China Law Library

Contract Non-Renewal to Terminate a China Employee—Without Severance

Many employers in China mistakenly assume that they can decline to refuse to renew an employment contract without paying severance, as if it were an ordinary contract. That is mistaken. Chinese socialist law sees employment relationships as somewhat unequal because employees depend financially on employers and have to follow orders, an imbalance is rarely seen in ordinary contracts. As a result the China Employment Contracts Act, instead of the Civil Code, controls when it comes to terminating a definite-term employment contract. The employer may not terminate the contract merely because the contract expires; otherwise, it will be legally liable to pay severance.

Contents

Severance is Owed for First Contract’s Non-Renewal

You may be required to pay severance compensation to the employee for non-renewal of their first employment contract. The severance liability rules appear in China Employment Contracts Act § 46(e), but the possible reasons for imposing liability is expanded by § 1, which requires courts apply the legislative intent to achieve several policy goals. The Chinese legislature is concerned about how the expiration of a definite-term employment contract can cause unemployment and loss of income. Providing appropriate severance helps mitigate the economic hardship faced by the employee and promotes overall societal harmony and stability.

China’s policymakers believe granting an employee appropriate severance is a necessary legal manifestation of recognition of work contributions that created value for the employer. Severance increases termination costs, thus encouraging employers to carefully and rationally think through terminations, which helps to maintain an overall more harmonious and stable employment environment. In the contract renewals context, the Act at § 46(e) requires employers to pay severance if they cite expiration as grounds to terminate a definite-term employment contract pursuant to § 44(a).

Caselaw. In an illustrative precedent where the employer was ordered to pay severance, Beijing Case 01-cv-8224 (2021), Wang signed a definite-term employment contract with a Company. The Company issued a contract non-renewal notice to Wang and refused to pay severance after termination, for which Wang claimed severance pay. The court noted that the statute requires an employer to pay severance upon the expiration of a definite-term employment contract, unless the employee refuses a renewal offer under equal or more favorable terms. In this case, those exceptions were inapplicable because the employer’s notice of non-renewal did not fall under such exceptions. Thus, the Company was liable to pay severance to Wang.

Permanent Employment Entitlements After the Second Contract

If your employee in China already completed a first employment contract, and their second or later employment contract is expiring, then ambiguous rules imposing permanent employment obligations may apply. In this context, cases from different courts have reached different results when an employer terminates an employee by using non-renewal on a second or subsequent definite-term employment contract. This is different from how the employer’s liability for non-renewal is clearly defined and seldom disputed when the first definite-term employment contract expires.

Most Chinese courts hold that the employer must honor an employee’s request to enter into an indefinite employment contract after the expiration of a second or subsequent definite-term employment contract, under the China Employment Contracts Act § 14(c). Failure to do so is considered an unlawful termination and is subject to statutory damages of twice the severance required under § 47 of the Act. This view is echoed in two Chinese regulatory agency opinions:
• Q&A #1 on Employment Disputes (Beijing Upper Appeals Court and Beijing Employment Dispute Arbitration Commission)
• Answers to User Questions on Financial Compensation for Terminations (Ministry of Human Resources and Social Security)

Liability for Unlawful Permanent Contract Termination

In a precedent where a Chinese employer was found obligated to enter into an indefinite employment contract, Beijing Case 0108-cv-15997 (2023), employee Li had signed two consecutive definite-term employment contracts with a Company. Prior to the expiration of the second contract, Li requested by email to enter into an indefinite-term employment contract. However, the Company refused on the grounds of poor business conditions and chose to terminate the employment relationship instead.

Li subsequently brought a claim against the Company, seeking severance and damages for unlawful termination. The Company claimed that the original contract had already provided for termination, and thus it acted lawfully. The court rejected this argument on grounds the China Employment Contracts Act § 14(c) requires an employer to sign an indefinite employment contract under these conditions, unless the employee is subject to Act §§ 39-40. Here, the Company failed to show that Li was subject to Act §§ 39-40, and the court ruled the termination unlawful, imposing damages on the Company under § 48.

Under Q&A #1 on Employment Disputes, if an Employer attempts to circumvent § 14 of the Act by signing employment contracts in the name of an Affiliate, a constructive contract is imposed on the Employer, and definite terms are cumulatively added together. In a precedent where an affiliate contract was constructively imposed on the actual employer, Beijing Case 01-cv-12178 (2023), Pang signed two consecutive definite-term employment contracts with the employer. Later on, the employer transferred Pang’s team to its affiliate and amended Pang’s contract to name the affiliate as the employer, without making any substantial changes to Pang’s position, responsibilities, or work location.

Before the contract expired, Pang requested that the employer renew it and convert it into an indefinite-term employment contract. The affiliate issued a non-renewal notice, saying the contract had expired. The court found that the affiliate did not show Pang was subject to the lawful termination grounds of Act §§39, 40(a), or 40(b), thus Pang is entitled to request an indefinite term employment contract under Act §§ 14(c) and 48.

Before the contract expired, Pang requested that the employer renew it and convert it into an indefinite-term employment contract. The affiliate refused to renew, saying the contract had expired. The court found that the affiliate did not show Pang was subject to the lawful termination grounds of Act §§39, 40(a), or 40(b), thus Pang is entitled to request an indefinite term employment contract under Act §§ 14(c) and 48.

Some Jurisdictions: Refusing Permanent Employment

The minority view among Chinese courts is that upon the expiration of two consecutive definite-term employment contracts, the employer has the right to decide whether to renew the contract. Under Chinese law, an employer is only obligated to sign an indefinite-term employment contract if both the employer and the employee agree to renew the contract. Otherwise, the contract expires and terminates even if the employee requests a renewal. Accordingly, the employer’s only obligation is to pay the employee severance pursuant to the China Employment Contracts Act § 46(e). This view is mainly seen in the Shanghai courts but could become more widespread as new precedents emerge.

Caselaw. In a precedent where an employee did not have to sign an indefinite employment contract, Shanghai Case 01-cv-9711 (2022), the employee Li had executed two consecutive definite-term employment contracts with the Company. Prior to the expiration of the second contract, the Company issued Li an employment contract non-renewal notice and paid the statutory severance after termination. Li then sued, claiming damages for unlawful termination. The court held that Act § 14(c) applies only when the parties have agreed to renew the contract. The court held that since there was no agreement to renew the contract, the Company was not obligated to sign an indefinite-term employment contract. The employer also paid severance as required by Act § 46(e), so the court ruled against Li.

To avoid litigation risks with China based employees, you should ask employees in writing before the expiration of a definite-term employment contract about whether they intend to renew. You are not obligated to pay severance if the employee chooses non-renewal. However, if you choose non-renewal for an employee’s definite term contract, you must notify them in writing in advance and pay the statutory severance.

Best Practices for Renewals & Indefinite Term Contracts

To renew a China employment contract with an employee, you should provide a written offer of renewal on the same or more favorable terms. Alternatively, you may also provide the employee with a copy of the new employment contract containing those terms. A renewal on less favorable terms must be negotiated with the employee and should be promptly completed when both parties come to an agreement, which helps avoid liability to pay double wages for failing to execute a written contract by the statutory deadline. Furthermore, if an employee who has signed two or more consecutive definite-term China employment contracts asks for an indefinite employment contract, you may not terminate the existing contract upon its expiration; otherwise, may be liable for unlawful termination.

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