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Employment
Terminating Employees in China Legally: the Official Guide

Terminating Employees in China Legally: the Official Guide

There are several established ways to terminate employees in China, but HR department practices often do not align with legal requirements. Thus, companies need to ensure that their termination processes, even for routine terminations, comply with complex Chinese local law requirements to avoid potential claims for financial compensation or damages. However, Chinese labor law does provide simplified procedures for common scenarios, such as uncooperative employees or those who abandon their jobs.

The following official guides have been translated from official Chinese government sources to American English by CBL using the user-centered translation method.

Contents
1. Three ways Chinese companies terminate employees

2. Ensuring terminations are legally compliant

3. Financial compensation may be owed as severance

4. Terminating employees who refuse to change job position

5. Employee’s liability for quitting without notice

Sources 6

1. Three ways Chinese companies terminate employees

In a recent case, a man requested eight days of bereavement leave for his late father. His request was denied, but he took the leave anyway and later discovered he had been discharged for absenteeism exceeding three days. The court held that his dismissal constituted unlawful employment contract termination. The case raises the question: What do the terms discharge, termination for cause, and resignation in lieu of termination mean in China?

All of these HR terms refer to an employer’s unilateral decision to terminate an employment contract. Below is an overview of what differentiates each type of termination:

Discharge: The employee does not meet the employer’s expectations or does not pass the trial period.

Termination for Cause: A more severe action, typically involving a major violation of company policy or causing major damage to the company, resulting in immediate termination.

Resignation in Lieu of Termination: The employer asks the employee to resign, and the parties negotiate the terms of the employment contract termination.

Each of these three options may be seen by courts as the employer’s decision to terminate the employment contract, potentially leading to liability for severance.

Unlawful termination occurs when there is no legitimate reason, proper termination procedures are not followed, or no financial compensation is paid. However, this does not apply if the employee violated the China Employment Contracts Act §39, i.e. by violating company policy, breaking the law, or causing major damages to the company. Otherwise, unlawful termination requires paying the employee damages of two months’ salary for each year of service, subject to §87 of the same Act.

Lawful termination follows the process in China Employment Contracts Administrative Regulations §19, requiring payment of one month’s salary as severance for each year of service, pursuant to Employment Contracts Act §46. For example, during a lawful resignation in lieu of termination, the employer would be required to pay the employee one month’s salary for each year they worked at the company as severance.

Employers must give employees at least one month’s notice of the termination, or otherwise pay one month’s wages in lieu of notice, pursuant to Employment Contracts Act §40.

A termination for cause would apply to major infractions such as a material violation of company policy of the law or causing major damage to the company. In these cases, neither financial compensation nor advance notice is required, however, the employer must document the cause and deliver written notification to the employee.

Employees in China are highly aware of their legal rights, meaning that employers need to ensure that terminations are reasonable, limited, and in good faith to avoid potential disputes.

2. Ensuring terminations are legally compliant

Ensure that the fine details of the factual grounds support the termination. For example, say an employer discovers that an employee owns a dormant company that directly competes with them, despite a non-compete clause. However, in this case, the China Employment Contract wasn’t actually violated because the company wasn’t doing business; merely having a registration on the books doesn’t legally amount to a non-compete violation.

In a more egregious situation, an employer in bad faith recommended a worker take three days off to look for a new job but then fired the worker for absenteeism. This is also highly illegal because the employee had reasonably relied on the employer to act in good faith, and the absence was therefore not held to be absenteeism.

Avoid ambiguities in the phrasing of your contract or employee handbook that could create reasonable differences in interpretation when terminating an employee. For example, a company’s employee handbook required termination if an employee “batters” a person in a public place. An employee was then fired for slapping a co-worker’s arm during an argument in a public setting because it was considered “battery.” Nonetheless, the termination was deemed unlawful because the policy lacked a convincing definition of “battery.”

Diligently document the facts justifying an employee’s dismissal. For example, while an employee could be terminated under company policy for being late to work five times in a row, such a termination would be deemed unlawful if the human resources department fails to properly document the incidents.

Ensure you are applying the law correctly. Even if an employee is terminated because of a violation, disputes can still arise over incorrect application of the law or company policy provisions. For example, terminating an employee for poor performance must follow the process in §40 of the Employment Contracts Act, while termination based on violation of company policy does not.

In another case, an employer failed to follow the law when terminating an employee who violated §20 of the company policy, with the grounds listed as a violation of §10. Employers must thus analyze whether the employee’s actions violated company policy and ensure that the specific violation is substantial—minor infractions do not justify termination.

Company policy provisions that are unlawful, unreasonable, or adopted without an inclusive process or notice to employees are not a lawful basis for termination. For example, a company policy provision requiring an employee to obey all supervisor instructions without exception would be unlawful if used to support the termination of an employee who refused to perform a dangerous task.

Terminations for cause based on disciplinary violations not explicitly stated in company policy may nonetheless be legal under certain circumstances. Employees are obligated to act honestly and in good faith and to fully perform the contract. However, note that in the absence of a clear policy, the violation supporting termination for cause must be extremely obvious. For example, if there is no company policy rule on absenteeism, a one-day absence would not support termination, but a 15-day absence would.

There are mandatory rules in the China Employment Contracts Act that must be followed during terminations. For example, the Employment Contracts Act §42 prohibits terminating an employee on the grounds of poor performance during a pregnancy or nursing period.

Failure to follow the required process can also render a termination unlawful. For example, if a company has a labor union, they are entitled to notification of any terminations.

The termination process is defined in detail under §40 of the China Employment Contracts Act, with specific processes depending on the circumstances:

Medical Related Terminations: The employer must be able to prove the ill or injured employee is unable to do their job.
Poor Performance: The employee must be given a second chance, either by retraining or reassignment to a different role.
Objective Change in Circumstances: The employer must negotiate with the employee and try to find an alternative job role.

3. Financial compensation may be owed as severance

The China Employment Contracts Act requires severance pay in the form of financial compensation for terminations that lack valid grounds like poor performance or misconduct. The amount of financial compensation owed as severance is one month’s salary for each year an employee has worked at the company, increasing up to a maximum of 12 years. Employees who have worked for between six and twelve months are entitled to one full month of severance, applying their monthly average earnings.

There is a statutory cap on severance pay at 300% of the average local salary, which in major Chinese cities such as Beijing and Shanghai, is around 30,000 CNY. The minimum severance payment is set at the local minimum wage. In addition to an employee’s base salary, compensation calculations include hourly wages, piece rates, bonuses, commissions, and allowances. If severance is not paid as required by law, the local labor regulator will issue an order to pay by a deadline, and if late, an additional penalty of 50%-100% of the unpaid severance may be added.

4. Terminating employees who refuse to change job position

Employees have a duty to cooperate with reasonable job role or position changes, in accordance with employee code of conduct, professional ethics, and company policy. Employers are likewise obligated to establish and follow proper company policies that protect employees’ labor law rights.

Under Employment Contracts Act §35, changes to an employment contract generally require mutual negotiation and agreement between the employer and employee. However, Chinese labor law provides exceptions to respect the employer’s right to autonomy in its management. Courts too balance labor law rights with business autonomy rights, and in the context of an employment relationship, allow businesses to unilaterally change an employee’s position or role so long as the change is reasonable.

China has a legal framework for determining whether a job position or role change is a reasonable expression of business management autonomy, thereby preventing abuse. In court precedents, the main factors weighed by judges are:

Productivity management needs.
Significance of the change.
Whether the change is discriminatory or humiliating.
Changes to pay and working conditions.
The employee’s ability to perform adequately in the new position.
Whether the employer took action to facilitate the change.

In a market economy, making these changes to manage productivity is normal, and Chinese law allows employees to reasonably change an employee’s position or job role.

As an employer, you should fully negotiate with employees undergoing this change and effect a contract amendment. If negotiation is not possible, any changes should give full consideration to protecting employees’ legitimate interests. The employee, in turn, should proactively cooperate with their employer rather than act passive-aggressively and negotiate to reach a fair outcome that achieves harmony.

Below is a case study where the company did not strictly follow Employment Contracts Act §35 when changing a job position, resulting in passive-aggressive behavior from the employee.

Case Study

In the recent Zhang case in Shanghai, the court held that the textile company lawfully terminated employee Zhang after a corporate reorganization led to a reasonable job role change. Zhang’s employment contract provided his role as a supervisor at the quality inspection center, and the role was modified as part of the reorganization.

All employees were notified of the position transfers during a 2021 meeting. Aside from being transferred from the QA department to the processing department, Zhang’s salary, performance standards, and wages remained unchanged.

When Zhang received an email from the company instructing him to report to his new position, he replied that he did not agree to the unilateral change. Instead, he remained at his original workplace. The company then issued a warning directing him to report to the new position, but Zhang replied that he still rejected what he called a bad faith, unilateral decision to transfer him. As a result, the company added a one-point deduction to Zhang’s file and issued another warning that failure to comply would result in termination. Later, the company issued a discharge notice to Zhang saying, “You are discharged due to serious violations of the contract, employee handbook, and code of conduct. The employment relationship is terminated.”

In March 2022, Zhang filed for employment arbitration seeking 420,000 CNY in damages for unlawful termination, but the tribunal ruled against him. Dissatisfied with the result, Zhang appealed to the district court, which took the appeal and examined the facts on the central issue in the unlawful termination case: whether the position transfer was reasonable.

The court found that Zhang’s employment contract itself provided that the company could change employee positions and job roles as needed. The corporate reorganization made it necessary to change job positions to meet production operation needs and was thus not directed at Zhang personally, rather it was an exercise of the company’s right to autonomously manage its workforce.

Moreover, Zhang’s job, pay, and working conditions remained largely unchanged. Therefore, in the court’s eyes, Zhang was obligated to comply with the transfer since it was both necessary and reasonable. While Zhang claimed that he lacked the ability to perform adequately in the new position, the fact that he waited around while refusing to do any work at the new position for two months revealed this claim to be baseless. The company was therefore justified in terminating Zhang’s employment contract on the grounds of serious disciplinary and professional ethics violations.

5. Employee’s liability for quitting without notice

An employee will be legally liable for quitting without putting in one month’s notice if their departure causes financial losses due to problems with handoff, social security, or lost productivity. These “disasters” constitute an unlawful termination or cancellation of the employment contract, for which the employer is entitled to claim damages under Employment Contracts Act §90.

Note that there are several exceptions to the 30-day notice-to-quit requirement:

Agreement to terminate (§36).
Employer’s fault, of which there are six types of events (§37).
Probationary employees, who only need to provide three days’ notice (§38).

If an employee quits without notice and the termination does not fall under one of these exceptions, the employer is entitled to serve a written notice on the employee demanding they return to work for a specific period or face disciplinary action under company policy.

If the employee cannot be located or notice cannot be served, then service by publication is also permissible. If the employee still fails to return to work after notice has been given, the employer may serve a second notice with a demand for a specific amount in damages.

The employee may also be liable to pay damages if their breach of the employment contract results in financial loss to the employer. The employer has the burden of proof to establish evidence as to the amount of such loss, and the supporting documentation should include wages, attendance records, proof of breach, and documentation proving that the notice was served.

Sources

This article was translated to American English using the User Centered Translation approach from the following Chinese government publications. The content was reformatted and put in logical order in one place.