee suggestions, they favor robust procedural rules during policy deliberations. Employers should consult their HR department regarding the format of these presentations and indicate how employees’ suggestions will be considered during the process. After the policy is adopted, human resources managers must ensure that copies of the current version of all new policies are maintained at the office with the same rigor as corporate bylaws and that employees receive training on the new company policy.

The Zhang Appeal—Implied False Pretenses (Appeal No. Su05-cv-8288) involved the employer terminating Zhang’s employment and issuing a termination notice containing prejudicial information. The notice claimed that Zhang had professional deficiencies and was not qualified to hold any position at the company because he refused to perform specific tasks; it also stated that from the resignation date onward, Zhang did little to no work during working hours, which was deemed insubordination.

The court held that the grounds for discharge stated in the termination notice must be reasonable and lawful and that the notice must be accurate. It reasoned that, at common law, an employee has the right to assess whether the reasons for termination are lawful, and any falsification constitutes bad faith, as now underpinned by the Employment Contracts Act §40.

Legal issues and risks

Termination for a material breach of company rules and regulations carries substantial legal risks under Chinese law and must be handled in compliance with Administrative Order 2022-10. A termination decision must adhere to the principle of good faith, and abuse of the right to terminate is prohibited. Analysis of judicial precedents indicates that strict compliance with the good faith principle is expected.

An employer’s right to terminate is unilateral and contingent on proper delivery of the termination grounds outlined in a notice that initiates the process. As a result, a court’s judgment primarily depends on whether the grounds stated in the Termination Notice justify termination. Courts will not consider reasons or grounds that are not explicitly stated in the Termination Notice.

If an electronic signature used on a termination notice or certificate is identical to the one used on an arbitration filing, it is deemed a personal signature at the statutory individual level. This issue has not been challenged in court, and Chinese regulators, government officials, and judges remain optimistic about the role of electronic signatures in employment disputes. If an employer qualifies, labor relations administration can be digitized by using electronic signatures instead of paper contracts, reducing the risk of litigation over voided employment contracts and expediting the confirmation of employment details such as position and salary.

The five-year trial period for using electronic signatures on employment contracts began on May 3, 2016, with the issuance of the 61 Circular. During this period, approximately three-quarters of employers reported not reviewing their electronic contract procedures, while about one-quarter took active steps to do so.

4. How is employment termination handled in business bankruptcy?

Short Answer:

In business bankruptcy under Chinese law, employment termination is meticulously managed by a trustee who must adhere to both statutory procedures and social policies designed to protect workers’ rights. The trustee, often appointed by a court and with wide discretionary powers, is responsible for ensuring that wages, social security costs, and other employment liabilities are treated as administrative expenses prioritized over ordinary creditors. While the termination of employment contracts requires judicial approval and strict adherence to the Employment Contracts Act—and cannot be unilaterally executed to avoid liability—the trustee may continue operations, retain some staff as caretakers, or implement layoffs in accordance with legal requirements to balance creditor interests with the government’s aim to maintain social stability.

Discussion:

In China’s social welfare state, any loss of files or mishandling could lead to significant financial liability for directors and officers of the company’s bankruptcy estate. The trustee is responsible for ensuring that the statutory rights of workers are satisfied and that all documentation is retained. Additionally, the bankruptcy trustee’s role in China is similar to that of a debt collection receiver, requiring the receiver to ensure compliance.

According to World Bank and IFC documentation on Chinese bankruptcy, the rules require improvement because they do not prioritize unsecured wage claims, and the trustee must balance stakeholder interests while ensuring compliance with PRC social policies. A remaining Chinese-language legal article provides a detailed analysis of best practices for bankruptcy managers to comply with PRC labor laws.

Continuing the employment contract requires the manager to determine, after taking control of the debtor’s business, whether ongoing operations are feasible. Managers generally continue operations and retain employees during both an initial liquidation and a reorganization, regardless of whether the debtor-in-possession or trustee-in-management method is used.

The financial obligations related to the ongoing employment contract are addressed under China Bankruptcy Act §42. Employee compensation, social security accruals, and other expenses are treated as administrative expenses. When the court permits the employer to continue operations, these accruals receive priority over the claims of ordinary creditors.

Curtailing layoffs improves economic stability by preventing moral hazard among financiers who seek to relieve unprofitable employers of debt while retaining the assets necessary for production. This approach secures the interests of the workers who drive the economy, a key policy goal that guides the statutory regime.

The policy ensures that an employer’s bankruptcy filing under China Labor Contracts Act §44 terminates all labor contract obligations. However, while the filing terminates these contracts, bankruptcy is not considered a statutory reason for canceling an employment contract. A significant ongoing controversy in China is that the law does not allow an employer to avoid liability for layoffs by immediately declaring bankruptcy.

Significantly, managing employment contract terminations in bankruptcy is the obligation of the insolvency administrator and is viewed in Chinese public policy as affecting broader labor law goals such as harmonious conflict resolution and social stability. In an effort to promote these values, the China Employment Contracts Act Section 44 mandates that employment contracts are terminated when a business entity is declared bankrupt, meaning that filing for bankruptcy serves as grounds for terminating all employment contracts.

However, the Employment Contracts Act does not recognize bankruptcy as a statutory basis for terminating employment contracts. This has raised disputes over whether an inactive entity must continue paying employees until bankruptcy is declared and for how long—typically a period of several weeks to months that exhausts all available resources of the entity.

The court also refers to earlier precedents for establishing the termination date under the China Employment Contracts Act §45. In these precedents, back pay calculated after applying the relevant formula acknowledges work performed during the period. In the Employment Contracts Act (Yu Chong Fa Min Chu # -), the court observed that employment in fact may arise when an employee is capable of and willing to provide oversight services; accordingly, the entity must provide pay and assume any legal liability for late payment.

China’s Business Bankruptcy Act provides robust protections for workers, with rights to payment falling into two main categories. First, a worker has the right to file a claim in bankruptcy. China Business Bankruptcy Act §41 states that a worker who has terminated employment with an entity has the right to file a claim, while under a 60-day limit from the bankruptcy announcement date, new hires may file a claim for salary owed. Second, under China Business Bankruptcy Act §109, priority payment rights apply to salary, basic living expenses, medical costs, workman’s compensation, pension, and social security contributions in bankruptcy cases that do not comply fully with the law.

Workers eligible to file a claim under the Act include those who have filed for termination, resigned within 60 days after the bankruptcy announcement, and new hires who begin work within that 60-day period. The China Employment Contracts Act §87 imposes harsh administrative penalties for violations, and a mandatory review process is currently in place to prevent corruption in the administration.

Bankruptcy administrators and terminating the employment contract

The Employment Contracts Act requires a bankruptcy judge’s declaration to lawfully terminate the employment relationship. Until that declaration is issued, the employer remains liable for wages, and neither the company nor its administrator can unilaterally terminate employment contracts without the judge’s specific declaration.

Administrators must follow the statutory termination procedures established by law and ensure that all grounds for termination are legal. Valid grounds may include reduced work hours or layoffs, and each termination must be accompanied by a detailed explanation of the reasons. Failure to adhere to these procedures risks the employee remaining employed despite the intended termination. In addition, any employee who remains under an employment contract during bankruptcy will continue to accrue seniority for calculating severance pay until the court issues its declaration.

The China Business Bankruptcy Law Section 18 provides that an administrator may terminate a previously unperformed contract between the bankrupt party and another party or may elect to perform according to its terms. Unless the administrator notifies the other party within two months after the bankruptcy petition is accepted, the contract is deemed terminated. The statute makes clear that any unperformed contract not selected for performance within two months is automatically terminated.

However, the statute raises the question of whether a contract includes an employment contract and is therefore terminated pursuant to the automatic termination provision. In this view, Section 18 of the Business Bankruptcy Law does not apply when terminating employment contracts, which must still follow the statutory termination procedures. Fundamentally, the Employment Contracts Act fully regulates the formation, performance, modification, cancellation, and termination of employment contracts, and it makes clear that any statutory provisions addressing a specific type of employment contract may contain separate legal rules and requirements.

In this context, a statute from another body of law could govern. The Employment Contracts Act specifically establishes additional rules under special circumstances, and the absence of a provision indicating that bankruptcy law should govern this situation means that employment law must strictly apply.

Courts in (2019) Jiangsu Appeal 05-cv-5877 [8] and (2020) Hunan Appeal 08-cv-419 [9] both ruled that bankruptcy law §18 does not apply to an employment contract. Accordingly, legal precedent interpreting employment law in China indicates that bankruptcy law requirements concerning deemed cancellations do not apply to employment contracts and that a bankruptcy trustee’s cancellation of a contract must proceed in accordance with the proper process.

Sections 15 and 28 of the Bankruptcy Act permit the trustee, with court approval, to hire necessary personnel. Trustees are also required to ensure that the company’s legal representative and financial officer maintain all records and seals, continue furnishing necessary services, and respond to inquiries truthfully. In return, the trustee must make reasonable efforts to ensure that the company’s property is securely maintained.

Trustee powers that protect these interests include the ability to hire former staff who can provide essential information and ensure that property remains secure. In China, however, a prudent trustee is often deterred from rehiring former staff and managers, which can lead to significant losses for the debtor. These individuals are referred to as retained staff.

Characterization of the Retained Employee Agreement and Avoidance of Wrongful Discharge Risk

In China, the agreement between the trustee and the retained employee must be categorized as a work services contract rather than as an employment contract. Section 1 of the Employment Contract Act 2008 describes the statute as specific to the regulation of the employment relationship.

The prerequisites for establishing such a relationship are not explicitly outlined in the Employment Contract Act 2008; instead, they may be found in a Ministry of Labor and Social Security Notice on Establishing the Employment Relationship §1. The Notice provides that even in the absence of a written contract, an employment relationship may be recognized if certain conditions are met.

This regulatory guidance resembles the economic realities test used in the United States to establish the existence of an employment relationship by examining three factors. First, it considers whether the parties are capable of establishing an employment relationship; second, whether the worker is under the direction and control of the employer; and third, whether the labor provided is an integral part of the employer’s business.

In the context of bankruptcy, a legal capacity to create such a relationship does not exist between a manager and a company in liquidation. The manager supervises the bankruptcy under the court’s direction with the primary objective of facilitating bankruptcy execution, replacing the company’s directors and officers, and preserving the enterprise as a going concern rather than engaging in commercial operations. A manager’s role in bankruptcy is considered part of their inherent powers and duties rather than being subject to the direction and control of another party. Therefore, a contract between a manager and a bankruptcy retainer does not constitute an employment contract.

Under the China Bankruptcy Act §§15 and 18, regulators expect the retained person to have a specific status, capability, and control over their process, and they must be appointed by the court. The agreement between the retained person and the trustee is governed by the China Bankruptcy Act rather than the China Employment Contract Act.

Chinese bankruptcy law generally expects the trustee to retain an insider of the defunct company who has significant power and control and to appoint that person under court approval. The agreement is governed by Bankruptcy Law rather than Employment Law. According to China Labor Act §72, an employer shall provide, enroll, and pay for social security benefits; however, in practice, this is infeasible because the trustee is not eligible to procure social security benefits and cannot open accounts.

Bankruptcy Act §41 states that payment of costs includes the cost of engaging staff. As discussed above, a retained person is not an employee and should not be treated as one. However, the contract entered into with that person by the bankruptcy trustee covers the process for engaging the required work and generating payment as a cost of bankruptcy, which can be disbursed at any time.

In particular, the Bankruptcy Act does not require the trustee to make Social Security contributions for retained staff, and the practical barriers discussed above prevent compliance with this requirement. The payment process for retained staff should therefore exclude Social Security or other workforce security contributions unless a bona fide employment relationship with the employer has been established. Retained staff have the option to file for unemployment benefits, and where the employment contract requires such contributions to be made to an employee who has returned to the job with the trustee—not as retained staff—those contributions must be made.

This article explains the fundamental legal doctrines, rules, and policies governing the bankruptcy trustee’s administration of employment relationships, the appointment of returning staff, and related disputes. Throughout the Chinese legal system, employer-employee law mandates extensive job security measures, especially during economic conditions that increase the risk of worker retaliation, to sustain long-term growth without inciting social discontent.

As a result, legal precedents suggest that judges generally favor job retention solutions and closely scrutinize compliance and procedural matters in employment disputes. Under these circumstances, the trustee bears a heightened responsibility to fully exercise statutory authority and manage the bankruptcy process in a manner that maximizes worker security.

5. Is lack of trustworthiness grounds for termination in China?

Short Answer:

A lack of trustworthiness may serve as one factor justifying termination, but only when the employer can substantiate that such a breakdown, combined with objective, demonstrable facts, has rendered continued performance of the employment contract impossible. While Chinese labor law generally favors the reinstatement of unlawfully terminated employees, courts—particularly in Beijing—have sometimes upheld employer termination when convincing evidence shows that a critical erosion of trust has occurred alongside other objective conditions. However, relying solely on an allegation of mistrust without additional corroborative evidence is typically insufficient to legally justify termination.

Discussion:

In China, an employer who unlawfully terminates an employee must either pay severance or continue performing the employment contract if the employee chooses. In practice, reinstatement is often difficult because the trust between the parties is usually damaged, so employees frequently opt for financial compensation rather than reinstatement after an unlawful termination.

However, worsening economic conditions have led more employees to choose to remain under the employment contract. Employers who oppose this typically argue that the working relationship is irreparably broken and the employment contract cannot continue. Their primary legal objective is to secure a severance payout rather than be required to reinstate employment. This article examines how courts evaluate this issue, specifically focusing on Beijing’s rules and judicial practices.

The China Employment Contracts Act §48 requires an employer who unlawfully terminates an employee to reinstate the employee unless the employment contract cannot continue to be performed. The Act and its related regulations do not specify the necessary conditions for demonstrating that performance is impossible, which creates uncertainty about when continued performance of the employment relationship is not required or permitted.

Many jurisdictions in China have issued opinions to clarify the substantive law that judges and arbitrators should follow. In the Beijing region, this issue is addressed by the Answer on Resolving Employment Dispute Cases issued by the Beijing High Court and the Beijing Employee Dispute Arbitration Commission.

An employer declares bankruptcy, has its business license revoked, is ordered to close, or is otherwise terminated; an employee involved in arbitration or court proceedings reaches the legal retirement age; an employment contract expires during arbitration or a dispute and does not meet the statutory requirements of the Employment Contracts Act §14 for an indefinite-term employment contract; an employee holding an essential position is replaced by someone else and the parties cannot agree on a new placement for the employee; an employee secures employment with another employer; during arbitration or dispute proceedings, the employer issues a recall order for the employee to return to work, but the employee refuses to comply; and any other circumstances that clearly do not support the continuation of the employment contract.

These six reasons provided in the Employment Contracts Act §14 for terminating a contract because continued performance is impossible reference only objective facts. Therefore, subjective reasons such as mistrust or hostility between the employer and the employee are not valid grounds for termination under the law.

Judicial interpretations regarding whether a breakdown of trust justifies terminating an employment contract are reviewed here based on 130 labor dispute cases in Beijing between 2017 and 2021. Courts determine whether to terminate an employment contract by examining whether any objective fact exists to bar continued performance, such as the employee’s essential position being filled by someone else or the employee having started working for another employer.

Unlike a strictly formalistic legal approach, Beijing courts now consider evidence of a breakdown in trust as an additional factor supporting termination. Decisions in Beijing have upheld terminating an employment contract when there is sufficient evidence to demonstrate that trust has irreparably broken down. Generally, courts seek objective facts showing that continued performance is impossible, with the breakdown in trust bolstering this argument.

In rare cases, Chinese labor law courts have held that a breakdown in the reciprocal trust relationship, by itself, does not justify terminating an employment contract. In a case adjudicated by the Beijing Third Intermediate Court, the employer claimed that the contract could not be performed because the reciprocal trust had broken down, but the court rejected this claim due to insufficient legal grounds. In contrast, other courts in Beijing have ruled that an employment contract may be terminated solely on the ground that the trust-based relationship has irreparably broken down.

The Beijing First Intermediate Court stated in one case that an employment contract is inherently based on trust because of the irreplaceable nature of human labor; accordingly, any breakdown in trust negates the foundation for continued performance. That court subsequently found that the employment contract could not be performed due to the collapse of the trust-based relationship, requiring employers to provide substantial evidence that the deterioration has reached a level that fundamentally prevents cooperation under the contract.

In this analysis of 130 precedents, fewer than ten cases found that a breakdown in the trust relationship was a dispositive factor. In most cases, judges used the breakdown of trust as a secondary reason for disregarding Beijing’s requirement that the Employment Contract continue to be performed.

When an employer takes this position, the court scrutinizes whether there is sufficient evidence to support this characterization of the relationship. One judge at the Beijing No. 3 Intermediate Court held that an employer’s mere allegation that the basis for the Employment Contract had fallen apart was not supported by sufficient evidence and rejected that argument. Consequently, the employer must provide substantial evidence that the trust relationship between the parties has deteriorated to the point that major disputes or conflicts prevent continued cooperation on the Employment Contract.

Current Beijing Judicial Policy on Lawful Termination

In Beijing, courts generally adhere to the policy set out in the Guidance, which focuses on determining if there is an objective basis for an employer’s inability to continue performance of the employment contract. Courts require employers to provide evidence that objective circumstances preclude continued performance before considering whether a deterioration of the trust-based relationship also provides grounds for termination. Because a breakdown in the relationship remains one of the factors examined, employers must present appropriate evidence to support this claim. Courts are unsympathetic toward employers seeking a judicial declaration of a fundamental breach solely on the grounds that the trust-based relationship has broken down.

6. Are quarantined workers protected from job loss?

Short Answer:

Under the previous Category A rules, workers diagnosed with COVID-19 and placed in quarantine were protected from job loss and received full wages during quarantine; however, since COVID-19 was reclassified as a Category B disease on January 8, 2023, quarantine measures have been eliminated, and employees diagnosed thereafter who are unable to work from home are entitled only to sick leave wages rather than full wages, with the legal safeguard now tied to the period of medically certified sick leave rather than quarantine status. This change means that while employees taking sick leave for medical treatment are protected from termination under the Employment Contracts Act during their medically certified leave period, those who are able to work or do not require leave may not enjoy the same level of job protection as under the previous quarantine protocols.

Discussion:

Public Health Emergency Joint Taskforce Circular #7 renamed COVID-19 to Novel Coronavirus Infections. This circular terminated the previous Category A administration for COVID-19, effective January 8, 2023. Joint Taskforce Circular 10.114, issued on December 26, 2022, specified that beginning January 8, 2023, Novel Coronavirus Infections will be regulated under standard Category B requirements, where quarantine procedures have ended, there is no determination of close contacts, and random testing is implemented.

As a Category B disease under these procedures, COVID-19 represents the first step toward normalizing HR and management responses to the pandemic following significant changes to China’s pandemic policies compared to the initial 2020 declaration. This report examines key issues that may affect HR procedures under the new regulatory system, providing analysis to evaluate each issue in context.

Coronavirus infections in China as of 2023 are governed under Category B guidelines, which do not require quarantine. Under previous guidelines, quarantined employees received full wages regardless of their entitled sick days; consequently, if an employee was diagnosed with coronavirus and ordered into quarantine, they received full wages. However, for infections beginning on or after January 8, 2023, employees without the capability to work from home receive sick leave wages instead of full wages, while those who can work from home continue to receive their full salary.

Historical labeling is included because, in a pandemic, it is important to determine whether disease classification has changed. 42 C.F.R. §41 requires that full wages be paid during a quarantine period for any location identified with an A-label infectious disease, and China’s Ministry of Human Resources and Social Security Circular 5 mandates that full wages be paid to quarantined employees who are unable to work from home.

On January 8, 2023, new China Orders and notices specified that COVID-19 is now considered a Category B disease without quarantine or worker isolation requirements. Under the previous Category A infectious disease control policy, quarantined workers infected with COVID-19 were paid normal wages.

Workers diagnosed with COVID-19 and quarantined prior to January 8, 2023, must receive normal wage payments for the duration of their quarantine. Workers diagnosed after this date who are legally required to stop working will receive sick leave wages, while those who can work from home will continue to receive their normal salary.

Question 2 examines the documentation employers may require when an employee calls in sick due to a viral infection. Ordinarily, an employee requesting sick leave must provide a doctor’s note from a board-certified physician that states the illness and specifies the time needed for recovery.

However, due to the atypical situation for individuals newly diagnosed with COVID-19, some companies have enacted flexible policies. These policies allow employees who face genuine difficulties in obtaining a doctor’s note to substitute alternative documentation that verifies their illness when applying for sick leave.

A flexible approach to sick leave is necessary during the pandemic. Teleworking should be considered whenever possible, and employees who provide documented proof through an antigen test or PCR results may have their sick leave requests granted at management discretion based on business operational requirements.

Once the pandemic has abated and there is no longer a surge in demand on medical resources, organizations should consider returning to the normal sick leave request process. Under this process, requests must be accompanied by a physician’s diagnosis and treatment recommendations, and employees providing falsified documentation should be disciplined in accordance with company policy.

When an employee claims a COVID-19 diagnosis but does not follow the sick leave request procedure and fails to report for work, employers should treat the situation as though valid sick leave has been requested and immediately require the employee to substantiate the diagnosis. Verification should be provided with a rapid detection test or, preferably, with medical certification from a healthcare facility.

In the absence of acceptable documentation, any absences should be treated as either vacation time or unpaid personal leave. If the employee continues to resist providing documentation or refuses to return to work, employers may take appropriate action in accordance with their company policies and procedures.

Coronavirus policy and performance-based terminations

When can an employee be required to return to work under a COVID-19 policy? Because recent guidelines often lack clear-cut rules, employers are encouraged to take a flexible yet cautious approach when establishing return-to-work conditions. An organization’s coronavirus policy may incorporate local public health department guidelines. For example, the Beijing Health Department’s policy on workplace return was partially outlined in its response at the 432nd COVID-19 Prevention and Control Conference.

According to that policy, an employee may return to work after seven days of self-care at home if the fever has subsided without the use of antipyretics and if symptoms have noticeably improved; otherwise, the employee may return 24 hours after the fever ceases and symptoms abate. Other policies may require an employee to secure a negative COVID-19 test after complete symptom resolution before being allowed to return to work.

Under the Company’s Staff Illness and Non-Work-Related Injury Medical Leave Policy, an employee diagnosed with COVID is entitled to take medical leave if time off is requested for treatment or recovery. This entitlement applies whether or not the employee is actively seeking treatment.

Employees who qualify for this leave are granted time off under Class B management. The policy ensures that those diagnosed with COVID receive the necessary time to address their health needs without adverse impact on their employment status.

Under the Company’s Staff Illness and Non-Work-Related Injury Medical Leave Policy, employees are eligible for sick leave only if a physician recommends that they stop working and receive medical treatment. COVID-19 symptoms vary in severity; in severe cases, hospitalization may be necessary, while mild or asymptomatic cases can be managed at home.

Generally, an employee diagnosed with COVID-19 may take sick leave if it is medically necessary to cease working for treatment. This policy ensures that employees receive proper care while addressing the varying levels of severity associated with the illness.

To manage employees who test positive for COVID, an employer may exercise powers under the Class B restrictions to determine how such cases are handled. Under the China CDC’s Class B policy, close contact tracing and quarantine are no longer imposed, giving the employer complete discretion regarding the management of a COVID-positive employee.

If an employer requires a COVID-positive employee to work on site, provided the employee is healthy and does not require medical leave, arrangements may be made for them to work onsite. At the same time, necessary precautions must be taken to mitigate infection risks, including disinfecting surfaces, ensuring proper ventilation, requiring masks, monitoring health, and enforcing social distancing.

Employees who need time off due to COVID-19 should follow company policy for sick leave requests and provide required documentation, such as a doctor’s note describing the diagnosis and treatment plan. However, due to the strain on China’s medical resources, obtaining proper documentation can be challenging. Therefore, a flexible policy for documentation requirements in sick leave requests is recommended. Currently, many companies consider a positive antigen or PCR test as sufficient documentation, and as health and social services improve, these requirements can gradually revert to normal procedures.

A more conservative policy option for protecting employee health and workplace safety is to require that COVID-19–positive employees remain at home, using a positive test as the criterion. When both the employee and employer mutually agree, remote work is an option. For employees whose work cannot be done remotely, annual leave or other temporary arrangements should be used to keep them away from the workplace during their recovery.

Return-to-Work Policy

Question 7 asks how a business can address situations where employees refuse to return to work after recovering from COVID-19 due to concerns about potential reinfection. Under current policy, employees required to fully return to work must report to the office immediately upon the employer’s request unless a legitimate health or safety issue exists. Employees are not permitted to decline work solely because of a fear of contracting COVID-19 again. In some cases, the company may allow employees who do not need to be physically present to work remotely. For positions that do not support telecommuting, employees may use vacation days, adjusted holidays, or personal leave to manage their needs.

An employee who refuses to work without a valid reason and without an approved leave of absence may face disciplinary action in accordance with company policy.

Question 8 addresses a scenario where a family member or roommate becomes infected with COVID-19. Under Class B guidelines, quarantine is no longer required, and the designation of close contact cannot be used to justify a layoff. When an employee’s family member or roommate becomes infected, management may inquire about the employee’s health status. If the employee is not infected, they should continue to work normally. However, if the employee must care for an infected family member, they may apply for unpaid personal leave in accordance with company policy, as described in the employee handbook, or arrange a flexible use of paid time off.

Concerns about COVID-19’s high transmissibility and its potential effects on the workforce justify requiring employees to periodically report both their own and their household members’ COVID-19 status. Based on these reports, the company may temporarily require employees to work from home until conditions improve.

The following question concerns the termination of an employment contract: After COVID-19 has been downgraded to Category II, may a business terminate an employee who is diagnosed with COVID-19? China’s Health Department Circular No. 5 (2020) requires that terminations under Employment Contract Act §40 or §41 be stayed during the employee’s isolation and treatment period.

However, because the requirement for isolation has been lifted, the provision in Circular No. 5 is no longer applicable. The authority to terminate an employee diagnosed with COVID-19 is now determined based on the relevant provisions of the Employment Contracts Act.

Employment Contracts Act §42 requires that employment contracts not be canceled during an employee’s medical leave period. Therefore, if a COVID-19 positive employee is on medical leave based on a doctor’s recommendation, the contract may be terminated only with the employee’s consent or for cause under Act §39.

In contrast, employees who do not require temporary leave for medical treatment are not entitled to these special protections, and their employment contracts may otherwise be terminated.

The emergent temporary rule §5 issued in 2020 required that the expiration of service contracts during quarantine or government intervention periods be extended. With the class B regulatory downgrade, quarantine measures have now been lifted and contract expirations are no longer required to be extended.

The employment contract law framework remains relevant when determining whether an employee infected with COVID-19 may have their contract terminated. Labor contract law §40 prohibits terminating such contracts during an employee’s medical leave period. Some legal commentators observe that a COVID-infected employee may have the right to continue taking sick leave for thirty days if appropriate certification is obtained through their neighborhood committee, to have their employment contract remain in force during the medical leave period, and to use that leave for the contract’s duration in lieu of termination.

Nonetheless, the China Employment Contracts Act prohibits terminating an employment contract if the employee is affected by a non-work injury or illness during the medical leave period, as provided in §40-41. Moreover, §45 of the Act requires that the employment contract be extended when an event covered in §42 occurs until those conditions no longer exist. Therefore, if an employee is on sick leave, the contract must be extended; otherwise, the original expiration period may be enforced.

Under current China labor law, COVID management practices have shifted from Class B, Grade A rules and restrictions to Class B, Grade B. This marks a major change in China’s approach to managing the virus and its impact. Relevant agencies, such as the Human Resources Ministry and local government officials, are expected to issue interpretation notices regarding the new policy for the current stage as well as for specific locales.

Organizations should monitor these changes as they develop and prepare to adjust human resources policies accordingly. This explainer is based on the law, regulations, and policies in effect as of its publication date and does not constitute specific legal advice for any individual client or situation. Because relevant rules, policies, and their practical application may change and affect the statements made, it is advised to consult a law firm for a comprehensive analysis.

7. What do cases on forced ranking terminations say?

Short Answer:

Forced ranking termination cases conclude that a low performance ranking alone does not prove an employee’s incompetence and therefore does not legally justify termination. Courts have consistently held that termination decisions based solely on such rankings, absent clear objective evidence and adherence to procedural safeguards, are unlawful. Instead, employers must consider alternative measures—such as additional training, job reassignment, or a structured improvement plan—while ensuring that performance evaluations are based on explicit and fair criteria. Consequently, forced ranking systems carry significant legal risks, as they can lead to claims of wrongful dismissal if used as the sole basis for terminating employment.

Discussion:

Wang received a C2 performance rating, the lowest possible score, and was transferred to a neighboring province while his salary was reduced. After an inadequate waiting period, the company terminated his employment contract in April 2011, citing his poor performance as the basis for the decision.

A major issue with the performance management process was that it was discretionary and subjective, with no clear standards defined for the performance ratings. The HR Performance Management Procedure required that all staff be evaluated twice annually, with those at the bottom required to undergo an upskill plan, job transfer, or termination. The company noted that in 2010 its East China sales team consisted of 11 sales staff, of whom 20 percent were required to be rated as a C (incapable); this amounted to precisely two individuals, one of whom was Wang, who received a C2.

The employment contract stipulated that any changes to company policy would be posted online and that employees were required to review these policies weekly. Wang received a C2 performance rating during the second half of 2008, the first half of 2009, and the second half of 2010.

In February 2011, the company terminated Wang’s employment and provided a partial severance package, citing his incompetence and continued underperformance following his transfer. In July 2011, Wang filed a labor arbitration claim with the Hangzhou City Binjiang District Labor Arbitration Tribunal and was awarded damages for unlawful termination. The company then appealed the award at the Hangzhou City Binjiang District People’s Court, arguing that the termination was lawful. The court ruled that the evidence did not support the claims of incompetence or ongoing underperformance after the reassignment and ordered payment of the remaining damages for wrongful termination; neither party appealed the decision.

In the context of forced ranking terminations in China, employees are evaluated based on their performance relative to one another rather than against an absolute standard. Depending on their ranking, an employee may be terminated or reassigned due to low performance. Such systems are typically established in company policies and incorporated into employment contracts as enforceable provisions.

When using a forced ranking system to justify termination, employers often refer to §40(b) of the Employment Contracts Act, which allows dismissal for lack of competence. However, Chinese courts have consistently held that employees identified as the lowest performers through such rankings are not eligible for unilateral termination. Being ranked last does not necessarily indicate a lack of competence, as numerous external factors can contribute to a low ranking while the employee still possesses the basic qualifications required for the job.

The conclusion that an employee is unqualified solely because they rank last, regardless of their skills or actual qualifications, is considered unreasonable because a performance management system will inevitably produce low-ranked employees. In China, even an unqualified employee, as defined under employment law §40(b), must be offered additional training or transferred to another job role prior to termination.

If continued employment is not feasible after retraining or a job role change, thirty days’ notice of termination must be provided, or one month’s salary must be paid in lieu of notice. Analysis indicates that organizations using forced ranking systems are likely to face two types of disputes: terminating an employee for being at or near the bottom of a ranking and altering an employee’s job role or salary based on a low ranking. Local judicial guidance has detailed how these two major risks should be understood, and Chinese employment law professionals should consider these facts while conducting their own assessments.

Employers in China face significant risks when discharging an employee under a forced ranking termination system. According to Chinese employment law, being ranked last on a performance review is not sufficient grounds for unilateral discharge. In some instances, an employer may try to characterize a last ranking as evidence of incompetence to justify termination. However, Supreme People’s Court cases have determined that being ranked last does not provide competent evidence of incompetence, and terminating an employee solely for that reason is unlawful.

A policy established in the China Supreme Court CLD, as set forth in the Minutes of the 8th National Conference on Adjudicating Civil & Commercial Matters, reinforces this position. Section 29 of that document states that terminations based on forced ranking or competitive hiring are unlawful, requiring the employer either to continue the employment contract or to pay compensation in lieu of termination. This approach is widely reflected in local regulations and court opinions, including the Zhejiang Issue Answers No. 2 §9, the Shenzhen Intermediate Court’s Guideline on Adjudicating Employment Disputes §85, and the Sichuan Great Law Interpretation §24, among others.

Forced ranking terminations and resume fraud: Analysis of Risk

The preceding cases reflect a consensus among China’s local courts regarding forced ranking terminations. In a Shanghai case, the court held that ranking does not measure an employee’s ability to perform and that terminating an employee solely on that basis was illegal, warranting an award for the difference in unlawful termination damages. Similarly, in the 2016 Chongqing case Yu 0103-cv-6151, the court ruled that relying on a ranking to terminate an employee constituted unlawful termination and ordered the employer to pay damages.

These cases illustrate the significant risks of terminating an employee based on forced ranking, as the labor dispute authority may determine that the discharge violates the law. The authority may require the employer either to continue performing the employment contract or to pay damages pursuant to Employment Contracts Act §87.

Any adjustment must serve a legitimate business purpose and be reasonable. Although the lowest-ranked employee cannot be terminated solely based on ranking, a written company policy or employment contract may provide legitimate grounds for a reasonable position adjustment for low-ranking employees.

For example, the China Supreme Court in Appeal 05-cv-450 ruled that a position change aimed at improving departmental performance is lawful when that intended outcome is explicitly stated in the employment contract and the employee does not object.

Across China, the same legal reasoning is consistently applied. In Guangdong 03-cv-4498 (2019), the court approved a company’s use of a forced ranking system to fairly determine job assignment changes while stressing that using performance grading as a pretext for a humiliating reassignment must be detered. In that case, the employee participated in a lawful competitive placement process, and the resulting job transfer was neither unlawful nor humiliating; therefore, the court upheld the transfer as compliant with the law.

Similarly, in Beijing 02-cv-572 (2020), the employer used a forced ranking process to reassign an underperforming employee to a clerk-in-training position at a retail store. After the employee refused the assignment, they were discharged, and the court held that the discharge was lawful.

Chinese courts and arbitrators generally examine legal compliance, procedural fairness, and substantive fairness when evaluating contested job role changes, often remanding cases back to the employer for corrective action if deficiencies are found. They scrutinize whether layoff provisions in the company policy or employee handbook were properly documented and published following the Employment Contract Act §4 procedure, which mandates public posting and an internal feedback process.

For example, in 2020 in case Guangdong 0106-cv-16106, the court rendered layoff provisions unenforceable because they did not comply with the law’s public notice requirements; the employer failed to provide evidence that the policies had been published or that employees had been notified of their existence. Beyond legal compliance, the layoff process must also be substantively fair, meaning that while disciplinary measures are permitted, employers should avoid actions that might reasonably be seen as degrading or punitive, and any changes to an employee’s compensation plan must adhere to reasonable guidelines and established company policy.

In Anhui Appeal 02-cv-2690, the employer’s termination process, which included a position reassignment, was held lawful because the positions retained relevance to the employee’s experience and abilities and the employer made appropriate salary modifications based on the applicable wage standards. The court emphasized that ranking lowest in performance evaluations does not establish incompetence, and an employer cannot lawfully terminate an employee solely for that reason.

While a forced ranking policy has inherent value, employers should reexamine the roles of individuals who rank lowest and identify positions that objectively match their qualifications according to established company policy or employee handbook provisions.

Below are detailed recommendations on how to adjust company policy settings to make using a forced ranking termination system less risky while remaining effective in organizational management. Prior to implementing any such system, legal counsel should be consulted to ensure compliance. The organization must establish objective criteria for determining incompetency, and legal precedents confirm that workers at the bottom of a ranking are not necessarily incompetent; therefore, the criteria must be carefully set so that a numerical ranking is not automatically considered evidence of incompetency. For example, a policy declaring that the bottom 10% of workers is deemed incompetent would be unlawful.

Each job role within the organization should have a specific set of standards that assess multiple attributes of a worker, including job duties, attitude, and performance against benchmarks. It is critical that these evaluation standards remain objective and are tailored to the specific demands of each position.

Develop an organized process to support alternatives to termination. If legitimate grounds for termination do not exist or if there is an increased litigation risk, consider options such as demotion, reassignment, transfer, job role adjustment, temporary leave of absence, or additional training. Ensure that all unilateral change proposals are carefully evaluated for their legality and factual basis, and make reasonable efforts to avoid significant changes to employee salary or working conditions.

Act lawfully when instituting procedures for forced ranking termination by following the appropriate involvement and public notice procedures under China Employment Contracts Act §4, and retain evidence that these procedures have been followed. Include performance evaluation terms in the employment contract that specify the criteria and process for forced ranking termination, and consider parallel methods to achieve the same result while mitigating legal risk. Establish a clear organizational structure with detailed job descriptions so that employees are evaluated based on job skills and accomplishments, and avoid résumé padding by clarifying job duties and rigorously holding employees accountable for their responsibilities.

8. How should I deal with resume fraud in China?

Short Answer:

In China, resume fraud should be addressed by first verifying that the false information provided meets the four key elements required for fraud: confirming the presence of false details, proving an intent to deceive, demonstrating that the misrepresented facts materially affected the hiring decision, and establishing that the employer relied on that information when offering the position. Employers should rely on clearly defined company policies that explicitly classify resume misrepresentations as a major policy violation, conduct background investigations promptly, and act within the probationary period to mitigate legal risks and potential wrongful termination claims. Additionally, any dismissal based on resume fraud must align with statutory provisions under the Contracts Act, ensuring that the fraudulent information directly impacted the job role and salary, as established by relevant case law.

Discussion:

In China, providing false information on a resume is not itself grounds for termination. However, fraud during the application process may justify termination if it significantly deceived the employer regarding the decision to hire the worker.

The fraudulent behavior must satisfy all statutory elements under the Contracts Act. The HR department should verify that the following requirements are met: false information is present, there was a subjective intent to deceive, the false information materially affected the hiring decision, and the false information actually induced the employer to make a poor hiring decision.

Termination based on significant skills gaps discovered during probation can occur if an employee fails to meet established company expectations. During the probationary period, an employee may be terminated for not achieving necessary performance standards, but this action must be carefully administered to ensure legal compliance. For example, a court recently ruled against a termination after an employee during probation failed to meet performance evaluation metrics related to contract collections because the employer did not assign the employee specific responsibility for securing payments on contracts or establish a contractual obligation to do so. Since the evidence did not support that the employee failed to meet expectations, the termination was deemed illegal.

Providing materially misleading information on a resume may be construed as a trade secret leak that damages the company’s reputation and is grounds for termination under disciplinary rules. In one precedent, an employee at Beijing Chuhang IP Agency persuaded clients to transfer their business to another agency, causing financial losses amounting to tens of thousands of RMB and severely damaging the company’s reputation. Although this might normally be considered a breach of a non-compete agreement—generally unenforceable in China—the company terminated the employee and prevailed in litigation on the grounds presented by Chuhang IP Agency.

In China, misrepresenting or concealing information on a resume has historically been sufficient grounds to terminate an employment contract. Under Chinese law, as illustrated by the Amazing Laser case, falsely representing information during the job application process is a lawful basis for termination.

Courts have held that such misrepresentations or omissions constitute a major breach warranting termination. Administrative regulations require that the termination decision be made prior to the end of the probationary period in order to remain legal, regardless of whether the issue was discovered during the probationary period.

Consider whether the employer’s company policy expressly prohibits resume fraud. The policy may clearly specify that false statements made on a resume constitute a material violation, and if sufficient evidence exists, the employer may terminate the employment contract.

For example, in Zhang v. Sun Marine Construction (Shanghai), the employee handbook provided the following rule: In the recruitment process, employees will fill out an Employee Information Form for review by HR and the company. If any false representations are made, it will be deemed a material violation of company policy, and the company may terminate the employment contract with the employee without liability. Zhang, however, completed the form by listing inaccurate educational credentials, and the court held that Sun Marine’s policy provided an appropriate basis for termination.

An employer seeking to terminate an employee for fraud must provide evidence that material misrepresentations were made that induced the employer to enter into the employment contract, as provided in Employment Contracts Act §26(a)(i). Major misrepresentations on key factors relied upon by employers when deciding to hire can be cited as evidence of fraud that renders the employment contract invalid under §§26 and 39(a)(v).

In Sun v. Beijing Hengchang Huicheng Information Consulting, the court held that false representations regarding academic qualifications provided in a resume constitute fraud because those qualifications are fundamental to determining the appropriate position and compensation. These legal precedents establish that material misrepresentations can have significant consequences on the validity of an employment contract.

Chinese HR professionals have noted that terminating an employee for falsifying a resume carries extremely high legal risks. While the term legal risk is colloquial and does not have a specific legal meaning in the United States, delaying termination may result in employers waiving their right to use resume falsification as grounds for termination.

For example, an employer’s decision to terminate an employee must be based on fraudulent information and made in good faith. In Kangdoori (Beijing) Dairy’s labor dispute with Liu, the employee falsified her educational background on job application materials; however, Kangdoori did not immediately terminate her employment, instead attempting to negotiate a transfer to a different position. When no agreement was reached regarding the role change, the company terminated her employment on the basis of resume fraud, although the court found that the primary reason for the discharge was the failure to agree on a different role.

In another case involving Beijing Wuyi Fashu Co. and Liu, the employee remained employed for nearly a year, and his continued employment did not jeopardize any major interests of the company. Although the court acknowledged that Liu had falsified information, it restricted the available penalties on that basis.

If the misrepresented or concealed facts are completely unrelated to the employment contract requirements or an employee’s ability to perform the job, China’s courts will determine that no misrepresentation occurred. This prevents the employer from terminating an employee for resume fraud.

In the Beijing Tianxin Ruian Information Technology Inc. v. Li case, the employee Li did not provide truthful information on the form associated with his employee record. However, the company did not rely on his degree when determining employment eligibility, nor did it reasonably question his job performance. The court concluded that the foundation of the employment relationship was unrelated to Li’s educational background and therefore not fraudulent, ruling that the employment contract could not be terminated.

In contrast to the precedents cited above, female employees in China often must conceal pregnancies to secure employment. Chinese employers typically consider a woman’s failure to disclose a known pregnancy as fraudulent inducement to contract.

However, China’s labor bureaus and courts generally interpret such refusals or terminations as violations of the temporary worker policy, constituting gender discrimination or discrimination based on family status unless there is proof that the specific work position is unsuitable for a pregnant woman. In a labor dispute in Dongguan, the judge explicitly held that pregnancy is not necessarily a reason to conclude that an employment contract was not formed or that job duties cannot be performed, and rejected Dongshan Electronics’ demand for compensation for training costs.

False statements on resumes may disqualify an employee from a job, constitute a major policy violation, or even amount to fraud that invalidates the employment contract. Employers have several valid reasons to terminate employees who falsify their resumes, but if these grounds are not raised until long after the employee has been hired or are not directly related to job performance, a wrongful termination finding may occur. The HR policy should clearly state the required job qualifications, specify that falsification is a major policy violation, and provide an action plan for immediate termination of employees who have falsified their resumes. Background investigations should be completed promptly after hiring to identify and address any issues.

Termination should be carried out with caution, as resume misrepresentations might not appear directly related to job performance. For example, IT professionals might be required to have a degree solely to comply with work permit processes, yet international employers often consider such qualifications essential.

9. Can employees be fired for poor performance?

Short Answer:

Yes, employees can be fired for poor performance under the China Employment Act, but only after the employer follows a stringent, multi-step process. Employers must demonstrate substantial evidence of incompetence through at least three formal performance reviews over an extended period, including initial poor performance documentation, a trial of retraining or job reassignment, and a subsequent evaluation showing continued inadequate performance. Each stage involves detailed documentation and adherence to standardized, objective performance criteria in line with company policies and legal provisions, ensuring that terminations are based on clear, non-subjective evidence. Failure to comply with these requirements can result in findings of unlawful termination and significant financial liabilities, as courts place the burden of proof on the employer to show that the employee was truly incapable of performing essential job duties.

Discussion:

The China Employment Act mandates a stringent process for terminating an employee for poor performance. Employers must conduct three performance reviews over an extended period to clearly establish that an employee is unable to perform the job. Section 39 allows for probation, salary modifications, and job role changes to evaluate performance. It requires three reviews: the first confirms poor performance, the second—after a period of probation and job reassignment—confirms continued poor performance, and the third determines whether employment should continue. Documentation requirements for these reviews and terminations are extensive, and engaging in an unlawful termination may result in significant financial liability. Although technically possible, terminating an employee solely on the basis of poor performance carries considerable legal risk.

Anatomy of a Performance Termination Dispute. A legal and economic empirical study using big data analytics was conducted with a representative sample of Chinese case law to determine factors influencing court judgments in disputed terminations for poor performance. By searching for poor performance or termination of employment contract with employment claims in China, 19,307 judicial opinions were retrieved.

The data indicate that the volume of poor performance dispute cases has been high and steady from 2019 to 2022 and occurs predominantly in highly developed regions of China, including 2,500 cases in Guangdong. Among the 19,307 disputes, employers succeeded at trial in just 1,200 cases, representing only 6 percent of judgments, and an 85 percent appeal rate suggests that a majority of litigants are dissatisfied with the trial outcomes.

First, disputes in these cases will address how an employee’s inability to perform a job is determined. China employment law holds that an employee’s failure to perform the tasks required by the employment contract constitutes grounds for deeming the employee unable to perform the job, though this interpretation is notably broad and ambiguous. Although the statute does not specify a standard, employers should avoid hastily declaring an employee incapable; in practice, courts generally rule against employers on this matter. The law further provides that being ranked at the bottom of a performance review does not by itself establish an inability to perform the job. Supreme Court Guiding Case #18 (2013) held that relying solely on a basic performance review is inadequate grounds for termination.

In Supreme Court Bulletin (2021) Issue #2, Dai v. Company Employment Compensation Dispute held that an employer’s use of a forced ranking system for rewards and penalties is not unlawful if a reasonable business purpose exists and regulatory compliance is maintained. While a bottom ranking is not considered proof of an inability to perform, a demotion or pay cut under this system is permissible if there is a rational basis for the ranking structure.

Employers must develop performance standards free from excessive subjectivity. In China, determinations of incompetence are typically based on performance evaluations, and if the criteria are unreasonably subjective, dismissing an employee for poor performance may not be legally supported.

In Li v. Construction Company Employment Dispute, the company relied on peer reviews for its performance evaluation. Both the trial and appellate courts concluded that the employer did not identify who conducted the evaluation or provide evidence substantiating the ratings, and the court rejected the evaluation results because the process was based primarily on colleagues’ subjective judgments rather than an objective framework.

Employers must clearly identify instances of substandard performance and evaluate employees according to the company’s standardized performance evaluation procedures. Courts typically require that performance evaluations follow a written human resources policy outlining what constitutes incompetence; without such a policy, a termination may be deemed unlawful. In a case involving a company in Tongbao, China—a legally distinct entity from the company in the previous case—the court found that proper performance improvement plan documentation supported the termination.

Legal risk number two involves properly terminating employees during their probationary period. Every detail must be documented, and the employer’s policy for evaluating probationary period employees must be strictly followed; otherwise, the termination may be classified as a layoff. In a case against an international logistics company involving the probationary termination of an employee named Zhu, the court found no evidence that Zhu had failed to meet standards or was otherwise unqualified, and therefore held that the discharge was a layoff.

A second legal risk arises when an employer substitutes re-evaluation for training or a job role change. The Zhejiang Provincial Labor Arbitration Committee, in its 2016 Typical Cases compilation, ruled the termination of Geng by a chemical company unlawful because the company merely labeled him needs improvement twice in succession before firing him for incompetence without offering retraining or reassignment.

Employers who terminate an employee for incompetence must strictly follow statutory procedures that require retraining or reassignment, and failure to comply will necessitate the payment of liquidated damages.

China’s judicial system uses discovery and evidentiary review to ensure that termination for incompetence is lawful. In a case from August 2023 involving a worker named Tian at a technology research lab, voluminous emails and performance management records showed that although Tian was incompetent, he was given a performance improvement plan backed by company policy. When reviewing the termination, the court found that all internal management systems were lawful under the employee handbook and that the performance improvement plan was carefully followed in compliance with company policy and the law. These findings were supported by extensive evidence detailing each step of the performance improvement plan provided to Tian and his inability to meet its goals. The court carefully examined each piece of documentation and provided robust reasoning in its opinion, ultimately holding that the termination was lawful and that Tian was not entitled to financial compensation.

Conversely, in a 2022 case involving a Beijing company, the employer alleged numerous grounds for discharge against Sun and submitted email evidence. However, the court found that only one email supported the employer’s claims, and that email merely contained a manager’s statement regarding Sun’s alleged violation without verification or confirmation, rendering it ineffective as evidence for proving lawful termination.

Transfers due to incompetence must involve job roles that are sufficiently related. In the Li employment contract dispute case, a court held that an employer must use its performance evaluation and character testing system to place an employee in an appropriate role based on their skills and personality. Li, a senior engineer, was transferred to a staffing pool at an aerospace company because he was deemed incompetent for his role and subsequently took excessive leave. For similar reasons, Li was offered positions as a copywriter, cook, and warehouse worker, all of which he declined before eventually terminating his employment.

During the probationary period, an employer may optimize the workforce by reassigning roles based on performance results, provided that the new role is similar in nature, offers the same salary and benefits, and provides reasonable accommodation for the application of professional skills. As a skilled professional, Li should have been assigned to an appropriate department that allowed him to effectively demonstrate his abilities. The roles of copywriter, cook, and warehouse worker did not align with his qualifications, were viewed as unreasonable and unsupported role placements, and were predicted by earlier job assessments to produce unsatisfactory outcomes.

An employer may not arbitrarily reduce salaries when modifying job duties. Although personnel reorganization is permissible to meet operational needs, the employer must do so reasonably and ensure that compensation after a job duty change remains in compliance with legal standards.

In a labor contract dispute at an accounting firm in the Shanghai Free Trade Zone, the employer reacted to Jin’s incompetence by reducing his salary from 20,000 to 5,800 renminbi. The court determined that this reassignment involved an unreasonable salary reduction that adversely affected Jin and ordered the employer to pay damages to restore his salary to acceptable levels.

Discussing termination procedures, the court in Chongqing Power Co. v. Fu held that the employer had illegally terminated an employee for incompetence because it failed to provide evidence of having given thirty days’ written notice in advance or of having paid one month’s salary in lieu of notice. In a later appeal, the trial court’s decision was overturned when the company produced evidence showing that it had made the substitute notice payment or received union approval.

When terminating an employee for incompetence, companies must be extremely careful to comply fully with statutory procedures. Such compliance not only minimizes legal risks but also ensures that employees are treated fairly.

An action plan is recommended that includes legal documentation available for use in proceedings to demonstrate when an employee is not meeting job duties. Establish a robust performance evaluation policy and procedures while clearly defining each position’s responsibilities and performance criteria. The evaluation system should specify each job role and its associated responsibilities.

In China, job descriptions are typically incorporated directly into the employment contract, as they serve as part of the contract and outline job requirements. For each role, performance evaluations should be linked to specific responsibilities and key performance indicator (KPI) goals, and legal compliance requires differentiating performance metrics between roles to ensure fairness. All job descriptions and performance evaluation plans should clearly detail job responsibilities and may include role-specific duties, KPIs, performance standards, and potential actions based on evaluation results. This approach simplifies dispute resolution by presenting comprehensive evidence in an accessible manner, thereby addressing concerns regarding the employee’s right to understand.

When possible, use objective, quantitative measures in employee performance evaluations and establish measurable, consistent criteria for each job position. The performance evaluation procedures must strictly comply with the China Employment Contracts Act, which requires that these procedures be ratified through a democratic process, that employees be given notice of the procedures, and that they have an opportunity to confirm receipt.

Employees must follow the evaluation process while mitigating conscious bias to ensure fairness and eliminate subjective, targeted, or discriminatory outcomes. Each evaluation sheet should be signed by the employee to acknowledge receipt, and the employer must provide a copy of the evaluation results to allow the employee an opportunity to respond. The employer should then re-evaluate the results after receiving the employee’s statement to finalize the evaluation. All documentation related to the process must be retained.

Develop a policy for job training and transfer that distinguishes when financial compensation is owed and when training will be offered. In addition to the approaches described above for identifying a suitable position or training program, design and maintain a documented process for providing clear options for job transfers and adequate training.

Employees needing improvement who wish to address performance issues to retain their jobs may represent a challenge due to a quiet quitting attitude in a toxic corporate culture; however, those who value their positions should be offered opportunities for training and growth. Ensure that the training program builds additional job skills targeted to an employee’s specific needs and deficiencies—as seen in an apprenticeship—and that the training clearly relates to the skills outlined in the improvement plan. The training must occur outside of legally mandated rest periods, which in China generally include evenings and weekends, and should not require excessive travel or after-hours commitments, while generally requiring at least one week of effort to complete. A manager can effectively guide this process by sharing insights into the China market, industry-specific expectations, or the company’s approach to work, thereby imparting valuable institutional knowledge.

Establish clear policies with a reasonable basis for job role changes and pay adjustments. Reassignment of job roles may be conducted either by mutual agreement with the employee or unilaterally by the employer exercising its rights. The law provides that a unilateral job role change for poor performance is allowed under §40 of the Employment Contracts Act, a right that may be exercised if the arrangements are reasonable and supported by an effective compensation policy. There must be a clear factual connection between the new and old job roles, and the new role should capitalize on the employee’s strengths while reducing the difficulty and workload to avoid a potentially discriminatory or unreasonable approach.

Pay adjustments must remain within reasonable limits and cannot be used as a pretext to drastically reduce overall compensation. Although the current quiet quit culture might seem to encourage demotivating an employee to resign rather than terminating their employment, courts have consistently held that such an approach is unlawful.

When evaluating performance, it is necessary to establish a reasonable timeframe for employees returning to their original positions after training or for those who continue to underperform in their new roles. This timeframe should account for ongoing unsatisfactory performance after training, and a qualitative determination of the appropriate period should be made before conducting a second evaluation. The employer must notify the employee of the evaluation timeline at the time of the transfer or upon entering training.

Determining the proper evaluation period is crucial, as an extended timeframe may create uncertainty regarding termination decisions, while an overly short period may not allow sufficient time for improvement. Generally, the timeline should be tailored to the specific characteristics of the employee’s role, with managers typically receiving a minimum of three months and operational or production workers at least one month. Employers may adjust the timeframe for each position or role according to actual business needs.

Under Chinese employment law, terminating an employee for lack of competence requires documentation of two consecutive performance evaluation results indicating that the employee lacks the necessary competence. Two evaluations must be consecutive; performance results from different periods of employment cannot be combined to justify termination.

For example, if a Chinese employee receives an evaluation indicating incompetence, is subsequently retrained or assigned a new role with a competent evaluation, and later receives another evaluation of incompetence, the employer cannot terminate the employee on the grounds of incompetence. Employers should retain the performance evaluations and documentation process described in part 2(a) in their records.

Regarding termination procedures due to poor performance, an employer must first conduct a redundancy review before terminating an employee for failing to perform their job duties, ensuring that the employee does not fall under the labor redundancy protection provisions of the Employment Contracts Act §42. The procedures require that the labor union be notified in accordance with Employment Contracts Act §43.

Employers must provide the employee with written notice of termination at least thirty days in advance or, alternatively, pay salary in lieu of notice. In addition, where required by law, a severance package must be provided.

10. Can a fired employee demand reinstatement?

Short Answer:

A fired employee in China may demand reinstatement if the termination is found unlawful under China Employment Contract Act §48, which allows an employee to choose between double damages or resumption of the employment contract. However, the success of such a request depends on several factors including whether the employer has expressed an intent not to perform the contract, whether the position still exists or has been restructured, and the employee’s conduct before and after termination. Courts in regions like Beijing and Shanghai focus on broader criteria that render performance impossible, while those in Guangzhou and Jiangsu place more emphasis on the employer’s explicit refusal to continue the employment, indicating that reinstatement is not automatically granted but must be balanced against business practicality and existing employment culture.

Discussion:

China Employment Contract Act § 48 requires compensation for financial damages resulting from an unlawful termination or discharge of an employee. Although an employee in China may have an interest in requesting a renewal of the employment contract, this interest is sometimes weighed against the employer’s trust in the employee’s continued performance. Nevertheless, this form of relief can cause significant disruption to business operations, and prevailing employment culture values are generally considered more influential than reinstatement relief.

Remaining compensation owed from the historical period of the employment contract presents challenges because effective legal standards have not yet been established, leaving clients without clear procedures for resolving disputes through arbitration or litigation. This uncertainty creates a major headache for those seeking to recover such compensation.

If reinstatement is not enforced, employers may believe they are permitted to terminate an employee by merely paying compensation, which in the long term serves as a penalty imposed on employers. Chinese law provides significant protection to employees.

The judicial culture routinely references German legal theory by suggesting that an employer cannot unilaterally terminate an employment contract, although employers are expected to have the freedom to make their own business management decisions. Evaluators have noted that the polite language used in Chinese to communicate instructions, while clear, is often perceived as insufficiently directive. This Insight evaluates how courts and tribunals in Beijing, Shanghai, Guangzhou, and Taiwan are deciding employment relationship restoration requests.

This approach to factors for consideration is more similar to common law systems, where specific statutory criteria do not exist. Section 48 of the China Employment Contracts Act stipulates that an unlawfully terminated employee may elect either double damages or employment contract reinstatement, implying that the employer’s intent is not factored into the decision. However, in China, an employment contract is distinguished from other contracts because it creates fiduciary and management rights that can only be effective if both parties trust one another.

As a result, judicial policy in many parts of China will consider whether the employer is willing to reinstate the employee. In contrast, judges in some jurisdictions take a stricter approach.

In Southern China, including Guangzhou and Jiangsu, the courts consider an employer’s refusal to perform the employment contract as a crucial factor in determining whether the contract cannot continue to be performed. This emphasis on the employer’s intent plays a key role when evaluating requests for Employment Relationship reinstatement. If an employer expressly declines to fulfill the contract, the court typically will not order its continued performance, and a request to resume performance under circumstances of equivalent bargaining power would not be considered appropriate. Nonetheless, the court will weigh other reasons that support a request to resume the Employment Relationship, such as whether the employee has begun working at another company or whether the position has been abolished.

In contrast, courts in Beijing and Shanghai treat the employer’s intent as a marginal factor in determining whether to resume the Employment Relationship, placing greater emphasis on all factors that render performance impossible. Employers who merely state an intent not to perform must provide sufficient evidence to support a finding that performance cannot continue; otherwise, the court will not uphold this intent as a valid basis to deny performance.

Consider whether the Employee has taken proactive steps toward alternative employment, such as actively searching for a new job, accepting an offer, or already starting a new position. Also consider whether the Employee’s previous role is highly specialized and costly to maintain, and if the current staff is already competently fulfilling the necessary duties such that reinstating the Employee would substantially disrupt day-to-day operations.

For example, a company might hire a new executive to replace the terminated Employee. This scenario illustrates how reinstatement could interfere with established operational routines.

Evaluate whether the job held by the employee still exists or has been eliminated. For example, the position may remain vacant, similar roles might be available, or the role may have been removed as a result of reorganization with no plans to recruit for similar positions. Additionally, consider the employee’s approach to the reinstatement request made prior to termination, including the reasoning and objectivity behind the request and whether the employee communicated effectively with human resources while avoiding incidents or property damage.

Assess whether reinstating the employment contract will significantly improve the employee’s well-being. For instance, the contract might offer long-term stock benefits, household registration in select cities, or enhanced educational opportunities for the employee’s children.

What wage rate or amount must be paid when the company is ordered to reinstate the employee? In Chinese employment disputes, an employee who is ordered to be reinstated may request an award for unpaid wages for work that would have been performed during the effective period of the employment relationship. In the absence of statutory law, there is no unified standard for calculating unpaid wages. The 1995 Ministry of Labor Recommendation 309 defines unpaid wages as the wage loss resulting from the termination that prevented the employee from working but does not specify a calculation method.

Although the statute of limitations has expired, provincial departments of labor typically adopt one of several approaches to resolve the issue. Some provinces calculate unpaid wages based on the employee’s average monthly salary over the 12 months preceding termination, while others may use different methods. This lack of standardization can lead to variations in how unpaid wages are determined in reinstatement cases.

This method calculates back pay by using the employee’s average salary over the 12 months preceding termination. It is the most commonly used method among China’s 31 provinces, which have issued a patchwork of local rules using slightly different terminology. For example, the Shanghai Wage Payment Rules §23 state that the repayment standard is based on the employee’s average monthly wage over the 12 months prior to the end of the employment contract, while the Guangdong Wage Payment Rules §29 require it to be based on the employee’s average wage over the 12‐month period.

Meanwhile, the Beijing Municipal Precedent Report §24 indicates that wages owed for reinstating the employment relationship due to procedural requirements must be calculated based on the minimum wage rate. Legal disputes often center around whether the calculation should include performance bonuses, overtime, and various allowances. Local courts have conflicting case law, and these differences must be resolved on a case‐by‐case basis.

The regulatory approaches used by Chinese local governments to determine back pay standards are designed to reflect local conditions. For example, the Shanghai Wage Payment Regulations Section 23 states that the base is the average wages over the twelve-month period preceding termination, with a specific note that the responsible party shall be liable in proportion to their fault. By contrast, the Jiangsu Employment Law Difficult Dispute Issues Guidelines provide that each party bears its share of fault.

Accordingly, courts in China have held that back pay amounts must be adjusted to reflect apportioned liability. In one Shanghai appeal case (02-cv-1965), the judge ruled that there was significant fault on the employee’s part along with only a minor procedural defect in the statutory process, and therefore awarded back pay based on the local minimum wage instead of the employee’s actual average wages over the preceding twelve months.

Instead of making a severance payment at termination, severance pay is calculated based on the local minimum wage and covers the time the employee would have otherwise worked. The obligations to maintain the employer-employee relationship are difficult to enforce effectively, and while the court can impose many financial obligations that a bailiff can collect, a remedy requiring continued management of an employee’s status calls for specific performance—a concept that China does not support through court-ordered contempt to ensure compliance.

This means there is no guarantee that the employee’s job will provide comparable working conditions. However, the court has more severe means of compelling compliance, including ordering payment of damages in lieu of specific performance, imposing fines, or jailing responsible individuals for contempt of court.

In case number 0106-cv-28504 in Guangdong, the Guangzhou Tianhe District Court, noted for its unusually high number of international commercial disputes, observed that an employment contract is a deeply personal relationship requiring management and cooperation. The court explained that the need for continued performance is fundamentally different from ordinary debt disputes and rejected the request to enforce the employment contract on the grounds that it was objectively unenforceable.

In case number 0113-exh-2975 in Beijing, the Beijing Shunyi District Court declined to hear the case because the request for continued performance did not clearly specify the required consideration. The decision highlights the importance of clearly stating the terms and requirements for continued performance when seeking to enforce an employment contract.

Measures should be taken to compel the employer to remedy its breach and comply with the judgment promptly. Chinese courts consider it their responsibility to ensure that workers return to work after reinstatement orders are issued and to impose appropriate penalties on employers that do not voluntarily comply.

According to the Shanghai High People’s Court Circular No. 153, courts may hold legal representatives in contempt of court to enforce the reinstatement of employees. This approach underscores the commitment to upholding workers’ rights and ensuring that court orders are effectively implemented.

The employer’s primary obligation to abate a breach of contract is to make wage payments, effectively converting otherwise impractical reinstatement orders into an enforceable salary payment obligation. Although this requirement may seem unorthodox, the court has developed a body of case law that makes the principle more predictable.

A landmark case on this issue is Beijing Appeals Process Supervision Case No. 28. The trial judge, following local Beijing court precedent, held that wage payments are sufficient to abate the breach of contract.

Under Chinese law, employers must carefully evaluate the grounds for termination and strictly follow legal procedures before proceeding. If a termination is challenged in court, evidence must be presented to demonstrate that the employment relationship cannot continue.

If the court rules that the employment contract must be upheld, a judge will award back pay for the relevant period and require management to reinstate the employee to an appropriate position. Employers must ensure that all termination actions fully comply with applicable legal requirements.

11. How can I fire an employee who breaks the code of conduct?

Short Answer:

To legally terminate an employee for breaking the code of conduct, an employer must ensure that the employee’s conduct constitutes a material or serious violation as specifically defined in the company’s internal policy, and that all steps of a progressive disciplinary process have been exhausted. This means that the employer should have provided adequate warnings, corrective opportunities, and detailed documentation of the infraction, ensuring that the decision to fire aligns with the proportionality principle and the only statutory acceptable grounds outlined in Employment Contracts Act §39. By carefully investigating the circumstances, including the employee’s intent, the severity of the breach, and any mitigating factors, employers can justify the termination legally, provided the action is consistent with both the company’s established guidelines and the broader expectations set by judicial precedents.

Discussion:

The China Employee Contracts Act §39’s disciplinary discharge provisions allow employers to address situations where employees seriously violate the employer’s rules and policy. While this provision provides the basis for imposing disciplinary discharge, the law does not clearly define what constitutes a serious violation.

Employers in China face two major risks with disciplinary discharges. Some employers may overestimate the severity of an employee’s actions and terminate employees for reasons that do not amount to a sufficient violation of company policy, exposing themselves to liability for unlawful discharge and the payment of damages. Conversely, due to the lack of clear guidelines, other employers may be reluctant to discharge problematic employees, fearing litigation, which hampers the effective enforcement of company policy.

According to law and precedent, there are five recognized termination reasons: a material violation of company policy, negligence or conflicts of interest that cause major harm to the company, employment with another company that materially affects work or is not corrected within a reasonable time after a warning, engaging in fraud or coercion to enter an employment contract or violating it in a way that prevents the contract’s purpose from being realized, and criminal prosecution. Reasons two through four are relatively clear, while disputes tend to arise regarding violations of company policy.

In order to legitimately terminate employees for violating company policy, the policy must clearly define the potential consequences of a violation. Clear definitions help reduce disputes over terminations and support consistent application of company policy.

China has a long tradition of balancing rights and powers, and its proportionality principle originated in administrative law. The Code of Administrative Procedure mandates that the State implement policy goals with the least possible interference in the interests of the relevant parties.

In employment law, an employer’s authority over employees is often compared to the government’s administrative enforcement powers due to the significant power imbalance. Accordingly, the proportionality principle ensures that disciplinary measures are fairly applied, and courts scrutinize disciplinary-based discharges to assess whether their use is reasonable; the law requires that company employment policies be structured in a manner that guarantees fair treatment of employees without management capriciousness.

Decisions reflect strict adherence to the proportionality principle, ensuring that the disciplinary measures imposed are balanced with the nature of the infraction and not excessively severe. In one representative case, an executive’s error caused the company losses exceeding RMB 15 million that continued to rise after he received a warning and was terminated during his probationary period. Subsequent arbitration and judicial review determined that the termination was unlawful.

The court explained, Zhang, albeit ineffective, is not demonstrably incompetent. The defects in his work style were relatively minor, for which the company is partially accountable to stakeholders, and do not rise to the level of gross negligence without a more significant subjective fault. Likewise, precedents discourage discharging employees for a single instance of low performance, holding that terminating an employee solely for failing to meet performance targets is generally unlawful.

Chinese judges evaluate the relevant facts when assessing proportionality to decide whether the disciplinary dismissal is justified. They focus on factors such as the employee’s violation of organizational policy, conduct, and degree of responsibility. Investigators examine the circumstances surrounding a policy violation as well as the employee’s state of mind.

Even when an employee’s conduct might otherwise warrant a negative review and the disciplinary dismissal intensifies, if the employee presents a mitigating rationale or if the conduct is not inherently blameworthy, a finding of a material policy violation is typically unwarranted. The conduct in question can be considered from various perspectives, including the violated organizational policy, the nature of the action, the extent of any resulting damage, and the employee’s state of mind.

The employee’s actions must be evaluated on several factors, including the underlying reasons and intent, the severity and nature of the results, whether negligence or insufficient supervision played a role, and the employee’s experience and value to the company. Among these, the reasons and intent along with the character and magnitude of the results are the most critical considerations.

When the outcomes are unremarkable, the court may mitigate what would otherwise be considered a major disciplinary violation if extenuating circumstances exist. It is important to note that in China, the results of an action can extend beyond what the at-fault party intended or anticipated, and therefore more drastic measures may be necessary to prevent courts, which are cautious about negligence, from imposing potential liability.

Terminating an employee in China requires due process, including factual evidence of a well-documented policy violation, and consideration of the employee’s contributions, as well as an evaluation of financial compensation and tax implications. In the case reported as Guangdong 0306-cv-21540, an employer terminated a worker for engaging in a fight on company premises and claimed it amounted to a serious company policy violation, but the court confirmed that while the altercation occurred, it was purely self-defensive and did not result in serious harm due to the timely intervention of bystanders.

The court determined that the employer unlawfully terminated the employee and ordered the payment of severance. It explained that the termination was inappropriate because the company failed to apportion responsibility reasonably and held the employee accountable without regard to fault; generally in China today, regulators and courts view holding someone responsible without due cause as inherently unfair.

In Beijing Appeal 02-cv-970, an employee posted screenshots of internal emails in social media group chats that disclosed the company’s inability to fully pay wages due to business difficulties. The employer considered this conduct a severe violation of employment policy and terminated the employee’s contract.

The court held that although the employee did not first raise the issue of unpaid wages with the company, the method of seeking relief was lawful and did not severely impair the company. The court further noted that the underlying cause of the dispute was the company’s fault and ruled the discharge unlawful.

In the Guangdong Appeal 01-26564 (2022), the court required that employers follow proportionality principles in disciplinary actions. The court noted that progressive discipline should apply to minor issues but not to significant violations that might be deemed unfair. In the Guangdong Appeal 02-2039 (2020), the court explained that for more serious company policy violations, fairness requires evaluating the consequences, impact, and damage caused by the employee’s actions, including whether the effects were significant or the violations repeated.

In that case, an employee posted a video of his employer on Douyin—the Chinese version of TikTok—with a caption stating that the employer was not making required social security payments for the employee. The court determined that because the employer was unlawfully failing to make social security contributions, the assertion was not a disparaging rumor, and it ordered the employee to be reinstated.

Cases involving joint fault suggest that courts are less likely to enforce termination if there is shared accountability for negative results, regardless of whether a rules violation actually occurred. In some situations, the fault may be attributed to other employees or even hired contractors.

For example, in Guangdong decision 01-cv-9122 an employee was terminated for failing to notice differences in the model number between ordered and delivered merchandise, which led to unrecognized price differences. The employer concluded that this was a major rules violation and discharged the employee. However, the court observed that six other workers were involved in the purchasing, quality control, and installation processes, and the judge concluded that although this particular worker made mistakes, the fault was shared among multiple individuals, including the purchaser, so the entire financial loss could not be attributed to a single person; moreover, the mistake did not qualify as a major policy violation.

The court discussed the negligence in employer management and the tolerance for employee behavior in Guangdong Court Opinion 0113-cv-5729. In this case, an employee was discharged for 97 attendance policy violations over 11 months. The court noted that these violations were discovered only during the annual company audit, even though the employee had been receiving an unadjusted salary and routine positive performance evaluations each month.

The court held that the company’s attendance policy and administrative practices were significantly flawed, which contributed to the employee’s repeated policy violations. The company had not promptly or appropriately identified absenteeism issues, so the resulting discharge policy was deemed reckless and failed to meet the due process requirements of Chinese labor law.

Considerations regarding the employee’s contributions, length of service, and the response to policy violations are important factors affecting the proportionality of an employment termination. Additional factors include the employee’s overall contributions and years of service to the company, which may mitigate the severity of any discipline imposed for policy violations. In China, the value of an employee’s contributions is evaluated based on factors such as skill level, the difficulty of replacing the employee, and their loyalty to the company.

In Beijing Appeal 02-cv-10263, the court stated that objective and reasonable discipline for a long-tenured employee must be determined with due care, because a long-tenured employee creates significant value over many years, and terminating their employment contract greatly diminishes future rehiring opportunities. In that case, an airline company was the employer, and the employee worked as an in-flight stewardess. The court noted that the flight attendant labor market is predominantly young, which poses a significant challenge for retraining an employee at an older age. Therefore, employment termination in such contexts must be handled with greater care.

In China, employers must exhaust all reasonable alternatives before proceeding with disciplinary dismissal. In accordance with the proportionality principle, the penalty should be appropriate for the violation, starting with criticism and providing an opportunity for correction, issuing warnings, or implementing changes in position or salary, before resorting to termination if a pattern of noncompliance persists over time.

In Jiangsu Appeal 02-cv0801, the court stated that the employer should follow a progressive disciplinary process, providing the employee with an opportunity to correct their wrongdoing before terminating employment if the violations persist. In Guangdong Appeal 01-cv-13821, the court held that immediate termination was disproportionate and not justified as a final measure when a less severe penalty, such as a written warning or probation, remained an option.

In Beijing Appeal No. 01-cv-2234 (2021), the court emphasized the importance of progressive discipline in a termination case that involved an integrated approach. The employer terminated the employment contract because the employee failed to respond promptly to messages while working from home.

The court noted that although employees working remotely who occasionally are slow to reply exhibit inappropriate behavior, such lapses are generally not considered serious negligence. In this case, however, the employer had issued three written warnings and clearly communicated expectations for work discipline, yet the employee continued to fail to reply in a timely manner without providing a reasonable explanation. On these facts, the court found the termination to be lawful.

Under Chinese law, employers may exercise disciplinary termination rights only if the action complies with the proportionality principle imposed by the courts. Generally, employers should first attempt reprimands, provide opportunities for correction, issue warnings, and consider job transfers with adjusted salaries, reserving disciplinary termination as a last resort.

Accordingly, office handbook policies should clearly define credible opportunities for correction to serve as the legal basis for any potential future termination.

To ensure that disciplinary terminations are legally sound, actions should be taken to mitigate legal risks. Internal procedures must include a graduated disciplinary process based on the proportionality rules described above and the specific violations covered. If an employee violates a policy, a comprehensive internal investigation should be conducted that includes interviewing relevant parties and determining the underlying causes, severity, consequences, and intent of the actions to ensure that the misconduct is accurately assessed.

When policy violations occur, prompt action is essential, and management must not neglect its responsibility for immediate follow-up to avoid implicitly permitting misconduct to continue. A progressive discipline approach should be implemented, emphasizing less drastic measures such as criticism, education, warnings, and other opportunities for the employee to comply with policy.

12. How can an employer defend against reinstatement demands?

Short Answer:

Employers can defend against reinstatement demands by proactively presenting a well-documented legal strategy that demonstrates a breakdown in mutual trust, thereby rendering job reinstatement impractical. They generally engage experienced legal counsel to thoroughly articulate all relevant legal and factual aspects of the case and to highlight evidence—such as insufficient commitment by the employee, a history of poor performance or misconduct, or ongoing disputes—that indicates a significant erosion of trust essential for the employment relationship. Additionally, employers often utilize skilled employment arbitrators to manage procedural timelines and facilitate settlements, citing the procedural law’s preference for faster, less costly alternatives to forced reinstatement. Ultimately, by substantiating that the working relationship has become unsustainable, employers aim to persuade the court that enforcing continued employment would not serve the intended purposes of fostering a cooperative and dependable workplace.

Discussion:

The court’s stance is intended to prevent workers from renegotiating their job conditions after being fired. The rule also serves important social policy objectives designed to curb arbitrary terminations and deter employers from dismissing workers without valid cause. During social policy discussions, some groups have noted that although Chinese courts and arbitration systems tend to award higher damages, concerns over income security create significant resistance to implementing these remedies. Meanwhile, the Chinese legislature maintains that the current procedural law is faster and less expensive than processes that compel an employee’s return to work. Some employment law experts continue to publish contentious and polarized articles criticizing the process for its impracticality in real-world settings.

In a typical lawsuit brought by a terminated employee in Beijing, the claim for recovery of the employment relationship is raised under Employment Contract Act Section 48, along with damage claims in which the employee seeks the 2N remedy for damages. Evaluating the prospects of a continuation claim involves examining whether the parties’ dealings demonstrate a meaningful level of trust, such as by clearly delineating roles and duties and providing for long-term job stability. Employers facing a continuation claim generally use two strategies to resolve the dispute. First, they engage their legal counsel to ensure that the judge is fully informed of all legal and factual aspects of the case. They may also deploy a highly skilled employment arbitrator to manage procedural timelines and facilitate the achievement of a settlement agreement.

The court will not enforce the performance of an Employment Contract if its execution becomes impossible. A common example of impossibility is an irretrievable breakdown in trust between the Employee and Employer. Under Chinese labor law, the employment relationship is not merely an economic exchange but also one characterized by trust and cooperation; when that trust is lost, the contract may no longer be considered necessary or practical.

Although this concept might seem similar to an ethical good behavior standard, the courts impose requirements that are typically more stringent than those expected by management. This article reviews case law from Beijing concerning employee misconduct and analyzes the reasons the court found that trust was not irretrievably broken, offering valuable context for HR managers in managing their compliance policies.

Employees who bring employment dispute cases to court are not engaging in behavior that Chinese courts consider as having destroyed mutual trust. In many other jurisdictions, merely initiating legal proceedings may be taken as evidence that the trust foundation is destroyed, justifying termination of the employment relationship.

However, the Chinese system takes a different approach; courts generally do not view workplace hostility, abuse, or insults as grounds for termination and instead require employees to return to work. There remains a strong cultural expectation that employees will maintain an interest in returning to work even after previous disputes have been resolved.

In Chinese employment contract disputes, even when the parties are highly adversarial, the court considers filing for labor arbitration or litigation to be an employee’s statutory right. This means that an employee’s wage claim does not necessarily undermine the trust required to maintain a harmonious employment relationship.

For example, in Beijing Appeal 01-cv-11628 (2023), the parties filed claims against each other multiple times, and the employer argued that there was insufficient trust between the parties to perform the employment contract. The court observed that each party has a statutory right to assert its claims, and doing so in itself is not evidence of a breakdown in trust. Similarly, in Beijing Appeal 02-cv-5232 (2023), despite multiple arbitrations and lawsuits between the employer and employee, the court found that merely asserting the relevant statutory rights does not constitute grounds for termination.

Terminating an employment contract under a specific contractual provision can significantly influence a Chinese court’s assessment of the lawfulness of the discharge. Generally, ending an employment relationship is considered a last resort in workforce management, and employers often argue that the trust integral to the relationship has irreparably broken down.

In some cases, however, a court may reject the argument that a breach of trust justifies termination if the evidence of a contract violation is insufficient or invalid. For example, in Beijing Appeal 01-cv-967, an employer fired an employee for a disciplinary violation, asserting that the ongoing employment relationship was fundamentally compromised. Due to a lack of sufficient evidence supporting the alleged violation, the court ruled the termination unlawful and required the employer to continue performing the employment contract.

Analyzing how courts review the trust grounds for terminating employment contracts and the layoff process, disputes with management or coworkers that are limited to certain individuals and do not affect the employee’s relationship with the entire company do not constitute a fundamental loss of trust. Courts in China adhere to this principle and follow judicial guidelines when reviewing disputes.

In Beijing Appeal 7107-cv-01 (2021), an employer claimed that an employee’s deep personal dispute with a key executive amounted to a loss of trust for the entire company; however, the court disagreed, noting that a personal dispute between a key executive and an employee does not necessarily result in a loss of trust by the entire organization. Similarly, in Beijing Appeal 8873-cv-01 (2020), the court held that although the employee led a dispute over a pay adjustment with their manager and supervisor, the conflict was limited to those individuals and did not undermine overall trust in the employee.

Various factors can influence a court’s determination of whether an employment relationship has fundamentally lost trust. If an employer gathers enough evidence of a breakdown in trust as recognized by the courts, it may successfully argue that back pay is not owed.

Chinese courts have declined to order back pay in cases involving disputes with an employee during a trial period or when the employee has only recently joined the company. They base this decision on the fact that there was insufficient opportunity to establish trust. For example, in Beijing Appeal 4846 (2022), the court held that a trial period does not allow an employment relationship to establish trust, noting that the trial period is a time for the employer to evaluate an employee’s competence and a process of mutual selection, and that the parties have not yet established a foundation of trust.

When employees, especially those who have been disciplined, lack a genuine desire to return to work and are instead exploring legal options, their interest in rejoining the workforce may diminish. Employees seeking reinstatement usually aim for financial compensation rather than a future with the company, indicating that they may not be truly interested in returning.

If evidence shows that an employee’s interest in returning to work is low, a judge is likely to conclude that the essential trust in the employment relationship has eroded and refuse to enforce the continuation of the employment contract. The court may determine that an employee is uninterested in returning if they advise management of their intention to retire, engage in negotiations to set a termination date and severance package, submit a termination approval form, complete an exit interview, or repeatedly decline the employer’s offer to resume the working relationship.

If an employee, aside from the dispute or lawsuit at issue, has additional grievances against the employer, it is important to evaluate whether the original motivation for working together remains intact. In unlawful discharge cases, management commonly raises multiple grievances against employees, while such employees typically do not have serious complaints unrelated to the labor dispute. However, if the employee continues to harbor significant grievances that undermine the original rationale for working together, a court will likely determine that the foundation of trust has been destroyed.

In Beijing 01-cv-2114, the employer repeatedly rated the employee at the lowest possible level while the employee consistently refused to cooperate. The court found that the employer had lost basic trust in the employee’s work approach and attitudes, and the employee no longer trusted management to evaluate performance objectively or handle grievances fairly, which resulted in the withholding of the year-end bonus. Consequently, the basis for cooperation was destroyed, making it impossible to maintain a harmonious and stable employment relationship, and the contract could not be performed.

Numerous significant legal disputes arise between the parties or their affiliates in addition to the core labor dispute. Although problems related to the employment relationship in China do not necessarily indicate a lack of mutual trust, a substantial volume of disputes may be viewed by a court as evidence that trust has been lost.

For example, in Beijing Appeal 622 (2020), in addition to an unlawful termination claim, the employer was involved in a defamation dispute involving a CNY $400,000 lawsuit against an affiliate and its real controller. In Beijing Appeal 4913 (2020), the employee filed a complaint with the Department of Labor Police and against an affiliate of the employer for defamation, while in Beijing Appeal 545 (2023), the unlawful termination claim was accompanied by an unrelated $8 million lawsuit against the employee. In these cases, the court determined that mutual trust had been irreparably damaged.

Trust or fiduciary expectations may be relevant when an employee holds a management role or when the industry demands a higher level of trust. China’s courts recognize that the level of trust required in an employment relationship increases when an employee occupies a management position or another critical role whose performance is vital to the employer’s business.

A court in the Beijing 01-cv802 appeal found that a discharge was unlawful. Despite rejecting fraud allegations against the employee, the court noted that the manager’s performance would materially impact the entire business and carefully considered whether sufficient mutual trust remained to continue the employment contract.

An article on Greater China explains that under certain circumstances, an employee may lose the trust of executive staff, which can serve as lawful grounds for termination without the payment of financial compensation. In one case, a trust manager responsible for a portfolio of valuable art inclusions in a trust lost the artworks and was subsequently discharged by the employer.

Normally, such an action might constitute an illegal termination; however, in the 2019 appeal 1628, additional context was provided that justified the termination in that particular case.

The prolonged labor dispute may be viewed as evidence of a breakdown in trust between the employer and employee, serving as grounds to refuse reinstatement. In Beijing Appeal 1496 (2023), the court noted that a five‐year delay in resolving the employment dispute severely undermined that trust.

The court determined that continuing to enforce the employment contract would significantly disrupt the employer’s business operations and personnel management while impeding the employee’s ability to work effectively.

In certain cases involving disputes with reinstated employees, a mutual lack of trust may develop over time, and internal workplace conditions can become unmanageable due to employer mismanagement. In such situations, failing to reinstate an employee as required is considered significant misconduct that undermines the employment relationship by indicating a disregard for the rule of law.

While lawsuits filed without addressing related disciplinary issues have produced mixed outcomes historically, newer cases have yielded more predictable results. Beijing Appeal 03-cv-11137 serves as a leading precedent for this principle.

A court that believes that applying the law may result in disorder or an unmanageable work environment due to a manager’s poor management typically finds that there is no longer a basis of trust between the employer and employee. Courts take a strict stance on these individual disputes, requiring the employer to provide complete documentation that meets statutory evidence requirements for the documented instance of employee misconduct and to present evidence that such misconduct will predictably and unavoidably recur in the foreseeable future and cause tangible harm to the employer.

Judges are more likely to find a lack of trust and confidence if any of the following factors are present: short employment durations, such as during a probationary period or temporary staffing arrangement; severe tensions between the employer and employee that extend beyond the current dispute, such as lingering resentment from a previous court case; an employee serving in an executive or mission-critical role; a particularly sensitive industry; or a history of unlawful termination prior to the current dispute.

By understanding how Chinese judges make rulings and identifying the main areas of concern, sound legal and documentation procedures can be devised to minimize liability in managing termination disputes.

13. How much severance payment is owed after job separation?

Short Answer:

S is owed severance calculated as 15 times his average monthly wage—computed over the prior 12 months and including social security contributions but excluding personal income tax—with this figure representing his full service duration; additionally, if his termination involved any delay that breached the Employment Contracts Act, he is entitled to double severance, potentially raising the payout to four times the regular calculation.

Discussion:

Mr. S is facing a cascade of events due to a company reorganization that has significantly affected his personal life. As he approaches his forties with financial obligations such as rent, car payments, childcare expenses, and supporting aging parents, he is evaluating strategies to maximize his lawful compensation or damages from the company.

This case examines all the necessary circumstances that require the payment of financial compensation under China’s employment law framework. It interprets these rules as effectively as possible to protect employee interests.

Additionally, the case explores how the law can be better understood and applied to achieve maximum severance payments. This analysis helps clarify the connection between legal requirements and employee entitlements.

China’s legislators have specified several circumstances under which severance is mandatory under the Employment Contracts Act. Under this law, employers may be legally required to provide compensation in the form of a temporary salary, which is typically interpreted as severance pay. Severance pay was first mandated in China under the 1994 Employment Act §28, which established the conditions for terminating employment contracts as set forth in §§24, 26, and 27.

According to China’s Employment Act, negotiated exits from a labor contract, termination for medical reasons following an illness that is not work-related, expiration of the sick leave period, failure to perform adequately after retraining or reassignment, or termination due to changes in financial conditions may all require an employer to provide financial compensation to the employee. Moreover, mass layoffs are recognized as events that trigger the obligation for layoff compensation. The 2008 Employment Contracts Act enhanced these earlier provisions by expanding and further defining both the circumstances that require financial compensation and the methodology for calculating it.

China Employment Contracts Act §46 requires severance when an employment contract is terminated under specific circumstances. Under Chinese law, workers may terminate their contracts and receive severance if a human resources violation occurs, such as failure to pay salary, provide necessary working conditions or protections, or make required social security contributions. Severance is also required when a contract is terminated due to an inability to perform work, material changes in circumstances, or in connection with a layoff. Additionally, severance is owed when an employment contract expires and the parties do not renew, even if an identical or superior offer is made, unless it is explicitly rejected.

These Employment Contracts Act requirements have been in force since 2008. In cases where an employer engages in unlawful conduct, employees may lawfully terminate their contracts with a severance claim, which, as of 2008, also entitles them to statutory liquidated damages in addition to any outstanding wage payments.

Recommended liability mitigation plan: Each provincial and equivalent political entity is authorized by China Labor Act §47 to set a cap on monthly wages considered in §§45 and 46 financial compensation calculations, taking into account minimum wage, average pay, cost of living, and other relevant factors. Social stability considerations mandate a limit of three times the provincial cap and a maximum of 12 years’ salary for financial compensation awards. Local governments may determine the cap on average wages, and the designated legal authority oversees compliance to ensure it is correctly applied.

Courts also compare affected employees with other comparable groups in the community to ensure that the determination is fair and just. For temporary workers with less than one year of service, courts typically do not support financial compensation awards below the statutory minimum wage. Information about wage levels outside Shanghai is available through the National Statistics Bureau website at www.stats.gov.cn and other related government portals. The national average wage is ¥67,569, doubled to ¥135,138, with a monthly wage of ¥11,261; the high income level is ¥372,559, doubled to ¥745,118, with a monthly wage of ¥62,093. Accordingly, basic pay in China for a worker ranges from $1,400 to $5,500.

Employees whose service period spans the January 1, 2008 effective date must have their financial compensation divided into segments for calculation. Financial compensation for employment after the effective date must be calculated under current law, with the accrual period beginning on that date, while compensation accrued prior to the effective date must be calculated and paid using the rules in effect at that time.

The two amounts are then summed to determine the total financial compensation payable to the worker. Compensation for periods before the Employment Contracts Act effective date was calculated according to the Ministry of Labor’s 1994 Circular No. 481, which has been formally repealed although certain aspects remain effective as references. The Shanghai High Court reaffirmed the requirement for segmentation in Administrative Order 2009-73, Opinion on the Application of the Employment Contracts Act in Section 21.

Managing a workforce reduction in China’s regulatory environment requires implementing proper procedures, starting with the lawful calculation of financial compensation periods. Chinese law requires that financial compensation provided when an employment contract is terminated be based on the number of years the employee has worked for the employer, calculated from the hire date.

Generally, this results in one month of severance for each year of employment, with the hire date serving as the reference point rather than the current Employment Contracts Act effective date. For more context on the Employment Contracts Act effective date, see this article.

Calculating Severance Pay for Pre-2008 Employment

If an employee earned more than three times the average local salary, the compensation will cover up to 12 months. Specific amounts are provided in the table below. For an employee whose Employment Agreement is terminated by mutual agreement, resignation, layoff, or due to an injury incurred outside of work, this calculation method applies. For periods after January 1, 2008, daily wages are calculated based on 21.75 days per month using the local average wages, and the payable amount is not further adjusted to reflect employment status.

For example, an employee who began working in January 1994 and whose Employment Contract was terminated by mutual agreement in January 2020 while previously earning 20,000 per month would be entitled to a severance payment equivalent to 24 months (12 plus 12). If the reason for termination was a layoff, the severance payment would be equivalent to 26 months (14 plus 12).

What should be included in the salary for financial compensation calculation? Does it include income tax, Social Security, and pensions? The amount should encompass both Social Security and pension contributions by the employee but must exclude income tax, employer Social Security contributions, and employer pension contributions.

Employers typically distinguish between gross salary and take-home pay. Gross salary represents the total earnings received for performing ordinary work in compliance with the law and aligns with the China Ministry of Labor’s labor law opinions. It includes hourly wages, piecework wages, performance bonuses, allowances, subsidies, overtime pay, and other forms of compensation. Take-home pay is the remaining salary after deducting contributions for Social Security, the housing fund, and personal income tax, and it typically corresponds to the paycheck amounts in other jurisdictions.

Administrative Employment Rules §27 explicitly require that severance pay be calculated using all wages to which the employee is entitled. This includes salary, piece rate wages, bonuses, allowances, and subsidies.

If the employee’s average wage over the trailing twelve months prior to termination is less than the local minimum wage, severance compensation will be calculated based on the local minimum wage. For employees with less than twelve months of employment, severance is calculated using their actual average wage over the entire term of employment.

The local average salary is defined according to government rules and determined using applicable wage statistics. Overtime pay, piecework earnings, allowances, and per diem are considered part of wages, whereas stock, stock options, dividends, and other investment-related benefits are excluded. Although some local governments tax stocks or options upon liquidation as employee income, these benefits are explicitly excluded from the wages used in severance compensation calculations.

Wages encompass the base salary, commissions, allowances, and subsidies payable to employees each month. The employee’s share of mandatory payments for income tax, health insurance, Social Security, unemployment insurance, and the housing fund is also included as part of wages, while the employer’s portion is excluded.

An employee’s monthly wage is calculated as the average of the final twelve months preceding the effective date of termination. Under Chinese law, the wage amount used to determine economic compensation includes the base salary, commissions, allowances, subsidies, and the employee’s share of payments for healthcare, retirement, unemployment insurance, and the housing fund, in addition to personal income tax. For this calculation, wages do not include the employer’s contribution to the five mandatory insurance coverages and the housing fund or investment-related earnings such as stock or option awards.

Severance Pay and Financial Obligations Resulting from Occupational Fraud

Regarding the issue of severance payment taxation, the law provides that severance payment obligations are subject to tax if the amount exceeds three times the local average salary for the preceding year. Under Chinese law, severance payment obligations include a tax preference that exempts payment from personal income tax up to the lesser of three times the local average salary or the total severance obligation.

This policy is outlined in the Notice on Individual Income Tax Preference Harmonization (Circular FSC [2018] 1064), issued jointly by the Ministry of Finance and the State Tax Administration. The Notice treats severance payment obligations, living allowances, and other termination payments as a single category, so any income exceeding three times the local average salary is subject to individual income tax, calculated separately using specific tax tables. The Notice took effect on January 1, 2019, meaning that severance payment obligations are only subject to personal income tax if the total obligation exceeds three times the local average salary; the employer is responsible for withholding the tax amount directly.

The period worked for a staffing agency may be factored into the calculation of monetary compensation under certain conditions. Section 5 of the Circular on Matters Regarding Implementation of Employment Contract Act Procedures in Shanghai (Part 3) stipulates that the rate for discharging monetary compensation obligations toward former employees of a staffing firm shall be determined by the salary specified in the staffing agreement or company policy. In the event of a dispute over this amount, the base compensation shall equal the average monthly salary in the city as reported by the government.

With respect to whether an employee’s work for clients of a staffing agency is included in their employment duration, the Supreme People’s Court Rules on Handing Labor Dispute Litigation and the Application of Law (Part 4) at Section 5 provide that the employment duration shall include time worked for previous employers if the obligation to render monetary compensation was assumed through staffing procedures by the previous employer and if any financial compensation owed during the employment relationship was not discharged.

An employee is deemed to have been transferred from their previous employer to a new employer if the employee continues to work at the same workplace and in the same position without any personal involvement in the change. In this situation, the primary party to the employment contract changes to a different employer.

The facts indicate that S has worked at the X entity for over 15 years and that his circumstances fully comply with the law’s requirements. His work location and tasks have remained unchanged, but the principal party to his employment contracts changed from the staffing agency to the current employer. Furthermore, the original staffing agency never provided him with any financial compensation. Therefore, when interpreting the law, the starting date of S’s employment at the former entity is used to calculate the financial compensation owed, which is based on 15 years of his average monthly salary accumulated over the prior 12 months. This calculation includes social security contributions but excludes personal income tax.

Under China Employment Contract Act §38, S is entitled to demand double the financial compensation for the failure to fully pay as required by law. Considering all the evidence and facts, S may also evaluate whether the company’s termination was unlawful. If so, he could be entitled to demand further compensation amounting to twice what should have been paid, resulting in a total of four times the normal financial compensation amount.

Many companies are planning workforce reductions to lower costs during adverse economic conditions. The most effective approach to terminating an employment contract is to secure an agreement with the employee to end the contract on negotiated terms, as such an agreement often provides a financial settlement that is superior to a conventional layoff.

Workers in China are increasingly aware of their rights and are more willing to use the legal system to defend them. Employers must treat employees respectfully during negotiations and communications about the termination, and it is essential to consult with a lawyer to ensure the process is handled legally and tactfully.

14. Can redundancies be made if there is a change in the market environment?

Short Answer:

Yes, redundancies can be implemented if there is a material change in the market environment, but companies must meet strict legal and evidentiary standards to justify such actions. The expert opinion states that substantial operational difficulties, defined by factors such as a revenue drop of over 60% or severe business losses that render performance impossible, may justify contract termination or redundancies. Employers must support their claims with robust documentation, such as formal revenue reports and bankruptcy audit reports if bankruptcy is implicated, and must adhere to local precedents and relevant statutory requirements. In practice, while the law recognizes a substantial change in objective circumstances—including force majeure events and significant business losses—as grounds for redundancy, the success of such actions depends heavily on compliance with detailed legal procedures and evidence.

Discussion:

The court system has determined that major business difficulties that prevent the execution of a contract constitute grounds for discharge, including in cases of business closures. A more recent case held that significant business losses rendering a contract untenable may also qualify. A plain reading of the statute provides guidance: a National Bureau of Statistics Circular defines major business losses as a revenue drop exceeding 60 percent, and bankruptcy law requires a filing when debts become due and cannot be repaid. Determining whether business losses justify considering a contract impossible to perform is unpredictable and depends on local legal precedent. Generally, if bankruptcy is relied upon as grounds for discharge, supporting evidence such as formal revenue reports and valid bankruptcy audit reports should be prepared in advance.

Terminating an expatriate worker in China requires compliance with both the China Employment Contract Act and its Regulations and the China Exit-Entry Administration Act. Legal employment of expatriate workers generally requires a valid employment contract. Upon effective termination, the company is responsible for canceling the expatriate’s work visa and issuing documentation to facilitate their exit from China. This documentation includes a work discharge certificate, proof of termination of the employment contract, a layoff application with two counterparts, and proof of filing to deregister the employment contract with two counterparts.

An objective change in circumstances occurs when employment contracts become impracticable or excessively costly, thereby defeating the contract’s purpose. Chinese legal systems often refer to this phenomenon as a substantial change in objective circumstances. This change may provide sufficient grounds to terminate an employment contract and end the employment relationship.

More specifically, recognized significant changes in objective circumstances include force majeure events—earthquakes, natural disasters, and fires—changes to laws or policies that require organizational restructuring, facility shutdowns, or fundamental shifts in business nature, and changes to business licenses that materially affect the types of commercial activities an employer may conduct.

Many legal experts consider the Employment Contract Act §40(c) to embody the doctrine of changed circumstances in Chinese employment law. Although a material change in circumstances is theoretically a sufficient basis for termination, in practice employers rarely succeed in terminating an employment contract for that reason. For multinational businesses, examples of changed circumstances might include outsourcing a factory or production line, automation, transforming to remote work, transferring job functions, or relocating positions outside China. One reason for the scarcity of successful terminations is that Chinese employment law is not greatly influenced by judicial opinions or precedents; instead, the binding authority comes from the Ministry of Labor’s China Employment Act Explanation of Certain Provisions, which lists only force majeure, business relocation or mergers, and transfer of business assets as acceptable rationales.

Although labor act explanations have not been updated since the 1990s, recent court decisions have provided some clarity regarding terminations under §40(c). Notable judicial decisions in Beijing, Shanghai, and Tianjin have determined that an employee who refuses a reasonable job transfer invitation has effectively abandoned their employment contract, with courts making fact-based determinations regarding the reasonableness of the transfer conditions and reasons.

If the three contexts change, the provided examples are intended to be illustrative, so the second definition should be used to determine if the new context fits the category. A good strategy is to formulate arguments for the judge using interpretations from China’s central government employment rules and explanations rather than relying on common sense or foreign experts. China’s government has provided three significant documents for this analysis: the China Labor Law Rules of 1996, the China Employment Contract Act Explanations of 2009, and the China Labor Law Act Numerical Guidelines (Nos. 48-56).

Termination may be justified when an employee severely violates the employee code of conduct. The document interprets such violations as fundamental requirements under China Employment Act s3(b), which states that employees must obey employee conduct rules. In several major jurisdictions in China, including Beijing, a violation of the code of conduct without an established disciplinary rule supports grounds for termination and is generally considered a violation of Employment Act s3(b).

When considering termination for serious misconduct, company policy documentation that details conduct definitions and disciplinary responses is critically important. The effectiveness of a policy depends on how well its provisions are written and documented. Even well-written policies may have gaps; in some startups, a policy may not even exist yet. For example, consider employees who do not show up for a month or spend work hours playing video games or browsing inappropriate websites. A lack of policy directions in these areas does not necessarily prevent termination.

Recent Interpretations state that a business can unilaterally terminate the employment relationship if an employee acts against the employee code of conduct and professional ethics. This opinion serves as a restatement of the relevant sections of the Employment Act and is intended to function as a backstop for Employment Contract Act §39.

The disciplinary action must be based on company policy or the employment contract, and the judicial interpretations page should be reviewed for additional details. Chinese judges have traditionally been allowed to evaluate what constitutes a breach of the duty of good faith, although the rise of statutory law and regulators imposing standardized, clear rules means that the outcomes could be inconsistent in some regions. Clearly define in the employee handbook what constitutes unethical behavior and rules of conduct, and state exactly why the employee is being terminated with reference to the policy.

Salary or wage payment provisions in an employment contract require specific clarity as noted on the judicial opinions page. Ensure that an agreement is in place obligating the employee to return any benefit if the employment term is not completed, and document that the employee understands these benefits are provided based on the expectation of a certain employment term. In addition, when time off or annual leave is provided as a holiday benefit, company policy should specify how much leave is accrued each month. Under current rules, if a benefit is not earned in proportion to the time remaining in the contract term, it must be refunded for the remaining duration of the term.

In employment contracts, the Employment Contract Act covers provisions that require an employee to remain employed for a specified period in return for professional or technical training. In practice, contracts often include clauses mandating a service period in exchange for financial benefits, and in these instances, Employment Contract Act §22 prohibits financial penalty provisions for early termination by the employee.

Such clauses are instead described as claw-back provisions for the financial benefit. Although a penalty may not be imposed if an employee terminates early, an employer may withhold any remaining financial benefits and demand a pro rata claw-back. An employee who qualifies for an indefinite-term employment contract may choose to enter into a fixed-term contract, and that contract remains valid. The Explanation states that an employee who qualifies for an indefinite-term contract but nevertheless enters into a fixed-term agreement cannot later demand that the contract be modified unless they can prove that the employer used fraud, coercion, or exploited their vulnerability.

Under local law in Beijing, terminating an employee solely because a fixed-term employment contract expires is unlawful. Consequently, any employee who requests an open-ended employment contract must be accommodated according to local government requirements; however, this law poses an additional challenge because it is difficult to characterize a third or fourth renewal of an employment contract as anything other than a lapse in validity after ten years.

The open-ended employment contract requirement does not apply when an employee has been subject to coercion or duress. In such cases, employers must present evidence of informed and voluntary consent, with the burden of proof shifting to the employer.

15. What can I do about employees who fake attendance records?

Short Answer:

Employers should enforce a clearly defined attendance policy that explicitly states that falsifying attendance records is a serious violation warranting disciplinary action, including termination. This policy must be formally enacted, disseminated, and compliant with legal standards, ensuring that any disciplinary measure taken is legally defensible. When an employee is suspected of recording false attendance, collect solid evidence such as surveillance footage, witness statements, or digital time logs to establish discrepancies between the attendance record and the actual work performed. This evidence supports a defensible decision to terminate employment, provided that the employee’s conduct clearly violates the explicit terms of the policy.

Discussion:

Attendance systems serve a crucial function for employers because maintaining time logs of employee clock-ins is essential for managing attendance records accurately. However, employees often find creative ways to manipulate these systems.

Examples of falsified timekeeping include clocking out after quitting or having a coworker clock in on the employee’s behalf. Organizations should be aware of these practices to ensure the integrity of their attendance records.

The law does not explicitly state that falsifying attendance records constitutes a serious violation of company policy. Nevertheless, courts have upheld employers’ unilateral termination of employment contracts when attendance records are falsified. This review examines the rules and standards established in available case law regarding the evidence needed to justify terminating an employment contract based on attendance falsification.

In the case of Xie v. Company A, the Shenzhen Intermediate Court ruled that the termination of an employment contract was lawful in a dispute regarding time clock falsification. Xie was found to have instructed a coworker to punch the clock on his behalf, and Company A terminated his employment contract in full compliance with its policy.

In his defense, Xie claimed he was unaware of his coworker’s actions; however, Company A presented security camera footage showing that Xie entered the building at a time when the time clock had not been punched and later asked a coworker to punch in for him. Xie’s actions violated a specific provision of Company A’s policy, which had been published and circulated and was consistent with the law. Accordingly, the court determined that the termination of the employment contract was lawful.

In the judicial system in China, instances of timecard fraud, where an employee falsifies records, can support upholding terminations. Judges rely on China Employment Contracts Act §39(a), which permits the termination of a worker if the employee seriously violates the employer’s rules and policies.

Therefore, an employer must provide strong evidence to the judge showing that the employee committed a serious violation of company policy prohibiting timecard fraud and that the company has established an effective policy outlining the penalties for such conduct.

The employer’s policy must specify which section defines falsifying attendance records as a major violation and include a provision stating that such a violation is subject to immediate termination for cause. Without this clear language, the employer risks a court ruling that the termination lacked sufficient grounds.

Falsifying attendance records breaches both the established attendance protocols and the employee’s duty of honesty and good faith. Many employers address these issues in their disciplinary rules and code of conduct sections.

Company policy must substantively state that violating the attendance policy is a serious infraction. It must also formally meet the procedural justice requirements established in China Employment Contract Act §4 by ensuring that the policy is democratically enacted and published.

For example, in EnPak Co. v. S.X., the court determined that because the policy directly affects employee interests, an app-based automated check-in policy introduced on June 1, 2015 had to be democratically enacted. The company was unable to provide evidence that the policy had been enacted in accordance with the law, supporting the conclusion that the mandatory automated check-in policy lacked a legal basis. Although Mr. Cheng did not follow the policy’s directions for checking in, the court did not find his conduct serious and ultimately held that his termination was unlawful because alternative methods were not used.

During litigation or arbitration, the initial investigation focuses on determining whether the employee falsified attendance by establishing evidence of a violation of company policy. Typical violations of a no-falsification policy include failing to sign in according to instructions, falsifying records, using proxies, or signing in when not present on the premises. The prohibited conduct must be clearly stated in the employer’s company policy document.

Evidence must also demonstrate discrepancies between the employee’s actual attendance and the attendance records. If the attendance data is accurate and truthful, even if a proxy is used to sign in, such conduct is generally not regarded as dishonest. In China, asking a coworker to sign in when arriving late is considered a minor issue. To avoid this outcome, the company must prove that the employee falsified the attendance record by showing that the employee did not personally attend the work site or remote work location during the recorded time.

The employer must typically present surveillance video combined with witness testimony or other relevant evidence. However, Chinese courts generally side with the employee. For example, in one leading case, an employer submitted evidence of a duplicated time card meant to disguise absences, but the court rejected it as insufficient proof of absenteeism.

The judge commented that, as a matter of policy, employers should bear the full burden of ensuring that employees are actually present for their shifts, reflecting China’s commitment to maintaining its manufacturing base. Consequently, the law requires employers to enforce rigorous employee timekeeping and policy management protocols to mitigate the risk of negative legal consequences. This requirement inevitably increases staffing overhead costs.

16. Can I take disciplinary action against employees who break rules?

Short Answer:

Yes, disciplinary action can be taken against employees who break rules, provided that the violations are clearly defined as serious breaches within a lawfully approved company policy or employee handbook that the employee has consented to as a condition of employment. Chinese law, under the China Employment Act and Employment Contracts Act, allows termination for serious violations if the company has complied with procedural requirements—such as proper notification, democratic adoption of workplace policies through a labor union or employee meetings, and clear documentation of the infractions. The severity of the breach is determined by its impact on the employer and whether due process has been observed, thereby ensuring that disciplinary actions or termination decisions are both lawful and enforceable.

Discussion:

Employment discipline refers to the minimum acceptable standards and requirements for employees that an employer enforces through its regular management processes. This framework is designed to promote an orderly workplace, ensure that work duties are performed, and hold all employees accountable for following established rules.

Maintaining an organized environment is essential for facilitating efficient operations and ensuring that every employee meets the minimum standards of behavior and performance. By adhering to these principles, organizations support consistent work quality and foster a positive overall workplace culture.

The Employment Act §25 provides that serious violations of company policy may warrant termination of an employment contract. Although the statute does not list examples of what specifically constitutes a serious violation, notices issued by the Ministry of Labor since the early 2000s state that the definitions must be provided in a lawfully approved company policy.

Accordingly, China HR policy generally categorizes disciplinary violations into two groups. The first category, processes, includes procedures for performing production work, technical work, or ensuring health and safety, and the second category, daily conduct, addresses typical issues such as attendance, demeanor, and responsibility.

Employment under the Employment Contracts Act §39 and case law interpreting it states that an employer may terminate an employment contract only when an employee has seriously violated a lawful, fair, and reasonable employer policy. It should be noted that an employee handbook compliant with the law must include complete and accurate company policies supplemented by the employee code of conduct; otherwise, it may be unenforceable.

Consequently, an employee handbook must clearly specify disciplinary requirements and cannot use the word discipline in its informal Chinese sense. The China Employment Contracts Act §17 removed all references to disciplining employees that appeared in China Employment Act §19 and consolidated disciplinary rules under company policy as provided in China Employment Contracts Act §4. Courts have consistently followed these principles by using company policy for disciplinary matters, and an employer terminating an employee must distinguish between violations of codes of conduct and company policy.

There is a difference between whether the code of conduct applies to a specific disciplinary issue or whether the employee handbook is being followed. Any employee may be required to abide by the disciplinary code without advance notice, while the employee handbook must be provided to the employee prior to any disciplinary decision. China’s regulatory inspection policy for labor relations requires that when an employer adopts an employee handbook, it must be negotiated by a labor union or, if a union does not exist, through a meeting of all employees, and a process must follow to ensure that each employee has received proper notice.

The Employment Contract Act strictly codifies the process for creating an employee handbook, specifying that in the absence of a labor union, a meeting of all employees must be held, and if approved, negotiations must be conducted with a labor union delegate. Chinese courts have established detailed requirements and distinctions based on earlier cases. In this context, company discipline and the employee handbook are distinct, and managers should verify the severity of the disciplinary code violation, determine whether proper notice has been issued, and confirm that the handbook was adopted through the mandated democratic processes with each employee being specifically notified.

China’s local law explicitly permits termination of employees for serious violations of an employee code of conduct, and such rules play a key role in establishing precedents across various provinces. The Employment Contracts Act addresses labor discipline in general terms without providing specific guidance. For example, the Beijing Administrative District has local rules prohibiting employers from terminating employment for absenteeism or loafing, whereas Shanghai courts generally do not consider a single day of truancy to be a serious violation of the code of conduct.

The Ningbo Intermediate People’s Court has established precedent that an employer without effective work rules or an employee handbook with clear guidelines may still lawfully terminate employees for serious breaches of the code of conduct if their actions—such as habitual truancy or repeated fighting with colleagues—constitute egregious acts. Where there is an obvious violation of professional integrity, a finding of aggravating circumstances can be made if there are objective facts and sufficient evidence to support it.

A serious violation of company rules involves willful misconduct that contradicts employment contract provisions and causes material damage to the employer. Courts applying specific legal precedents have found that such misconduct may fall under this category if it is shown to materially damage the employer. Typical examples include falsifying or misrepresenting an employee’s ability to perform the role, but subsequently failing to do so, or neglecting to use a required professional qualification.

While in much of the world lying to a customer or client is considered a serious offense or even grounds for criminal action, China does not regulate or penalize deceptive behavior in the same manner. In Forever Company v. Ruan, the Beijing Court ruled on a case where an employee knowingly lied to a client, resulting in a lost sale that could be interpreted as grievous malfeasance. The court upheld the claim, concluding that because lying to a client was not prohibited by the handbook or employment contract, no compensation was owed.

Hiring additional employees while carrying out a workforce reduction appears to contradict the financial rationale for layoffs and can be grounds for rejecting the layoff request. In the Roche Pharmaceuticals Co. administrative review of a layoff dispute, the employer added new workforce headcount just before laying off the final group of employees, which the court described as absurd. The Suzhou Court of Appeals noted that the number of new hires was nearly the same as the number of laid-off employees, concluding that the fact pattern was inconsistent with a genuine layoff and rendered the plan’s filings inauthentic.

The local human resources bureau is notified of the layoff process and plan, requiring management to communicate with the labor union representing employees and engage in good faith negotiations with them. Some local layoff administration regulations provide detailed rules governing negotiations with labor unions or with all employees collectively during the layoff process. During the plan’s design, the employer must obtain feedback, adopt all feasible recommendations, and, before implementing the plan, report to the regulator which recommendations were adopted, while the union or employees may report their own feedback directly. A Beijing judge noted that 21st century domestic management forces a choice between a China office mindset and conducting internal hearings, whereas holding employee leadership meetings that all staff attend is the optimal approach for communicating with employees, improving business operations, and ensuring accountability to a fairness ethos.

A review of court cases in various jurisdictions reveals that unlawful termination often involves absenteeism, significant tardiness, fighting, or striking. These examples come from adjudications by the Shanghai court system.

In Shanghai Appeal No. 1-cvA-0496, the court found that Ji Fengshan seriously violated the employer’s disciplinary rules by inflicting injuries during a workplace altercation on August 17, 2014. In light of his misconduct, the court determined that the employer’s termination of the Employment Contract was lawful, and his claim of unlawful termination lacked legal or factual support, thereby denying him financial compensation.

Ji Furu contended on appeal that termination was not appropriate because the injuries sustained by his coworker were not severe. The court rejected his defense and held that, although the injuries did not reach the level required for criminal punishment, they still constituted a breach of labor discipline that justified terminating the Employment Contract.

The court further determined that physical violence—even if it did not result in significant injuries or lead to criminal prosecution—remains a serious violation of the employee code of conduct. Consequently, his claim for wrongful termination damages was denied.

The court emphasized that employees must comply with company policies on attendance and discipline. In this case, Liu was granted a one-day leave of absence for June 27, 2012, but beginning on June 28 she accumulated nearly two months’ worth of unapproved absences, which her employer determined to be a breach of the disciplinary policy.

Liu contended that she made three requests to her supervisor to resume work but was denied; however, she provided no evidence to support this claim. By August 3, 2012, she had repeatedly failed to report to work for over a month at the time the written termination notice was issued, a conduct the court characterized as a substantial breach of the employee code of conduct. In addition, the employer provided its labor union with a notice outlining the grounds for termination before taking unilateral action.

Under sections 25(b) and 43 of the China Employment Act, an employer may terminate an employment contract for a severe violation of company policy, and the court interpreted these provisions to extend to an employment contract’s personnel policy. The court also held that a letter sent by registered mail constitutes effective service of process and that the company lawfully filed a notification with the labor authorities.

In China, employees are expected to report to work on time. In this case, the employee’s failure to report on time, along with not requesting a leave of absence or providing documentation for sick leave, clearly violated company policy. Even when no specific policy on absenteeism exists, an employer may still lawfully terminate the employment contract.

Wang Haibing v. Lisega Pipe Support Technology (Shanghai) Co., Ltd. Appeal No. 9328, Shanghai Court of Appeal. According to fundamental requirements of Chinese law, employees must adhere to established codes of conduct, protect the company’s lawful interests, and follow directions from management while fulfilling their work assignments.

The court found that on November 13, 2013, during work hours, Zhang Jianjun and more than 20 others left their posts without permission and gathered at another production facility, resulting in an incident involving physical harm. This conduct seriously disrupted business operations and constitutes a serious disciplinary violation. On November 14, 2013, the same workers, including Mr. Zhang, assembled at the site entrance without authorization and blocked the doors, severely disrupting normal operations. This significant disruption of staffing constitutes another serious disciplinary violation.

Absence without permission, in violation of company policy, is a major disciplinary infraction. The court expected the employee to first raise an arbitration claim for unjustified resignation in order to seek severance pay. Nonetheless, the court determined that the termination of the employment contract was valid and rejected the request for severance pay.

Under Chinese employment law, a lawful mass layoff requires that an employee’s contract be terminated first. The law, previously described as strict on layoffs, mandates that the process for selecting layoff candidates be conducted fairly and equitably in strict compliance with the law. Failure to comply with any provision of the Employment Contract Law voids the termination.

In the case of Luo Dongsheng v. Shenzhen Exchange Services, Inc. ([2017] Appeal 7552), the court determined that a reassignment to Shenzhen Exchange Services became effective on May 19, 2022, when that company executed an employment agreement with Luo. The agreement required him to report to the designated work location specified in his role, and his compensation was calculated based on the duties performed at those locations.

Although the job role remains subject to legitimate business judgment, any changes in work location or job duties must comply with applicable legal standards. This requirement ensures that modifications in job assignments adhere to legal standards despite managerial discretion.

The court determined that Luo Dongsheng’s refusal to report to his new job position constituted absenteeism and, therefore, a violation of the code of conduct. The SZSE notified him on May 10 to report for duty, but by May 19, he had accumulated seven days of absenteeism—a clear violation of the code of conduct. Accordingly, the SZSE terminated his employment on May 19 and was not liable for wrongful termination.

In the rehearing, the court ruled that the termination on May 20 was justified because Luo Dongsheng did not provide labor service. In summary, the worker refused a rational job role change and failed to report for duty at the new position for seven days, constituting a serious code of conduct violation. Consequently, the court rendered its decision without reviewing the employer’s policies and procedures, and directly authorized the termination under China Employment Act §25.

Judicial review of terminations for breaches of the employer code of conduct focuses on the general applicability of these standards, which are fundamental to all employees. The first step Chinese judges take when reviewing whether a rule or policy was breached is determining whether that rule is among the most basic standards applying to employees.

Judges strictly apply disciplinary precedents only if the breach is considered serious, and the Chinese character for strict is emphasized above all else. In Chinese culture, determining whether a breach is serious involves many contextual factors, including the employee’s role, the nature of the acts, their impact, and broader social or ethical norms. A termination may be based on employer code of conduct violations only when all these factors, considered together, amount to a serious breach.

Chinese law relies on judicial precedents and official explanations to define acceptable and unacceptable workplace conduct, which generally falls under company rules and policies. In cases determining worker ethics or professionalism, principles such as honesty, company culture, policy compliance, and internal management rules are applied. Courts examine the circumstances of each case to determine whether dishonesty has occurred, and they often find that workers who steal trade secrets are also acting dishonestly, thereby violating legal standards for employee professionalism. Disloyalty and dishonesty are typically seen as behaviors that breach employee professionalism, and several recent cases in China illustrate extremely harsh measures against such misconduct.

At Beijing Municipal Science and Technology Co. Ltd., a court found that an employee named Xiao, with assistance from a customer service employee, refused an order from a customer under false pretenses before resigning. Instead of following the company’s designated channel, he routed the order to another sales channel. Despite Xiao’s appeal, the Beijing Municipal Third Level Intermediate People’s Court determined that he had severely violated employee professionalism standards and deserved harsh penalties.

The China Employment Act allows a company to terminate an employee who commits a serious violation of company policy or the professional code of conduct. Section 39 of the Employment Contracts Act, in conjunction with Sections 3 and 25, provides a basis for management to ensure disciplinary terminations fully comply with the employment policy framework.

These laws require employment contracts to clearly describe prohibited conduct that supports termination as defined by the China Employment Act Section 25. Employees must strictly comply with company policy and the code of conduct, and they are required to observe professional ethics and local public policy when performing their roles.

17. How can I document severe company policy violations by workers?

Short Answer:

Documenting severe company policy violations requires a detailed, step-by-step approach that begins with conducting a comprehensive internal investigation to establish clear, factual evidence of the misconduct. This should include verifying employee actions through reliable records, such as audited work hours, signed employee acknowledgements of company policies, and documented policy updates, ensuring that the policy explicitly defines the violation and its consequences. Employers must follow legally established procedures including notifying the labor union prior to termination and serving termination notices via a method that provides verifiable records, such as registered mail or email. Maintaining all related documentation—from meeting minutes, policy discussions, and communications—to satisfy due process requirements is critical for supporting disciplinary actions in any dispute resolution.

Discussion:

Effective termination procedures are among the most commonly encountered and complex issues in employment management. In China, an employment termination may take several forms, including the expiration of the employment contract, termination during the probationary period, termination without cause, and layoffs or a reduction in force; however, employee terminations for cause due to misconduct tend to generate the most disputes.

Employers often lose disputes despite having adequate facts because regulations and case law require an exhaustive investigation prior to termination, which must also comply with due process requirements. Terminating an employment contract in the China legal environment requires a holistic assessment of all relevant employees’ interests rather than rigidly adhering to fixed positions, and documenting that all steps adhere to legal requirements and organizational policies is essential to succeeding in a dispute.

The labor union must be notified of the intended actions before terminating the employment contract. Notice of termination must be served using a method that provides verifiable records, such as registered mail or email, and even in cases of gross misconduct, termination is contingent upon the completion of all required documentation.

Wang was hired as a restaurant manager at a chain in 2006 and signed an open-ended employment contract in July 2012. In October 2016, Wang violated company policy by requiring employee Yu to work more than nine hours in a day. Wang then obtained Yu’s consent to remove nine hours from that day’s record and assign them to the November 1 work-hour record.

On November 7, 2016, the company discovered during an audit that Wang had altered work-hour records. On December 21, 2016, Wang’s employment contract was terminated for administrative policy violations, accompanied by a report documenting the grounds for dismissal. Wang disputed the termination and filed for arbitration, seeking financial compensation for the unlawful discharge. The key issue in the case was whether Wang’s actions constituted a serious violation of company policy.

China Supreme Court Labor Dispute Resolution Rules §13 states that when a dispute arises in which an employer has dismissed, terminated, or discharged an employee or made a decision affecting compensation, benefits, or seniority calculations, the burden of proof lies with the employer. Therefore, the employer must provide satisfactory evidence of both the fact that Wang deleted an employee’s work records and that the company policy clearly specifies that deleting work records is a serious violation, having been approved by a meeting of all employees and lawfully enacted.

The company provided evidence that, in 2009, an Employee Handbook was adopted in compliance with the Employment Contracts Act of the PRC, setting forth specific employee disciplinary regulations. The Handbook explicitly defined Fraud or Dishonesty, including but not limited to Altering or Falsifying Data or Information, as a major violation of company policy that warranted immediate termination in accordance with applicable labor laws. The company also demonstrated that employee Wang acknowledged and agreed to comply with the Handbook in 2015.

Subsequently, all necessary amendments to company policy were publicized on the company website, and Wang reviewed these policy updates on the company intranet. In addition, the labor union committee issued a Letter of Consent to Terminate Wang’s Employment Contract, explicitly approving the termination.

The arbitrator dismissed Wang’s claims, determining that the termination was factually supported and conducted lawfully. In China, courts review termination disputes to decide whether a policy violation occurred and if it reached a level of seriousness warranting termination.

In this case, the key factors that led to the employer’s success were the sufficiency of the factual documentation and the lawfulness of its procedures. Employers in China should follow these recommendations to guide their approach in similar cases.

Ensure that sufficient evidence is available to support the claim of occupational fraud and to inform sound legal strategies. Determine the accuracy of the facts in the case to ensure that judgments are made on solid legal grounds.

Generally, conduct an internal investigation to establish whether serious misconduct has occurred, and avoid focusing on every possible violation under the $1.5 million standard. Workplace experts writing about discharge and termination recommend focusing on substantive violations rather than chasing every piece of evidence, ensuring instead that any alleged violation is robustly supported by evidence. When acquiring and examining certain types of evidence in China, it may be appropriate to apply e-discovery best practices from a comparable jurisdiction, such as the Northern District of California.

Policies must comply with statutes and be sufficiently substantive. Company policy rules are prepared and adopted in accordance with the law, and disciplinary actions against employees or workers are generally permissible only if they are based on established company policy. The law requires that adopted policies be reasonable, and some policies may be deemed unenforceable if they are not.

Nonetheless, these policies should conform to regulatory compliance standards, meaning that specific policies must have a clear statutory basis where possible. The section of the policy handbook listing major violations that warrant termination must be comprehensive, clearly itemizing what constitutes a major violation, including well-defined catch-all provisions.

Employer rules and policies must be developed through a process that involves all employees, and finalized policies must be provided to all employees. China’s Employment Contract Act §4(b) requires that, before adopting or amending employment-related policies that affect fundamental employee rights, the employer discuss the proposal at a meeting with all employees to receive their input.

After input is gathered, the final version is confirmed through negotiations conducted on equal terms between the employer and employee representatives or the labor union. To document compliance, the employer should retain meeting minutes, communication records, and a copy of the policy distributed to employees that confirms receipt.

Termination in accordance with legal requirements

It is required that the labor union be notified of all terminations. According to China’s Employment Contracts Act §43, an employer terminating an employment contract must provide advance written notice to the labor union stating the reasons for termination. The labor union is entitled to request that the employer remedy any situation where the termination violates any applicable law, administrative regulation, or employment contract. The employer must consider the union’s feedback and inform the union in writing regarding its decision on the discharge.

Chinese law requires that any legal employment termination process include labor union representation. According to Employment Contract Act §43, before an employment contract is terminated as a result of a discharge, the labor union must be notified in advance and provided with the reasons. The labor union has the right to require corrective action if the termination does not comply with applicable laws, administrative regulations, or the Employment Contract, and the employer must respond in writing to explain any corrective measures that will be taken.

Although employers may compile substantial evidence to support a discharge, no legal termination may occur without following these procedures, and many employers in China fail to notify the labor union in advance of their intent to discharge employees. The service of process must also comply with the detailed statutory requirements in China; whenever possible, service should be made in person, and when key documents are delivered by courier or other nonpersonal methods, those requirements must be met. The Chinese administration aims to incentivize businesses to adhere strictly to these procedures by imposing significant penalties on those who are careless. An employee is entitled either to double financial compensation or to continue employment under the existing employment contract.

18. What policy can be used to prevent sales representative reimbursement fraud?

Short Answer:

A rigorous, written compliance policy that mandates strict adherence to documented expense procedures and authentic receipt verification is key to preventing sales representative reimbursement fraud. This policy requires that employees submit valid tax receipts verified against official sources, mandates random spot-checks and audits of expense reports, and enforces zero tolerance for any misrepresentation or falsification of receipts. Any discrepancy or breach of these clearly defined rules is treated as a severe violation of professional ethics, justifying termination and legal action, which deters fraudulent claims and enhances both internal control and regulatory compliance.

Discussion:

Employment terminations related to fraudulent reimbursement claims are among the leading causes of employment disputes in China’s pharmaceutical industry. In a review of 167 labor dispute cases, 36 cases—approximately 22%—primarily involved fraudulent reimbursement claims.

False expense reports have a significant impact on medical and pharmaceutical companies in China, where corruption is widespread. Pharmaceutical sales workers often engage in unethical practices endemic to the industry, such as giving kickbacks to doctors for writing prescriptions for specific products. This practice violates the Unfair Competition Act, Sec. 7, concerning bribery, and has resulted in significant administrative penalties for several pharmaceutical companies.

This misconduct is compounded by a pervasive practice of freely transacting in cash, which can seriously hinder the economic growth of these companies. False expense reports are viewed as a form of embezzlement that undermines compliance efforts. A cultural issue in the workplace is that employees in medical representative and pharmaceutical sales positions frequently abuse the expense reimbursement system to obtain cash that is then used to pursue business opportunities or serve personal interests. While this behavior causes direct financial losses, it also creates additional regulatory risks that companies rigorously target for elimination.

False reimbursement claims under Chinese employment law are defined as a fundamental violation of professional ethics, with courts and arbitrators consistently characterizing the act of submitting a false reimbursement claim as a breach of trust between employer and employee regardless of the amount involved. Courts have taken a harsh view on terminations, holding that even a small expense reimbursement claim constitutes a serious act of dishonesty that justifies dismissal.

The fact patterns in such cases render the specific amount claimed immaterial because the core issue is the undermining of the trust relationship between employer and employee. Generally, most courts view a loss of trust as sufficient grounds for termination, basing their analysis on the severity of the breach rather than the magnitude of the financial loss.

The burden of proof in these disputes rests with the employer under the Civil Law Code and according to the Supreme Court’s opinions on labor disputes, also known as interpretations. In cases where an employee is terminated, the employer must establish that the termination was lawful.

Regarding fraudulent reimbursement claims, the employer must prove that specific requests were fraudulent. This task is challenging since the judiciary is generally skeptical that discrepancies in POS receipts constitute fraud. The employer’s evidence must persuasively demonstrate a pattern of fraudulent behavior by the employee, including malicious intent, for a judge to conclude that fraudulent reimbursement claims occurred.

Chinese regulators have stated that receipts are issued by merchants, such as restaurants or managers, and must be provided in exchange for purchases. In Shanghai Second Appeal case 692-CV-TX, the court observed that an employee’s failure to produce a required receipt or to prevent its loss is not considered a reasonable or compliant business practice.

Legal commentary further notes that employees and entrusted third parties should collect genuine receipts that adhere to company policy, which must be followed even if conducting authentic transactions is inconvenient. Courts have held that such noncompliance does not excuse employees from liability, even when managers are aware that compliance policies in China may not function as intended. Upper management, in particular, has expressed doubt over whether China’s transparency policy can be effectively implemented, leading top performers in China to adopt innovative approaches to meet both compliance requirements and policy.

Receipt falsification should not be used as the sole evidence in disciplinary proceedings to conclude that an employee committed fraud. Instead, employers must rely on falsification in conjunction with other evidence that the employee acted in bad faith with the intent to disguise the nature of an expense reimbursement; in short, that the employee committed fraud. Chinese courts have considered factors such as the number of falsified receipts, the history and duration of the falsification, the total value of the falsified receipts, whether the employee colluded with a third party, and whether more than two types of expenses were falsified.

In Shanghai case 01-cv-10993 (2016), Wang was employed by China International Intellect Tech Co. (CIIC) in May 2013 and assigned to work at a pharmaceutical company as a Senior Medical Representative. In August 2015, the pharmaceutical company accused Wang of falsifying expense reimbursements, a severe violation of the company’s compliance policy, and subsequently returned him to CIIC in accordance with the Employment Service Agreement. CIIC then administratively terminated his employment contract. To establish that Wang falsified expense reimbursements, the pharmaceutical company retained Company B to investigate the receipts and produce a report concluding that:

A review of two reported cases illustrates how courts reach decisions in these matters, beginning with a loss for an employee at a pharmaceutical company. On December 22, 2014, Wang submitted a value-added tax receipt listing 30 boxes of chocolate for a total value of 5,607 CNY, but it was later discovered that he had purchased gift cards, a practice prohibited by company policy.

Additionally, four receipt book invoices and sixteen general receipt form invoices submitted by Wang were verified against the authenticity system of the Beijing Local Tax Bureau and determined to be falsified. For 70 invoices that lacked purchaser contact information, the company requested an opinion from the Beijing Chaoyang Local Tax Bureau, which on May 12, 2016, determined that the entity listed on the receipt, Beijing Hotel A, had no record of making a purchase.

An internal investigation into Wang’s reimbursement requests revealed that the merchants were complicit in falsifying the tax receipts. The trial and appeals courts both held that Wang had severely violated the company’s compliance system and that all evidence demonstrates he committed expense reimbursement fraud, with no damages or compensation awarded.

In reviewing the case, it is critical to note that the company provided clear proof that Wang both falsified receipts and submitted them in violation of company policy. A large number of receipts involving substantial sums of money were proven by the tax bureau to be falsified, enabling the company to meet its burden of proof in showing that Wang acted with malice. Additionally, the company’s visit to the merchants confirmed that Wang was working with them to falsify receipts, further indicating his intent to defraud the company.

Government filings document that an employee submitted genuine invoices for actual business expenses while manipulating the reimbursement process. Examples of manipulation include purchasing prohibited items, misrepresenting expenses, and submitting expenses for unauthorized purposes.

A lower court hearing in similar cases held that when company approval is present or enforcement is lacking, terminating the employee may not be justified; some courts have even ruled that company policy has been implicitly modified to permit these practices. Nonetheless, with sufficient evidence that human resources has taken a zero tolerance stance on these violations, terminating the employment relationship may be legally upheld.

Falsified or forged documentation supporting an expense request reflects significantly more culpable intent by employees who generally use fake or entirely fabricated records. From the court’s perspective, this conduct constitutes a major violation that warrants granting a motion for summary dismissal. The key legal issue in these cases is how to prove that the employee engaged in this specific misconduct.

Pharmaceutical firms typically gather evidence through a variety of investigative methods. Initial strategies include using a local tax authority website to verify an official tax receipt’s authenticity, contacting third parties such as restaurants, hotels, or transit providers to confirm the events stated in the reimbursement, and visiting hospital locations where the medical representative claims to have conducted events to verify the venue and the personnel in attendance.

For example, one German-invested pharmaceutical company conducted investigations at multiple hospitals and discovered that doctors listed on the sign-in sheets submitted by medical representatives for events had not attended. The company verified that names on expense reports for meals were fraudulent, and in another case, an employer discovered during an investigative visit that a hospital listed as the venue for an academic event did not have rooms with the specified names. The judge upheld the company’s determination that the employee had falsified the events, awarding significant judicial relief.

Numerous additional court opinions demonstrate the Chinese judiciary’s support for judge-issued investigations. In Suzhou Civil Case 0591-cv-107, a doctor sought to withhold payment card information supporting a cash register receipt despite a subpoena, but the court granted the employer’s application for a judge-issued order to financial institutions to obtain the complete statement, which did not include the receipts in dispute; as a result, the court found the employee guilty of expense report fraud. In Suzhou Appeal 01-cv-511, the employer obtained legal evidence by having the judge inspect the retail plaza where the employee purchased gift cards for reimbursement, allowing the claim to be challenged as fraudulent. Chinese law entitles pharmaceutical companies to employ such judicial resources, as the court may authorize a judge-issued subpoena to conduct investigations into relevant third parties.

In Chinese judicial practice, the law is divided on whether a company’s disciplinary action is appropriate for expense fraud cases when the internal process has been approved without objection. In some instances, employees have argued that management approval of a reimbursement request serves as an acknowledgment that no misconduct occurred, yet precedents show that management may still prevail in court despite such assertions.

For example, in one leading case, the company hired a medical representative in September 2003 under an employment contract set to expire in September 2015. The representative was assigned to work at the company’s Guangzhou office, where they were responsible for marketing the company’s prescriptions to local hospitals. In 2013, the medical representative received an email notifying them that their employment was terminated due to findings of expense fraud.

Chinese judges conduct trials without a jury and require extensive evidence to establish facts. For a full list of evidence requirements and evaluation criteria, please refer to the whitepaper on Dispute Documentation.

The employer produced evidence alleging that Jia submitted falsified expense receipts and disputed the validity of his claims. The evidence indicates that the reimbursement receipts originated from an entity providing business or other services rather than from a health and safety qualified restaurant provider. The receipts were issued by a tax station categorized as other services, which misrepresented the type of service provided even though they described the service as food and beverage services. Business records research showed that the other services entity did not serve food at its registered business address or at any other locations. Moreover, the expense claims consistently included numerous meat dishes but no vegetables or drinks, which is not consistent with common dietary practices. In addition, certain dates on the receipts indicated they were issued before the corresponding credit card payments were made. In his defense, Jia argued that the receipts were legitimate and that the company had previously approved all expense reimbursement claims rather than deeming them falsified.

The lower court noted that the pharmaceutical company did not promptly object to Jia’s reimbursement claim, and it made specific findings that the items were not consumed. Despite evidence from Zhangdan suggesting consumption did occur, there was no timely objection to the reimbursement, so the company’s later claim of fraud lacks factual support. Payment systems did not record any objections, affirming the appropriateness of the reimbursement process; as a result, the company had been aware of his method of reimbursement for an extended period of time. Consequently, the court found the discharge to be unlawful and awarded severance pay, and notice of appeal was subsequently provided.

On appeal, the company argued that its expense policy requires receipts to be forwarded to company headquarters after being filed in the electronic system along with all explanations. The finance department reviews the receipts and verifies the calculations, but it does not determine whether the expense was actually incurred. However, staff conduct spot inspections and take action to address false reimbursements.

Trial Court Findings: In 2012, Jia requested approximately 90,000 yuan in meal expense reimbursements. The request was supported by invoices from service providers that appeared to be for dining services but provided no evidence of actual consumption. The five companies issuing these vouchers neither operate as restaurants nor hold business licenses for food and beverage services.

The court ordered Jia to provide the location where he ordered the food, and Jia responded with an affidavit stating that he could not remember because too much time had passed. Jia contended that a typical consumer is not required to verify whether a restaurant holds the proper licenses to issue fapiaos. He further argued that when an employee submits a fapiao—even if company policy ordinarily renders it non-reimbursable—the expense is deemed to have been incurred, and the financial department approved the expense reports without objection until a global wave of terminations, including his own, at which point these defenses were retroactively constructed.

On appeal, the court held that the company must apply reasonable spot checks for irregularities in invoices submitted by employees as part of an effective post hoc financial controls policy. In this case, the identified irregularities gave the company reasonable doubt about the authenticity of the invoices.

The company reimburses Jia’s expenses for meal meetings only if he actually dined in a restaurant and made the purchase, which is a fundamental requirement of the corporate accounting management system. Due to high levels of trust in Jia and efficient procedures in place, management at all levels and the finance department reviewed all reimbursement requests and processed the payments. Submitting an invoice receipt without actually dining in a restaurant and making the purchase does not qualify for reimbursement and is considered equivalent to using falsified tax receipts.

The company policy stipulates that even after management approves an expense reimbursement, if records demonstrate that the expense did not reflect actual consumption, the individual requesting reimbursement is held liable. Auditors may require the claimant to provide specific details, such as the location where the expense was incurred, for verification purposes. In this case, Jia’s total annual expense submissions exceeded 90,000 CNY and were seven times above the industry’s average, prompting further review. Because the evidence did not establish that actual consumption occurred, the court’s statutory inference—following Chinese judicial guidelines—concluded that the expenses were allowances for personal consumption rather than legitimate business expenses. Jia also failed to provide the documentation necessary to support his claim for business-related expense reimbursement, leading the court to reject it, and the company’s check payments to Jia were reviewed and consistently covered the full amount, further indicating a lack of legitimate expenses.

Based on these facts, the appellate court upheld the company’s decision to discharge Jia as lawful. The case opinion notes that cases involving falsified expense reimbursement receipts require a substantive review of whether the employer’s procedures were followed or disregarded, a factor that materially affected the outcome regarding the termination’s lawfulness.

The first type covers reimbursement requests that would otherwise be valid but rely on falsified or erroneous tax receipts. China’s tax agencies maintain a comprehensive online database of Value Added Tax receipt records and now issue e-invoices, which means that verifying the validity of a tax receipt is largely automated. Reimbursement requests for purchases made with falsified or erroneous receipts ordinarily cannot be approved and should be rejected due to fundamental negligence.

Under Chinese law, even if these requests are approved, the employee remains responsible for any resulting loss caused by their negligence and is liable for submitting erroneous receipt reimbursement requests. For reimbursement requests that include highly inaccurate falsified receipts, an enhanced compliance program similar to a Sarbanes-Oxley Act program may shift liability to the employee. Courts have held that an intent to defraud is considered far less credible than claims of management negligence.

Type 2 occurs when the facts and tax receipts are accurate, but the claim itself violates company policy and the employee acknowledges this violation. In some cases, the reimbursement policy may have been modified by long-term customary practice. A senior manager might be tempted to use this discretionary power to achieve better results, and management and regulatory bodies may later assert that the reimbursement policy has been substantively changed.

Type 3 involves situations where the underlying facts are false. Common examples include submitting fake receipts and falsifying the information underlying the claim. Although these claims are sometimes approved, most finance and accounting systems incorporate fundamental principles addressing falsification. Every business has the right to spot-check and audit claims and to reject reimbursement requests when the facts are fabricated or when receipts are used for personal consumption. A business is therefore permitted to determine that even an approved reimbursement request violates company policy and ethics, and it is entitled to take appropriate actions, including termination.

The phrase reflects industry characteristics implies behaviors initially thought to be unique to the healthcare and pharmaceutical sectors, but a more accurate description is that this behavior commonly occurs across all industries, with a particular prevalence in pharmaceuticals.

Healthcare and pharmaceutical companies should establish a written compliance policy with clear procedures for handling invoices and reimbursements that are integrated into internal controls while strictly enforcing the expense policy. Under no circumstances should expenses be regarded as a cost of sales. A rigorous process to review all invoices submitted by employees should be implemented, either by using dedicated software tools or by manually querying tax bureau servers for records of each invoice. If an employee is found to be violating the expense policy, as much evidence as possible should be gathered, potentially by retaining a private investigator. After terminating an employee, the robust subpoena power of the Chinese judiciary can be employed to gather evidence proving that particular receipts are fraudulent.

19. How should employers respond to sexual harassment claims?

Short Answer:

Employers must establish and enforce clear, comprehensive anti-harassment policies that include detailed procedures for reporting, investigating, and addressing sexual harassment complaints. They should proactively monitor the workplace, ensure robust training for employees, and comply with legal requirements by consulting with labor unions, holding deliberative meetings, and collaborating with legal counsel to validate their policies. Additionally, employers need to maintain strict confidentiality during investigations, thoroughly document digital communication evidence, and implement fair disciplinary measures to prevent retaliation or wrongful termination, ensuring that all steps are rigorously followed to protect both victims and the rights of the accused.

Discussion:

The definition provided in China Civil Code Section 1010 lists words, photos, images, and physical contact as examples of conduct that can constitute sexual harassment. Statutory interpretations over time have held that obscene emails, gender-based jokes that insult or stereotype, or the display of sexually explicit materials constitute sexual harassment. Most cases of sexual harassment in China occur via email, messaging apps such as WeChat, or social media.

A provision in the Women Employees Employment Law requires employers to take action to prevent and stop sexual harassment in the workplace. Despite these laws, the statutory language remains ambiguous because it does not clearly define what constitutes harassment or specify the legal responsibilities of businesses, which often leaves victims struggling to protect their legal rights and interests.

China Civil Code Section 1010 defines sexual harassment as engaging in behavior involving words, text, images, or physical conduct of a sexual nature against another person without consent. The primary criterion for an act to be considered sexual harassment is that it is unwelcome and infringes upon the recipient’s dignity and integrity.

Examples of sexual harassment in China include physical contact, such as inappropriate touching, groping, or kissing, as well as manifestations in written or graphic form, such as inappropriate images or obscene emojis. Courts in China, including those adjudicating under the Women’s Rights Act and the Occupational Safety for Women Act, have acknowledged that men may also be subjected to such unfair treatment, and as a result, the Civil Code no longer treats the right to be free from sexual harassment solely as a women’s rights issue, with judge-made law now explicitly gender neutral.

The Protecting Women’s Rights Act obligates companies to take reasonable action to prevent sexual harassment and provides detailed instructions on updating their human resources policies accordingly. For almost two decades, the China Supreme Court has consistently held employers liable when they fail to take effective action to prevent or address incidents of sexual harassment. In severe cases, terminating an employee immediately after an incomplete review of a sexual harassment complaint has led courts to award significant compensation for unlawful termination. Additionally, under China’s employment regime, hiring an individual with a history of harassment-related terminations can be problematic due to the absence of at-will employment and the doctrine of implied contract. Therefore, employers should carefully consider these legal obligations in their risk management strategies, ensuring that plans are clear, effective, and strictly followed.

Although termination outside of China is often viewed as the end of the story, in China, under the civil law doctrine of good faith, justice may require providing a second chance.

The following steps should be taken to address sexual harassment in the workplace in China. First, develop a comprehensive policy that prohibits sexual harassment and establish a robust protocol for processing complaints and delivering feedback. This will enable whistleblowers and victims to report incidents effectively.

In addition, review governance procedures for conducting company investigations to ensure that the procedures clearly define their scope and protect the privacy and reputation of all staff involved. Specify disciplinary procedures to indicate that severe policy violations, including sexual harassment, may result in termination without financial compensation.

While most managers can be trusted to create sensible policies, they are generally unaware of China’s procedural requirements for doing so. The procedures for establishing company policies that materially affect employees are governed by Employment Contracts Act §4(a). This law requires that proposed policies originate either through negotiation with the labor union or through a meeting of all employees where feedback is solicited. In any event, the labor union is entitled to negotiate on behalf of the employees before any new policies are implemented.

After new policies are enacted, they must be posted in an accessible location or provided directly to employees in writing. To comply with these requirements, it is advisable to work closely with outside legal counsel to ensure the provisions are rigorous, practicable, and lawful. Employees must be thoroughly trained on sexual harassment prevention and should receive handbooks summarizing the content of any talks or seminars presented. They should also be able to recognize sexual harassment and understand the appropriate process for protecting their rights.

Harassment prevention policies must comply with Chinese law by detailing penalties for violations and protecting the privacy rights of both the accused and the victim. Cases in which the conduct constitutes an administrative or criminal law violation should be referred to law enforcement, as described in the China Sexual Harassment Prevention Law.

Strict confidentiality procedures should be maintained to ensure that no information becomes known about someone who has been harassed. In addition, counselors should be made available to help victims cope with any psychological trauma they may be experiencing.

20. How can theft by employees at China sites be stopped?

Short Answer:

Implement stringent internal controls including comprehensive background checks, restrictive access to high-value areas, and rigorous, frequent audits combined with video surveillance and robust inventory management systems. Employee theft can also be curtailed by fostering a transparent, punitive, and proactive work culture that emphasizes ethical conduct and accountability through clear policies, training, regular monitoring, and prompt disciplinary action when breaches are detected.

Discussion:

In China, numerous reported cases detail employees misappropriating property by exploiting weaknesses in internal controls and management oversight. Such incidents pose a major legal compliance risk by often providing early warning signs of occupational fraud. Companies can reduce this risk by promptly initiating an investigation and taking appropriate action. This article reviews the legal basis for occupational fraud in China, examines common characteristics of offenders, provides prevention tips, and evaluates the best methods for pursuing legal remedies.

The China Criminal Code provisions on occupational fraud apply to employees who misappropriate property by abusing their roles or responsibilities. A significant amount of misappropriated property constitutes criminal occupational fraud. When the misappropriated amount falls below the criminal threshold, companies may take disciplinary measures, such as termination, and pursue civil remedies for the return of the property. In addition, companies may seek appropriate liability if the misconduct causes damage. Strict enforcement of penalties and adherence to proper legal procedures in addressing occupational fraud are critical to protecting a company’s interests.

Business executives in China should be alert to several common types of occupational fraud. A classic example involves warehouse managers or logistics workers who, exploiting gaps in oversight, lose items that they later sell. Alternatively, management or sales workers may use their control to make overpriced purchases from their personally owned company and pocket the difference. Employees also often falsify tax receipts when seeking expense reimbursement. Note that impropriety and conflicts of interest overlap in these examples, as using personally owned companies for sales likely violates company conflict of interest policies.

As China treats falsified tax receipts as use of forged documents, this misconduct can carry significant criminal liability. Selling receipts of modest amounts is already criminal, even if at the lowest occupational fraud level. The criminal law provisions covering falsified receipts for ordinary proper VAT receipts are aggressive, requiring that either 100 falsified receipts or an amount of CNY 400,000 be reached in order for the act to be deemed criminal. Provisions for falsified receipts related to special VAT receipts are even more stringent, as using and issuing such falsified receipts must be distinguished—if these occur, the company itself could be criminally liable. A company that discovers an employee’s use of falsified receipts should be especially mindful of these issues.

The Criminal Code requires only mere knowledge of the forgery rather than intent, making prosecution relatively straightforward. Continuing to hold such invoices may trigger criminal liability if it is discovered that an employee has submitted more than 50 falsified tax invoices or if the total exceeds 200,000 RMB.

If a company has applied a business expense deduction on its VAT tax for corresponding purchases under its business expense deduction policy and later finds that those purchases are supported by falsified invoices, an administrative penalty may be imposed to recover unpaid tax and interest. Affected businesses should immediately contact their local tax bureau to negotiate a resolution and avoid potential administrative penalties for noncompliance.

Notice that in China Criminal Code §271, personnel does not refer solely to employees of a company or enterprise. With the modern use of outsourcers, temporary staff, and contract labor, other service providers can also be criminally liable under this statute.

Authority refers to a person’s level of responsibility in performing specified tasks, so it is irrelevant whether someone is formally employed if their role is essential for conducting business operations. Workers at a staffing agency, interns, outsourced service workers, or individuals employed on contract can all be subject to this statute. For example, an outsourced accountant for a car parts sales business who commits embezzlement could be charged with occupational fraud.

The employee must have exploited their position of substantial advantage, which may include seniority, management authority, or the right to access and handle company assets. If a person who does not hold a position of substantial advantage takes or uses company property without proper authorization, the conduct is generally classified as theft or civil embezzlement under other criminal law provisions. These cases center on whether the position provided access or control over financial resources, and criminal liability requires the purposeful misappropriation of company property. Company property is defined broadly to include not only assets it owns but also those it temporarily possesses due to custodianship, management services, or outsourced work under contractual obligations.

Chinese judges in criminal cases are required to apply the subjective intent theory, similar to that used in jurisdictions such as California, meaning there must be criminal intent to misappropriate resources belonging to the company. Negligence or gross negligence does not establish liability. The theory of culpability is person-focused rather than entity-focused, so an employer generally cannot be held criminally liable for an employee’s actions, and an employee is not liable merely because their employer engaged in separate corruption. Criminal intent to misappropriate company property involves an intent to assume personal ownership rights, disposal rights, or to derive a benefit from the assets.

Legal Consequences for Occupational Misappropriation and How China’s Courts View Flying Orders

In cases of non-compete or flying orders behavior, practitioners should carefully analyze each instance to determine whether the facts satisfy the elements of occupational fraud. A clear example of occupational fraud is when an employee uses their authority at the company to redirect sales orders to a company they own or control in order to collect the profits. In some instances, sales force staff use company resources to develop clients and refer orders to a different company than their employer in exchange for a commission or kickback; in China, this conduct typically resembles private party bribery rather than occupational fraud.

Knowledge of the criminal penalties imposed by China’s courts is essential to forming an effective legal strategy. A conviction under China Criminal Law §271 for occupational fraud carries a prison sentence of up to five years or detention, while cases involving large amounts have a base minimum sentence of five years and may also include asset forfeiture.

A 2021 regulation issued by the Supreme People’s Procurate and the Supreme Court defines a large amount as RMB 60,000. Companies should consider referring an employee to law enforcement if they obtain evidence that misappropriation has amounted to at least RMB 60,000 (see Xiang 0502-cr-113, 2019).

In one case, two employees misappropriated company property while serving as a warehouse manager and a procurement agent. The procurement agent recorded false order quantities and submitted them to suppliers, who then fulfilled only the required amounts. The warehouse manager entered falsified stock receipts and reported inflated usage figures, and the company’s payment was subsequently siphoned off to the employees, the supplier, and other co-conspirators. The company engaged an accountant to determine the amounts paid to the supplier, and the court found that the two employees had misappropriated company property in their positions and were guilty of occupational embezzlement.

Internal investigations of occupational fraud cases are challenging because procedures for conducting them are highly restricted. Collusion with third parties may result in no company record of a transaction, and cash transactions are often impossible to document. Even when an employee transacts with their own wholly owned business, the transaction is likely registered under someone else’s name; with offshore transactions, it is very difficult to determine whether a company is controlled by an employee due to financial secrecy making the identification of beneficial owners particularly challenging.

Obtaining crucial documents such as internal books, tax records, bank transaction records, and key witness statements often requires the involvement of law enforcement and the judicial process. China’s criminal justice system mandates that this evidence be developed through a solid preponderance of the evidence, making it essential to use outside lawyers, private investigators, and accounting firms to gather facts as the basis for initiating a case.

China’s trade secrets law applies to employees who use an employer’s customer lists for their own purposes, and claims for damages may be pursued if there are losses resulting from such unauthorized use. In China, a trade secret violation involving gains or losses exceeding $40,000 may result in criminal prosecution under Supreme Court Interpretation on Intellectual Property Crime No. 3.

Representative cases provide insight into the law’s application. For example, in Beijing case number 17648 in 2014, an employee formed a company to purchase the business’s offerings and resell them to the same customers. The court held that this conduct violated trade secrets law and constituted unfair competition, and it ordered compensation for damages.

The two primary challenges are defining a trade secret and determining the amount in controversy. In China, a trade secret must be proven to be nonpublic information that has economic value, utility, and trade secret protection. The trade secret holder must demonstrate that appropriate measures were taken to protect the information. These measures include entering into non-disclosure agreements with employees, encrypting electronic documents, using locked filing cabinets, marking documents as Confidential, establishing effective trade secret protocols, and conducting periodic trade secret protection training.

Not every customer list is guaranteed to be a trade secret. According to the Supreme People’s Court in its Unfair Competition Interpretations Section 13, a customer list constitutes a trade secret when it is a collection of customers accompanied by special data, such as business identity, address, and contact information, that identifies behavioral patterns differing from generally known public information. A mere list of customer names and contact information is not considered a trade secret; however, if that information is developed over time with a detailed history of transactions and behaviors, it may be protected as a trade secret.

Significant disputes continue to arise in China over what information qualifies as a trade secret and how losses should be calculated. Although courts have held that customer lists are not generally considered trade secrets, the content of a request for quotation usually is, because it is issued at the customer’s discretion to a limited number of suppliers, kept confidential, and offers a direct economic advantage. Quantifying losses can be especially challenging. In one common scenario, employees use trade secret information to recommend low-price purchases and claim they are not required to choose the lowest price if they subsequently obtain approval, arguing that the company suffered no loss. In cases where a customer places an order with a distributor, proving that the order should have been made with the rights holder can be difficult because distributors often offer more flexible payment terms. Despite these challenges, Chinese judges traditionally rely on their discretion and experience when resolving these issues, so any supporting evidence can be helpful in reaching an equitable decision.

If financial data from multiple firms in the same industry is available, that data can be used to calculate an industry-average profit margin; this profit margin can then be applied to the portion of revenue obtained from the client by the Flight Order as a result of the harm.

The Chinese Employment Contracts Act §29 stipulates that both employers and employees must fully perform their contractual obligations. If either party fails to do so, the breaching party is required to indemnify the non-breaching party for any losses sustained.

For example, in one case a sales engineer operated a side business and diverted client orders intended for his employer to his own operation. The court applied the Chinese Employment Contracts Act along with relevant provincial law, holding that any breach of agreement required the responsible party to fully compensate the non-breaching party, and affirming that the occupational position demands complete adherence to the terms of the agreement.

In China, directors, managers, and executives found to have committed occupational fraud are typically terminated for a material breach of company policy or for failing to perform their duties. This type of termination is the most common subject matter in labor dispute cases and may be managed as a separate matter under the Conflict of Laws Act rather than as a trade secrets dispute.

In labor dispute cases, arbitration is mandatory, whereas prior to 2002 the judge served only as a judicial reviewer of the arbitration award. In addition, the employer is required to pay a specific sum for damages resulting from the breach, a requirement that does not apply in intellectual property intangible valuation cases where judges may independently determine damages. Furthermore, legal expenses are not awardable in a China labor dispute case, while the Anti-unfair Competition Act allows them to be included as part of damages.

Companies facing an allegation of occupational fraud against an executive must take three key precautions. First, evidence must be fully preserved. A surprise investigation can help secure the most evidence possible. For example, in a case involving an executive committing fraudulent reimbursement claims, all items on the executive’s desk—including bookcases, computers, and documents—were promptly sealed for evidence preservation.

Second, employment actions should be taken to address the situation. Rather than terminating the employment relationship immediately, it is advisable to place the executive on leave and change their duties, thereby preserving the employment contract to ensure continued access to vital information. Generally, the guiding principle is to act lawfully, creating a compliant plan of action that minimizes legal risk.

Employee compliance policy should provide detailed coverage of information collection, training, whistleblowing, and document management. An employer’s policy must include requirements for collecting employee information at the time of hiring and should provide background reports. After onboarding, employees must receive compliance training that explains the potential consequences of violating company policy, and documentation of their attendance should be retained.

Additionally, the company should establish a hotline to report non-compliance as an essential channel for identifying internal issues. Employers should provide convenient and efficient reporting methods, such as a dedicated email address or phone number, and establish processes for handling reports along with an organized method for conducting investigations. This process should include a written procedure with a compliance committee composed of human resources, legal, and internal audit staff that details how to handle reports and escalations and specifies when external counsel should be contacted.

When dealing with suppliers, there is a high risk of collusion or conflict of interest when an employee creates their own entity and sells to the business as a vendor. A thorough background check and conflict of interest review on potential suppliers is essential, and the selection process can be enhanced by requiring reviews and approval from at least two qualified executives. During ongoing transactions with a supplier, periodic reviews of their qualifications and pricing should be conducted to ensure fairness, with on-site visits, audits, and inventory checks also considered. If audit results indicate non-compliance with law or company policy, a plan should be implemented to exit the contract for breach.

In China, the most common type of occupational fraud involves the use of fake or falsified official government receipts known as fapiao for inappropriate reimbursement. These receipts are often used to conceal bribery, fraud, and tax evasion schemes, so internal reimbursement policies should require finance department personnel to verify the authenticity of every reimbursed fapiao. Reimbursement procedures must include complete supporting documentation, such as receipts for purchases, with approvals granted by two tiers of oversight. It is advisable to use automated software tools to improve the detection of fapiao fraud.

The following measures ensure the collection of evidence that cannot be easily challenged in court. Immediately intervene to secure the employee’s computer and copy the hard drive for analysis. Because many clues relating to occupational fraud and compliance issues can be found on a work computer, the employee should be placed on temporary leave to prevent the destruction of evidence. Ensure that data is preserved and reviewed under strict procedures that prevent tampering or challenges in court. Begin by working with a notary public to preserve the data and retain a digital forensics expert to ensure the evidence remains intact during collection. If the data resides on a website, contact a notary public immediately to certify its existence.

Attorneys assisting with the investigation can help plan a course of action, including collecting and preserving evidence, drafting legal documents, conducting necessary internal interviews, and facilitating negotiations. Lawyers serve as independent third parties who cannot be influenced by internal company relationships that might otherwise affect the investigation’s outcome. Moreover, they can provide advice on any criminal issues that may arise.

Conducting a professional investigation, or involving outside experts when necessary, is considered best practice. Employee misconduct may be concealed, and privacy laws or evidence-gathering restrictions can limit investigators’ access to key evidence. To gather comprehensive evidence, secure the services of a forensic investigator; if financial expertise is essential to the fraud, retain a certified public accountant to audit damages. Professional staffing may also be necessary to conduct employee interviews in accordance with local best practices and without compromising evidence.

In cases of occupational fraud in China, companies typically opt for negotiated resolutions that include restitution and employment termination, or they may unilaterally terminate employees while proceeding with civil litigation or criminal prosecution. When conducting an internal investigation, it is important to assess all related legal risks; a former employee may file a whistleblower complaint regarding potential regulatory violations, induce other employees to resign, poach clients, or steal and misuse trade secrets, and a former employee in a higher-level role poses an even greater overall risk. Evaluate all possible risks and develop a long-term strategy to manage potential scenarios while selecting options that minimize legal risk.

21. Termination following severe disciplinary violation

Short Answer:

Terminating an employee for severe disciplinary violations in China requires that the employer strictly follow legally compliant company policies that have been enacted through a democratic process and clearly communicated to employees, ensuring consistent application. The employer must provide direct, reliable evidence that the employee’s actions caused demonstrable material damage or risk, as evidenced by materials such as employee handbooks or signed acknowledgments. If the evidence is indirect or insufficient to prove a serious, material infraction—and if procedural safeguards like proper notification to the labor union or documented service of policies are not met—the termination may be ruled unlawful, potentially resulting in financial damages payable to the employee.

Discussion:

Section 47 of the China Employment Contracts Act requires payment of damages when an employee is terminated due to a reduction in force. Labor arbitration centers in China are highly administrative and primarily seek to protect employee interests, and they are almost certain to base awards on the text of the Employment Contracts Act. Generally, a Chinese labor law arbitrator will expect that a company offer damages even when an employee resigns voluntarily or is terminated for cause.

Section 14 of the China Company Law Act entitles a company to establish due process policies that have the force of law with respect to employees in China. Such policies must explicitly outline the process and define all major and minor causes for termination. The process for discharges is required to apply legitimate grounds and adhere to due process principles, which is best ensured by documenting that the company’s policies and procedures are consistently followed.

Case number SH02-cv-10462 concerns Zhao’s dispute against their employer, a hotel, regarding the lawfulness of a discharge. The hotel terminated Zhao’s employment on October 22, 2019, citing that Zhao shared computer usernames and passwords with others and falsified customer satisfaction surveys. The hotel asserted that these actions constituted dishonesty and relied on progressive discipline policies that defined such conduct as grounds for immediate discharge.

Zhao filed a lawsuit against the hotel for unlawful discharge, seeking payment of damages as compensation. At trial, Zhao admitted to sharing their username and password with five colleagues but argued that management had given implicit consent and that the practice was common among employees. The hotel introduced its employee handbook, disciplinary policies, and information protection policy as evidence, all of which had been acknowledged and signed by employees including Zhao, indicating that sharing usernames and passwords was a major infraction warranting immediate discharge. Based on this evidence, the court held that the discharge was lawful.

Chen began working as an assistant sales manager for an investment company on April 2, 2007. On August 26, 2019, the company issued a termination notice.

During the trial, the company introduced internal audit reports, interview records, work emails, certifications, the employee handbook, and documented confirmations to support claims that between 2017 and 2018, Chen gave unauthorized gifts constituting a kickback and that from 2014 to 2015, Chen purchased company products from distributors at a discount without making payment. However, the court found that the shipping documents for the gifted products had been approved for payment by the department manager, which indicated that the conduct was authorized, and that the claims regarding unpaid products were unsupported by the emails or reports; therefore, the termination was unlawful. [Shanghai Appeal 02-cv-6341 (2020)]

The employer bears the burden of proof, as explicitly provided by China’s Labor Dispute Law Interpretation §44. When an employer under China Employment Law terminates an employee for violating company rules, section 50 of the Labor Dispute Law Interpretation requires a factual determination of whether the rules are enforceable against employees. The rules must be lawful, communicated to employees, and adopted in strict adherence to all statutory requirements for democratic processes.

Generally, the company’s policies may not violate any mandatory provisions of law or regulation, which could vacate the adjudication outcome under Civil Procedure Law §197. For example, policies cannot impose extremely dangerous work conditions, unsafe working hours, or discriminatory practices against women or other minority groups.

Company policies must be adopted in full compliance with statutory provisions that require a democratic procedure, as set forth in the company’s employee handbook and policy documents. Policies adopted on an ad hoc or informal basis—with no documentation other than employee signatures as evidence of acknowledgment—will be deemed by courts to have no legal effect.

Termination may be challenged as unlawful unless disciplinary action is based solely on demonstrable material damage that is clearly caused by the employee. Feedback should be obtained in writing through policy memoranda as an alternative to meetings for policy adoption, a method that courts regard as compliant with democratic procedures. In judicial practice, holding a virtual conference is also considered sufficient to satisfy the meeting requirements.

Documentation for policy notice, publicizing, and evidence for court procedural compliance – how to do it right. When sending policies by email, it is crucial to fully document a complete chain of custody that includes the sender, the recipient, the email contents, and timestamps for when the email was sent and read. Proof of service for document delivery should be retained, and essential documents for employment disputes include emails, screenshots, photographs, videos, and audio recordings, with each file stored in its original format.

In China, a leading cause of disputes is the failure to retain photographic or video evidence of employee misconduct, and business professionals unfamiliar with the workflow for capturing, storing, and retrieving digital evidence may omit necessary steps. Although Chinese law does not specify detailed standards for preserving digital evidence, the Supreme People’s Court mandates that a party with inadequate evidence of authenticity produce additional evidence, such as affidavits or identity verification, in its Several Provisions on Civil Procedure Evidence. In this regard, modern Chinese judiciary practice is similar to that in many U.S. districts that use extensive eFiling, where courts impose rigorous discovery procedures for retrieving electronic documents, including emails, videos, and audio recordings.

Any disciplinary action must be taken promptly, as the one-punishment rule applies to employment actions (see above). In China, employers who waive or gratuitously delay discipline may be deemed to have abandoned the relevant right. Therefore, after an employee commits a major infraction, awarding a performance appraisal, raise, or promotion may be interpreted by the Chinese legal system as a waiver of the right to discipline the employee for that specific conduct.

One common issue observed in labor law practice occurs when an employer issues a warning for a specific act of employee negligence and later terminates the employee for the same act. Although no statute explicitly states that the one-penalty principle applies to employment law, judges treat the concept as a judge-made doctrine that applies to all categories of dispute.

Section 43 of the China Labor Contract Act requires that the labor union receive advance notification of the grounds for termination. Note that most judges in China are former employees of state-owned enterprises who have strong affinities for bureaucracy and often view the human resources department as equivalent to the legal department. Courts generally allow a reasonable grace period for notifying the union after termination.

In the second context above, a hotel termination was upheld as lawful because the grounds for termination were clearly provided in the employee handbook, updated progressive disciplinary guidelines, and the information protection agreement, which explained what constitutes a policy violation and its consequences. The employee claimed that sharing usernames and passwords with co-workers was a common practice; however, this is exactly the behavior the policy was intended to prevent, and no evidence was presented to demonstrate that it was common.

In the second case, an investment firm’s employee handbook, signed acknowledgment of receipt, and termination process were each legally compliant. However, evidence of a major disciplinary offense by Chen laid the foundation for concluding that the termination was unlawful. The employer had no direct evidence or admission from the employee, and indirect evidence such as anonymous reports and emails was not sufficiently reliable to prove the violation, so the employer was ultimately held liable.

To avoid liability, Chinese legal policy favors protecting workers’ rights while ensuring due process before making a termination decision. Human resources should verify whether the available evidence proves the alleged violation, request stronger documentation if any gaps are found, and ensure that the labor union or employee representatives are properly notified. Support from an employment attorney may be essential in investigating and reviewing evidentiary issues and ensuring that all relevant documentation is collected and preserved.

22. How can kickbacks and corruption by managers be prevented in China?

Short Answer:

Kickbacks and corruption by managers in China can be prevented by establishing robust internal governance frameworks that include clear, detailed policies and employee handbooks explicitly prohibiting conflicts of interest, unauthorized financial gains, and other forms of corruption. These frameworks should incorporate rigorous compliance procedures and regular training on legal and ethical standards, as well as the creation of a negative checklist system clearly enumerating forbidden activities. Additionally, companies can reduce risks by implementing effective disciplinary protocols, ensuring prompt internal investigations, maintaining meticulous documentary evidence, and engaging external audits or third-party reviews to verify transactions. Proactive board oversight and stringent enforcement of these policies—supported by statutory legal provisions and a progressive discipline system—serve as key mechanisms to deter and address managerial misconduct before it escalates into broader legal or reputational issues.

Discussion:

Employee misconduct related to theft, bribery, or other corrupt practices creates significant legal risks, as China’s extensive code of conduct may be triggered whenever an employee misappropriates company or client resources. Such behavior also reflects failures in corporate governance.

The law provides a remedy for the company, and a robust employment governance structure ensures that issues are detected and disciplinary procedures are enacted before reputational damage or regulatory intervention occurs. This article reviews China’s employment law regarding employee misconduct arising from an abuse of position, examines practical pathways for addressing such misconduct, and reviews the managerial processes used to ensure legal compliance in corporate governance.

The applicable legal framework for dealing with employees who take advantage of their position for personal gain spans several domains, including Employment Law, Corporations Law, Administrative Law, and Criminal Law. This comprehensive body of law outlines the criteria for determining misconduct and the resulting legal consequences, providing businesses with specific grounds and a procedural framework for taking action. In many cases, employment law serves as the primary authority, as Chinese employment law grants employers the right to take necessary corrective action when an employee exhibits misconduct. Current laws permit terminating employment for violations of established codes of conduct.

When exercising this right, employers are expected to comply with legal requirements and follow company policies and procedures while accurately assessing the severity of the misconduct. The law provides a clear statutory basis for addressing employee misconduct, enabling employers to choose an appropriate response based on the specific circumstances and the seriousness of the breach.

Section 39 of the China Employment Contracts Act expressly permits termination of an employment contract if material negligence or actions taken for personal gain result in significant harm to the employer. That is, if a worker causes substantial economic harm to the company, the employment contract may be terminated. However, under Chinese law, the burden of proof remains on the employer to demonstrate that, while pursuing personal gain, the employee caused significant harm.

Chinese case law generally respects business entity policy documents that define significant harm, provided the definitions are reasonable. Courts may reject such policies if the monetary threshold is set unreasonably low. In situations where the entity does not clearly define potential financial harm or notify employees of those criteria, the judiciary will rely on a balancing test that considers the facts of the case, industry risk expectations, and the employee’s salary and position within the company.

A corporation’s internal policies and procedures can support termination for employee self-dealing and other conflict of interest violations. Chinese enterprises typically develop employee handbooks that define policies concerning conflicts of interest and duties of confidentiality, and they include a list of forbidden conduct, such as engaging in unapproved outside business or referring suppliers or clients in which a personal interest exists.

When an employee violates these provisions and causes harm to the company, it constitutes negligence and grounds for terminating the employee’s contract without proof of specific economic losses. The directors’ duty of loyalty and duty of care under China’s company law require all directors and high-level officers to prioritize the best interests of the company over their own self-interest; any financial gain received by a director by virtue of holding office is attributed to the company, and directors may be liable for disgorgement of these gains, which serves as a deterrent against misusing company assets, usurping corporate opportunities, and competing with the company.

A Chinese court typically calculates restitution based on the gain actually realized by the executive or the financial loss incurred by the company. A critical aspect of evaluating the restitution amount is determining how much benefit was gained or the extent of damage incurred to the company’s interests.

These inquiries are fact-intensive and require evidence and documentation of the specific gains or losses as well as proof linking the actions to the resultant economic loss. The method used to calculate the restitution amount varies depending on the nature of the misconduct.

In cases of direct fund misappropriation, lending at high interest rates, or providing low-interest or interest-free loans, the amount may include both the principal and the fund’s interest. Competent legal counsel will normally base the interest rate on the policy rate established in the contract or, if no provision exists, on the current LPR. An agency relationship imposes a duty to avoid self-dealing, so the disgorgement will include all amounts involved in the transaction. For non-competes, any quantifiable proceeds will be disgorged, including salaries received at a competing firm.

When officers or directors obtain business benefits without the approval of the shareholders or a meeting of members, determining the disgorgement amount can become significantly more complex. Companies may retain third-party intermediaries, such as accountants, to perform a special review and verify the specific information. In the event that there is a dispute or the amount cannot be precisely quantified, courts and arbitrators will make a reasonable evaluation based on industry gross profit margins, average gross profit, and the company’s historical financial data.

Employment collusion that harms a business entity may constitute unfair competition subject to the administration and enforcement of existing unfair competition law. See Anti-Unfair Competition Act Section 8(b). In cases involving clearly defined issues such as trade secrets misappropriation (see note 6), the act provides detailed rules to govern liability, while other situations may be addressed under Section 2, which defines unfair competition as any business operator’s act during manufacturing or service provision that violates the competitive market order and harms other business operators or consumers.

Courts balance claims of unfair competition against the principles of free competition, ensuring that enforcement does not unduly interfere with competitive freedoms. Accordingly, a conservative and restrained approach is typically taken, as exemplified in the China National Intellectual Property Administration’s Unfair Competition Law Enforcement Trends 2022 Report (excluding quoted text).

Adjudicators generally decline to apply the catch-all provision and advise litigants to rely on other provisions of existing law. Options include China’s Civil Code, which is analogous to common law torts, as well as specific provisions of the Antitrust Act, China’s Burr, Moments & Fink Act on Labor Fairness, or the Companies Act if the legal relationship is sufficiently defined.

The judicial analysis to determine a violation of §2 under the catch-all provision is threefold. First, there must be no law or provision that specifically regulates the conduct. Second, the conduct must damage the lawful rights and interests of another operator. Third, the conduct must violate the principle of good faith or industry-standard business ethics (see https://baike.baidu.com/reference/6773/a717O2_28TCuLhuzqt4iTSgYSg_4cb8bvlEo8q6HZGZeikarSxQgnAhxFPIybgU-P_n5BKA96FM3iB_09DLdlXYZIPY6MPIY3YesGziF_sd8jA).

In China, serious occupational fraud is classified as a criminal offense. For an employee, a conviction may result in a prison sentence exceeding ten years and a lifelong criminal record, while for a business, occupational fraud triggers severe remedial measures, enabling the police to use their subpoena authority to efficiently secure evidence, recover losses, and deter crime. Generally, China Criminal Law §271 and related Judicial Interpretation documents have a strong deterrent effect on potential fraudsters by establishing a minimum threshold of 30,000 CNY for an occupational fraud offense.

The two most common forms of occupational fraud are misappropriating assets in custody while falsifying associated documentation, often referred to as fox guarding the henhouse, and executing contract scams that involve forgery, counterfeit contracts, and artificially inflated prices and quantities to illicitly extract company funds.

Strict standards govern the proof of occupational fraud. Chinese courts have established that the greatest challenge in securing an occupational fraud conviction is proving the intent to convert company property for personal use. Judges essentially focus on whether the funds were borrowed or stolen, and an employee who takes company money for personal expenses under a genuine belief, however unfounded, that the company owed money for past wages will typically not be criminally liable because the intent is merely to offset a debt obligation.

Conversely, if an employee transfers company money to a personal bank account for personal spending, the crime of misappropriation may be established instead of occupational fraud. Under Criminal Code §272, misappropriation of funds is established if funds greater than 50,000 yuan are not returned within three months, if profits from investing misappropriated funds exceed 50,000 yuan, or if funds greater than 30,000 yuan are misappropriated for use in unlawful activities.

China criminalizes operating a competing business, regardless of any non-compete agreement. This approach applies even if a non-compete agreement is absent.

A classic example of funds misappropriation is an employee diverting business opportunities to themselves or their own company. There are three scenarios that may result in a criminal conviction. One scenario involves the employee using Company A’s funds through a contract or investment in Company B, which ultimately benefits the employee a second time. Another scenario occurs when the employee uses Company A’s name to engage in business dealings with Company B, again benefiting the employee. Alternatively, if an employee makes unauthorized transfers in Company A’s name to Company B without conferring any personal benefit—meaning the transferred funds do not ultimately benefit the employee or a third party—the employee would not be guilty of funds misappropriation. Chinese judges and legal scholars generally agree that their statutes tend to criminalize a broad range of business deals that otherwise fall into a legal gray area.

Criminal trade secret misappropriation prosecutions in China fall under Section 219 of the Criminal Code. Under this statute, an employee who is required to keep trade secrets confidential or who acquires them through theft, bribery, fraud, threats, or electronic hacking and who causes at least 300,000 CNY (US$41,000) in loss is guilty of trade secret misappropriation. It is important to note that the disclosure or use of a trade secret is not required to establish this crime.

In China, trade secret damages are determined based on the reasonable royalty that would be charged for using the trade secret. For example, in Shanghai High Court Reference Case 176 The AI Microchip Case, a company copied AI microchip design files and conducted in-house manufacturing runs. In cases where a former employee joins a competitor and brings trade secrets, the new employer may be considered a joint tortfeasor if it knowingly uses the traded secret.

A bribery charge against a private sector employee is established under China Penal Code §163 and associated judicial interpretations. These provisions collectively state that an employee who solicits or accepts property of value from another in exchange for providing benefits, or who receives a commission or processing fee for personal gain, is guilty of bribery once the amount reaches 30,000 RMB. The threshold for a bribery charge against a private sector employee in China is extraordinarily low.

The employee is not required to abuse their office, and the other party is not required to receive any improper benefit; a conviction may be rendered against parties involved in an otherwise legitimate transaction simply because a payment was made. Additionally, financial value is interpreted to include not only traditional items such as cash or gift cards, but also anything convertible to monetary value, such as covering travel expenses, debt cancellation, and free use of real estate.

Criminal acts of breach of trust now include providing improper benefits to friends or relatives and running a competing business. Previously, a wide range of employee fraud went unpunished. Often, executives or key employees awarded profitable business operations to relatives, made purchases at disproportionate prices or sold goods at disproportionately low prices, or purchased inferior quality products from companies operated by friends.

Additionally, employees in key positions at private enterprises in China would secretly operate competing businesses using corporate opportunities, resources, and profits belonging to the company. There was no appropriate criminal law provision to punish this conduct, despite the fraud causing major losses to companies. The rise of corruption in private enterprises was quietly noted as occurring in a neglected area of the law. Between 2013 and 2023, 65 NPC and CPPCC members petitioned for the law to recognize these activities as crimes of breach of trust, with most officials representing China’s private business sector. In response, the Criminal Code has been amended to encompass private sector workers under provisions originally applicable only to employees of state-owned enterprises, such as providing inappropriate benefits to friends or relatives and operating competing businesses. Under these provisions, the law will regulate and control similar types of wrongdoing and corruption by private sector insiders. Criminal Law Amendment Act No. 12 takes effect on March 1, 2024, providing private enterprises with an effective means of legal recourse.

The statute establishes liability for employees who use their positions to benefit friends or family members while causing significant harm to the company or business. For example, it applies to situations where employees delegate profitable business activities to friends or family members, conduct transactions with them at clearly unreasonable prices, or purchase or accept substandard goods or services from their businesses.

However, not every activity that benefits friends or family members constitutes a crime. To mitigate liability, an employee may report the intended activities to the board of directors or shareholders meeting and obtain the required approval under the Articles of Incorporation in accordance with the China Company Act §183 (2023).

Unauthorized operation of a competing business under China Criminal Law 165 and Company’s Act 184 may be interpreted as a breach of the duty of loyalty. Under China Criminal Law 165, the crime is defined as causing a major loss to the company when a director, supervisor, or executive either personally operates a competing business or assists with another operation of a competing business.

However, not all competing business activities are considered criminal. According to China’s Company Law 2023 §184, an employee will not face criminal liability if they report the conduct to the company’s board of directors or shareholders meeting and the meeting subsequently passes a resolution authorizing the activity.

An employer’s human resources compliance protocols should include provisions in the employee handbook that prohibit conflicts of interest, trade secret misappropriation, and self-dealing. A Negative List should be used to explicitly enumerate banned activities such as referring suppliers with conflicts of interest, establishing affiliated firms to conduct related business, unauthorized disclosure of company trade secrets, and using job opportunities for improper gain. Clearly listing these prohibited practices makes the policy more straightforward and easier to enforce.

Each employee should be provided with a copy of the employee handbook and receive training on its contents and the consequences of noncompliance. Policy enforcement should strictly adhere to the procedures and documentation standards outlined in the handbook to minimize legal disputes and risks. The handbook should also detail a fair progressive discipline process, where minor violations may warrant a verbal or written warning, and more serious violations may necessitate terminating the employment contract.

Ensure that all evidence is admissible in court and properly retained, including relevant transaction contracts, bank records, approvals, and invoices, to provide transparency and traceability of the process. Implement a documentation and reporting procedure for executives and sales personnel that requires regular disclosure of any actual or potential relationships with competitors or clients; these disclosures should be subject to dual review and approval by multiple departments to prevent conflicts of interest.

When potential misconduct is discovered, initiate an internal investigation immediately to lawfully collect and preserve all relevant transactional documents, correspondence, and reports. Compile the data in a coherent manner to establish a complete chain of evidence that supports later actions. In cases of major misconduct, refer the compiled evidence to the appropriate regulatory agencies and public security officers for further action. If the employee proceeds to arbitration, use the evidence of misconduct to assert a counterclaim, and note that the facts and judicial determinations from an arbitration or civil suit may support subsequent criminal charges.23. Can employees who quit change their mind?

Short Answer:

Employees who quit can change their mind provided they notify their employer within the designated 30-day period before a written confirmation of resignation is issued. The article explains that while a written resignation notice legally offers to terminate the employment contract, it remains revocable if the employer has not yet confirmed this notice, particularly when the employee continues working during the notice period. Once the employer confirms the resignation or the notice period has passed without retraction, the resignation becomes final and the employment relationship terminates accordingly.

Discussion:

Resignation notices must be submitted in writing, including via scanned email documents, for the notice to be legally valid. Oral announcements or agreements with a manager do not constitute a valid resignation notice. This requirement ensures that the human resources department has adequate time to plan for and conduct an orderly transition of the employee’s work obligations.

China’s labor law does not obligate companies to recognize a general right to resign; rather, it grants employees a legal entitlement to resign under the specific conditions set forth in the law. Some employees mistakenly believe this entitlement is equivalent to a fundamental human right, which leads many to state they will quit whenever they want and reject the company’s policy of requiring 30 days’ advance notice. The law distinguishes between two types of resignations in China: ordinary resignations that require 30 days’ written notice and instant resignations that do not comply with the notice period, as provided in Employment Contract Act §37.

Under China’s employment law, if an employee submits advance notice of resignation and remains employed during the notice period, the employer has the right to confirm acceptance of the resignation. This confirmation process can lead to a wide range of complex situations, which can be classified into five distinct types. Under normal conditions, the law requires that an employee provide 30 days’ written notice of intent to resign, and any notice confirmed by the employer terminates the employment relationship on the 30th day thereafter.

When an employee does not follow this procedure and resigns without the employer’s consent, the employer may confirm the resignation with the effective date specified on the resignation notice. Because an employee must provide 30 days’ notice before resigning, the law generally treats an immediate resignation as a day of absence, meaning the employer can terminate the employee for job abandonment. If an employee remains at work after providing notice of resignation, the employer may choose to confirm the resignation earlier at its discretion, thereby terminating the employment relationship immediately upon confirmation.

Situations arise when an employee wishes to rescind a resignation. Under legal principles, an individual may waive certain rights, and it is generally acceptable for an employee to rescind a resignation within a reasonable time.

However, many employers mistakenly believe that the employment relationship can always terminate after 30 days, reflecting a misunderstanding of the right of rescission. An employer can avoid potential disadvantages by promptly confirming acceptance of a resignation or by making a retention decision. Under the 30-day rule, if the employer does not confirm within that timeframe and the employee reports to work, the resignation is deemed rescinded and the employment contract continues in effect, so the employer cannot terminate the employment relationship based solely on the intent to resign.

Chinese employment law considers facilitating easy resignation as a fundamental safeguard of workers’ human rights by improving bargaining power. The emphasis on job mobility, which contributes to human capital development, justifies a short thirty‑day notice period. Employers are expected to treat resignation requests as critical matters that warrant employee coaching and aptitude training, a practice that simultaneously addresses many of management’s legitimate concerns regarding terminations.

Despite an overall employee‑friendly approach, courts robustly protect workers from abuse. However, underperforming employees may sometimes seek to misuse the right to resign to challenge unfavorable employment conditions. In such cases, the resignation letter’s tone, language style, and brevity may serve as evidence of potential abuse of resignation rights.