Contents
Most Forced Ranking Systems are Illegal
Use Transfers to a Different Role or Retraining
Job Transfers Must Be “Reasonable”
How to Set Up a Compliant Termination Process
Compliantly Retraining/Transferring Workers
Document Continued Poor Performance
Introduction
An employee in China can be legally terminated without severance pay on grounds of poor performance. To do so, they must be given a second chance either through retraining or transfer to a different position, and fail their performance evaluation again. In a dispute, the employer must present evidence at every step in the process to demonstrate that the termination is compliant. These rules don’t appear in any statutes or regulations; instead, they are precedents appearing in cases such as Wang and Li discussed below. China’s judiciary is extremely strict about what constitutes a lawful termination for poor performance. Therefore, the risk of being ordered to pay severance compensation is very high.
This explainer by CBL will introduce the law in the reported cases followed by a list of management best practices necessary to minimize legal risks in China.
Lawsuit Risks Quantified
Employment terminations are scrutinized closely by the Chinese legal system. Workers take advantage of these aggressive legal protections, and there is evidence of at least several hundred thousand lawsuits being filed annually. Hundreds of thousands of lawsuits are filed a year by terminated employees, which can be inferred from the approximately 10,000 published employment dispute appeals every year.
The data indicates that white-collar and skilled technical workers are disproportionately likely to dispute a termination. This can be inferred from how court disputes are concentrated in three high-skilled employment jurisdictions – Beijing, Shanghai, and Guangzhou – each accounting for about 10% of the total cases. In addition to generally being more legally savvy, white-collar workers have more difficulty finding an appropriate new job.
Performance evaluation methodology is the key factor in this kind of termination dispute in Chinese courts. In the law, “poor performance” was very briefly defined in the former Ministry of Labor’s Circular on the Employment Act as the inability to adequately complete tasks specified in the Employment Contract, or the amount of work done by colleagues doing the same kind of work in the same position. The vagueness of this rule is unusual for China’s civil law system, where regulators and the judiciary both issue detailed lists of rules implementing statutes.
Most Forced Ranking Systems are Illegal
Using forced ranking systems and defining the bottom 10% is a popular method for identifying poor performance in China. However, despite the absence of regulations prohibiting the practice, China’s courts established case law characterizing it as a form of arbitrary termination if used alone. The caselaw published by the Supreme Court as the following cases, Wang and Dai, establishes the doctrine that a low rank in itself is not a lawful basis for termination in China, but it can be used to adjust job roles and salary.
In Wang, listed as Leading Case No. 18 (2013) (Hangzhou Civil Case 885), the China Supreme Court rejected the termination of the employee, Wang, based solely on a low ranking because there was no other evidence of poor performance. However, the judge emphasizes that Wang does not entirely prohibit forced rankings, only their use in the absence of other performance-related evidence.
A lawfully compliant implementation of forced rankings is illustrated in the Dai case, Suzhou Appeal 05-cv-450 (republished in China Sup. Ct. Gaz.). Here, the court reasoned that the law permits company policy to reassign job roles and salaries for low-ranked employees because such laws are essential to enable effective business management. The court reasoned that termination is lawful if there is a nexus between company policy and reasonable performance management needs, but it cannot violate any other law and must follow the business’s Employee Handbook.
Be objective when describing the reasons in a performance evaluation that concludes an employee perform adequately, because excessively subjective standards will make the termination illegal. A highly subjective unlawful termination based on a performance evaluation system with feedback from both managers and subordinates was presented in the Li case, reported as Beijing 3rd Lower Appeal 13042 (2014).
The Li court found that the company did not retain information about who rated Li or documentation to support their reviews, and this evidence was described as being purely subjective. Therefore, the court held that the performance evaluation could not be used to support the termination in the absence of objective criteria or safeguards for fairness. From this case, we can see that Chinese courts will only uphold a termination if there is objective evidence that the employee cannot perform the job adequately.
Keep a paper trail: in the Ding case, reported as Beijing Appeal 01-cv-9714, the court explained that the HR process should document and retain all evidence of poor performance, how the evaluation process was done, and records of how evaluators concluded that the employee performed poorly. Failure to maintain these records constitutes failure to meet the party’s burden of proof.
The Beijing court acknowledged that subjectivity is inherent to any performance evaluation, but that employers can add objectivity by basing them on objective, quantifiable documentation. In Ding, the judge explicitly said that the termination was unlawful because the employer failed to keep these kinds of records. As these cases indicate, the law in this field is highly context-specific, and it’s easy to make mistakes.
A CBL Pro can help you set up a compliant process for managing terminations.
Use Transfers to a Different Role or Retraining
Employers are frequently sued for not providing remedial training when putting a worker on a Performance Improvement Plan (PIP). For example, in Geng, reported as Zhejiang Leading Case No. 7 (2016), Geng’s performance evaluation concluded he “needs improvement” initially and again after being given a second chance, which resulted in Geng being terminated for poor performance; the court held the termination unlawful.
Managers familiar with at-will jurisdictions may know that it’s actually very common to simply demand an employee improve performance or else be discharged but using that practice in China could result in a costly lawsuit.
A PIP is insufficient under Geng unless it also includes training activities or a different job role. This is concerning because many managers in China are accustomed to illegally using the PIP as a substitute for job training during their termination process. While that may be easier for managers in the short term, flaunting the law in this manner could expose you to liability and reputational damage.
Superficially compliant training programs are common in China but are nonetheless illegal circumvention. In the Hé case, reported as Beijing Appeal 01-cv-11052 (news link), the employer claimed its termination of Hé was done only after training failed to remedy underperformance. However, the court found that the employer’s PIP was a mere restatement of Hé’s existing job role, duties, and objectives, which did not qualify as retraining. The judge held the termination was unlawful.
Document performance problems using processes similar to those routinely upheld by Chinese courts. A method for doing this is illustrated in the Deng case, reported as Guangdong Appeal 01-cv-16081, where the documentation retained by the employer included a complete set of emails and HR documentation. The PIP included a specific work plan to improve Deng’s performance, including weekly training sessions done in accordance with the Employee Handbook. Performance evaluations used highly specific and defined criteria and methodology and identified over ten specific skills and abilities that could not be performed capably despite the additional training.
The court held that the documentation was adequate to determine that Deng could not perform the job adequately. Moreover, the termination was held lawful at both arbitration and on appeal to the judiciary, which speaks to the persuasiveness of the evidence provided by the employer.
A comparison of the above results indicates that the dispositive factor in whether the underperforming employee has been legally terminated comes down to clearly documenting facts that the employee is not able to do the job, even when trained.
Job Transfers Must Be “Reasonable”
Under Chinese law, managers have the freedom to do business within the bounds of the law and reasonableness, so the transfer must be reasonable. An illustration of an unreasonable position transfer approach is found in Li, reported as Shanghai Appeal 02-cv-10287 (news link), where Li was a senior aviation engineer who was performing poorly and placed on “the bench” as a result. During that time, Li took a significant amount of time off, because the company offered Li several inappropriate positions like photocopy operator, chef, and handyman—which Li refused. As a result, the company terminated Li.
The court on appeal held that the new roles were not sufficiently related to Li’s old one. It restated the current doctrine that an employee properly evaluated as unable to perform adequately can be reassigned to another job role. Nonetheless, the fundamental character of the job must be similar, with a similar salary, and utilize the employee’s professional skills. In the instant case, as a skilled technologist, Li’s professional skills were utilized in the original position but not in the new ones offered, and the pay rate was significantly lowered, which the court found unlawful and unreasonable.
Don’t reduce pay unreasonably when changing an employee’s job role, even if the employee’s job is transferred. In the Jin case, reported as Shanghai Appeal 02-cv-726 (2021), an accounting firm reduced Jin’s monthly salary from 20,000 CNY to 5,800 CNY because of professional negligence. On appeal, the court upheld Jin’s claim for compensation, reasoning that the reduction exceeded what a reasonable person would accept.
A defective HR process for justifying the termination is a third common ground for liability. In a widely discussed case, Fu, reported as Chongqing Appeal 02-cv-1494, the lower court found that the employer did not provide any evidence of proper written notice warning of termination or payment in lieu of notice and held that the termination was therefore unlawful. The lawyer handling the matter was incompetent and simply did not know about the judges’ expectations.
On appeal with a retrial, the company this time did submit evidence that it paid Fu one month’s salary in lieu of notice and that the company had consulted with the trade union about the termination, after which the court the termination lawful. The Fu case stands for the proposition that a human resources compliance process must be in place to avoid legal risks when terminating employees who perform poorly. The case has garnered some attention because of the unusually incompetent lawyer, which resulted in a slight change in the facts to the same exact case.
How to Set Up a Compliant Termination Process
Terminating employees for poor performance can be done legally by setting up a performance evaluation system and ensuring staff fully comply with the process; evaluation forms should, at a minimum, clearly state job duties and objectives. Job analysis, a common human resources task, is the first step to ensure compliance because Chinese labor law requires evaluation metrics and objectives to be tailored to the job role. During a dispute, having all required documentation in place makes proving your case easier, and provides the arbitrator with a clear case timeline of all the actions you took.
The job analysis and evaluation processes taken together are the foundation for building a case if you are sued for unlawful termination. A job analysis done in China will typically list the department name, position name, direct supervisor, management authorizations, management role, extent of duties, and job role. The job role is the heart of the position description and must therefore be as detailed as possible. As part of the job analysis, common evaluation methodologies such as Key Performance Indicators (KPIs) or Outcomes and Key Results (OKRs) can be used to establish objective requirements for what constitutes minimum competence.
A common problem in China is managers cut corners on this compliance need: they merely define the position role with provisions in the employment contract, job description, and performance evaluation form. During job analysis, ensure managers document relevant evidence from the start and maximize the amount of information contained in the performance evaluation forms. The termination process steps can then be matched to the job role, performance indicators or objectives, evaluation standards, and results.
Use quantitative metrics when doing performance evaluations, and make sure they are lawful and reasonable, with every similar position being held to the same standards. In Chinese business culture, KPIs are already ubiquitous and are well-understood by employment dispute arbitrators.
The performance evaluation methodology should be prepared using an inclusive process and delivered in writing with a signed receipt to the entire staff before it goes into effect. Review how performance evaluations are being done by staff to ensure full compliance with the methodology, and proactively identify risks associated with lack of objectivity or bias, especially the possibility that individuals are singled out for disparate treatment or even discriminated against.
The employees being evaluated should also read and sign completed evaluations so that they know the conclusion and can dispute any facts in advance; results should be sent in writing, not orally communicated. Have an effective document retention system in place for all these materials.
Get a CBL expert to review the performance evaluation standards and human resources for compliance with the law.
Compliantly Retraining/Transferring Workers
Under the above-reported cases, an effective first step to take when you find an employee is performing poorly is to meet with them to discuss solutions. Give the employee a choice of undergoing training or a transfer to a different job role. Document the process with a written acknowledgment of the employee’s choice and the company’s specific implementation plan. The company’s human resource manager must already have in place a complaint process for the training or job role change.
Supporting trainees’ success in a commercially reasonable manner is the best way to ensure that your program clear the high bar set by the law. Personalize the training program to remediate the employee’s shortcomings and inadequate skills. Hold the training at reasonable times, not during employee breaks, with training cycles of at least a week.
If using a PIP, document it in both company policy and the Employee Handbook with a description of the specific training methodology and process. The PIP documentation for the job role should list the curriculum, objectives, improvement targets, training methodology, plan of action, and quality standards.
Constructive discharge schemes are aggressively rejected by Chinese courts, who require that any changes to job roles and salary must be reasonable, with heightened scrutiny for any decisions the employee does not consent to. Judges and arbitrators pay close attention for signs that an employer is attempting to mask abusive treatment of an employee as a normal part of doing business and will always deem such attempts illegal. Here, the China Employment Contracts Act § 40 provides that management has discretion to reasonably unilaterally transfer a poorly performing employee to a different position if the salary adjustments are done in accordance with a lawful salary plan.
Avoid § 40 constructive discharge allegations and ensure that the reassignment is not discriminatory or abusive by offering a related position that utilizes the employee’s competency, and not a role for which they are untrained. An alternative is to reasonably reduce their salary and workload, but make sure the salary adjustment is fair, and that management is not using performance as a pretext to cut costs.
Abuse allegations in China are often raised in the context of Foreign Corrupt Practices Act (FCPA) compliance, where dishonest managers are alleged to constructively discharge staff that raise concerns or make compliance reports. Therefore, a documented objective process can prevent retaliation for attempting to comply with global company policy.
Document Continued Poor Performance
In China, a reasonable second-chance evaluation must be given to the employee after reassignment or retraining, which is a reasonably long period that has a definite start and end date provided to the employee in writing. Employees can only be lawfully terminated without severance pay if they continue to perform poorly after that time has passed. In a dispute, an excessively long period increases uncertainty around the performance determination, and an excessively short one lacks credibility as to whether the employee has a fair chance to be rehabilitated.
This is governed by judicial reasonableness standards without defined numbers, but employment lawyers generally recommend that ordinary technical staff be given at least a month and managers be given at least three months. Since workplace learning occurs differently for each occupation, employers should tailor the period to match what happens in practice.
At the end of the remediation period, an employee whose performance evaluation reveals they performed poorly twice in a row may be legally terminated. However, if the employee performed poorly once in the past, then met performance standards on a later evaluation, then the counter is reset and two new poor performance conclusions in a row must occur. The company needs to maintain full records of the entire termination process.
Get attorney review of the records supporting a termination for legal compliance before making the decision. A major legal risk is provided in China Employment Contracts Act § 42, which provides five circumstances under which employment cannot be terminated, nuanced rules familiar to experienced labor lawyers.
Conclusion
As noted above, legally terminating an employee in China is complicated and requires strict compliance with the China Employment Contract Act by providing the employee with procedural justice and a second chance to succeed at the job. Regulators have not published quantitative specifications, so taking an approach that aligns with the expectations of the judges in the cases discussed in this article can minimize legal risks.
If the employee cannot be rehabilitated and termination is the only remaining possibility, you can terminate them with thirty days’ written notice of employment contract termination or provide a payment in lieu. The rules are inherently judicial in nature and revolve around collecting and preserving evidence for judicial review. To minimize legal risk, get help from a CBL pro to optimize your China employment policies and processes.
FURTHER READING
Get authoritative insights about this topic from an official government guidance translated by CBL:
For a general overview of this topic, see also CBL’s China Employment Law FAQ.