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 Chinglish.  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?

The Chinese business community’s interest in layoffs is leading to a heated debate, and legal disputes over layoffs are on the rise.

Chinese employment law, however, is not granular in its provisions regarding layoffs. The statutory Employment Contracts Act does not provide much detail in its layoff provisions beyond stating that they are economic in nature, while layoff rights are primarily covered through concepts such as a major change in conditions or a force majeure event. The Employment Contracts Act and layoff policy provide for the following kinds of employment contract terminations:

• agreement to terminate
• employee resignation upon notice
• employee immediate resignation (typically constructive discharge)
• termination due to employee fault
• layoff as a result of employee incompetence or a major change in conditions

Generally speaking, the typical business layoff strategy in China is to use a combination of these legal grounds for terminating an employment contract on a large scale. Employment lawyers are familiar with several general manager clients in China who always describe these business plans as layoffs, but legal analysis of those plans shows that they include a significant number of terminations characterized as employment contract terminations due to a major change in conditions. Managers in China generally pursue terminations due to changed conditions before using the economic layoff characterization. Thus, managers in China are skilled at administering different types of layoff plans in parallel for different groups of employees.

China’s legal compliance culture, however, is typified by a traditional Chinese metaphor about hats, which warns that a common problem with legal compliance is placing the wrong hat on one’s head, thereby making an embarrassing mistake. Ensuring that the appropriate hat is placed on each employee therefore requires careful planning and attention to detail.

Let’s look at each of the kinds of layoff provisions provided by China’s Employment Contracts Act introduced above.

Today, negotiated agreement to terminate is always considered first in a layoff under Chinese law. Let’s consider why that is. Historically, Chinese culture has been characterized by a weak respect for contract rights; however, lawyers describe agreement to terminate as offering a safe pathway. In contemporary China, labor laws are used as a vehicle to intervene in contractual rights in order to achieve social objectives, while freedom of contract dominates transactions outside the employment relationship, such as the sale of goods. Chinese judges evaluate labor and employment disputes within the context of social factors and resolve disputes according to various provisions from State Council regulations and administrative rules, rather than by applying contract law principles. However, alternative dispute resolution methods, such as arbitration or mediation, or agreements reached by the parties outside the courts, are always respected by judges and are therefore safe from being second-guessed.

In employment law, this means that mutual negotiation and the signing of a settlement agreement provide certainty that the business will not later become embroiled in a dispute. Chinese law has very few explicit statutory provisions regarding the importance of mutual settlement agreements; one of the leading provisions is §35 of the Supreme Court’s Employment Dispute Adjudication Rules, which provides that:

An agreement reached by the employee and employer regarding cancellation or expiration of an Employment Contract, processing related procedures, payment of wages, overtime, severance pay, or damages shall be held valid so long as it does not violate law or administrative regulations and is not made under circumstances of fraud, duress, or unconscionability.

Thus, Chinese judges in the 21st century respect the autonomy of the parties in the employment relationship to reach agreements through negotiation and will not undermine the contract rights thus obtained. Any currently effective Employment Contract can be terminated upon mutual agreement, and the parties may resolve any disputes between them by negotiating a settlement agreement. The Employment Contract Act §42 includes a number of protections for vulnerable persons who cannot be laid off without fault, including older persons, the sick or disabled, and pregnant women. However, a mutual negotiation and termination agreement can be used to lay off even these statutorily protected persons.

Note that the amount of compensation required to achieve a mutual agreement in these cases is generally substantially higher, and human resources professionals tend to discuss this in terms of humanitarianism and treating their employees fairly.

Plan the entire process carefully to ensure success. Begin by establishing a standard severance package that the entire team will use, then assemble the team and prepare the contracts and negotiation plans. Define a standard severance package tailored to each employee, using an appropriate process to determine the reasonable amount for each individual. Gather files and analyze human resources information regarding each employee’s compensation, job role, years worked, and start date—pay special attention to identifying employees who started before 2008—and determine whether there is any remaining annual leave that should be considered. Use this information to accurately predict the severance payout owed to each employee. This process will establish a baseline for negotiations with each employee and determine an accurate total cost for finance. The team should include both human resources personnel and an outside attorney. Human resources should gather all relevant information and establish the baseline severance offer and negotiation parameters for each employee. The outside attorney should draft the contracts, analyze the legal risks associated with the layoffs, and handle any necessary negotiations between managers and employees personally.

Ensure your termination agreements and layoff lists are legally compliant and equitable. Chinese law uses the local term for negotiated, which is commonly used to disparage people seen as taking advantage of others. As a result, the Chinese legal culture is cautious about how severance payments are negotiated and maintains strict standards to ensure that the process is fair. A poorly negotiated termination of an employment contract can later be nullified by an arbitrator or the courts if the employee can establish evidence of fraud, duress, or exploitation. Consequently, a person who induces an employee to quit without proper severance could be seen as taking advantage. Business managers in China need to collect and document evidence from the negotiation process to prove that fraud, duress, or exploitation did not occur.

Recall that, earlier in this article, we mentioned that managers in China must obtain a written waiver from the employee at the time of termination in order to avoid uncontested claims for overtime pay. Now, let’s look in more detail at the provisions of a typical negotiated severance agreement. At a minimum, such an agreement should establish the termination date, the deadline for the final paycheck (including social security contributions), the severance amount, the payment period and method, and an agreement regarding the handover of work. Common contractual provisions often include, for example, an agreement by the employee that no disputes exist between the parties, a non-disclosure agreement, or a non-competition agreement (typically used only for senior management and those with access to critical trade secrets).

Keep in mind, however, that negotiating a termination with an employee requires providing a severance package that the employee is willing to accept; fortunately, most Chinese employees are open to discussing the termination of their employment contract. In our experience assisting multinationals with layoffs in China, preparing structured processes and internal written protocols for the managers who will carry out the process can dramatically increase the success rate of negotiating a termination. You can prepare effective protocols for your managers by contacting the personnel scheduled for layoffs and negotiating the terms of termination, and by determining an effective approach for buyouts of employment contracts in China. Business managers in China typically adhere to established methods, and by thoroughly analyzing the business culture, you can identify a suitable approach for your organization. Managers in China who have carried out layoffs after the COVID epidemic have often cited the major impact of COVID-19 on business as evidence of a material change in objective conditions; during this period in the Chinese justice system, we have observed some courts upholding such grounds in industries such as tourism and food and beverage. However, the material change in objective conditions standard remains poorly defined in the law, which is likely to lead to continued volatility in future pandemics.

Under Chinese law, a major change in conditions is defined by Employment Contract Act §40: An employer may terminate the Employment Contract by providing 30 days’ written notice to the employee or by paying the employee one month’s salary in lieu of notice, under any of the following conditions: … (3) if a major change in the conditions under which the Employment Contract was originally signed occurs such that it cannot be performed, and the employer and employee consult but are unable to amend the Employment Contract to reflect the change. The Administrative Interpretation for the Employment Contract Rules §40, issued by the Ministry of Labor and effective nationwide, states that such major changes include force majeure or other conditions that result in the business being relocated or undergoing an acquisition or asset transfer, but do not involve an economic layoff. However, it does not further define what constitutes a major change in conditions. In Chinese legal practice, judges have reached inconsistent conclusions in interpreting what constitutes a major change in conditions and have applied different levels of oversight to various cases. These inconsistencies affect business management, particularly for multinational companies that apply a uniform set of global human resources rules and require certainty about legal compliance.

Focus on comparing the alternatives available to management that address the material change in objective circumstances. The Employment Contract will be terminated if management and the employee are unable to negotiate changes to the contract that are acceptable under these circumstances. In this situation, consider employee retention options first, rather than laying off employees and paying severance. Options include substituting the position or role performed by the employee, proposing a change in the work location, or modifying the compensation structure. In fact, you should always provide sufficient details to employees about alternative positions they can transfer to. Layoffs under the significant change in objective circumstances provision also require following a labor union process. Ensure that the project management team includes members with expertise in the strategic changes being implemented by the business, in addition to understanding how the role of human resources will support those changes, as well as outside counsel who can help design a legally compliant process. Chinese law §§43, 22 of the Employment Contracts Act and §21 of the Layoffs Rules require engaging with the labor union in advance of any proposed layoffs due to significant changes in objective circumstances. If there is no labor union at your organization, establish a plan to organize one or bring in temporary management from the labor dispatch agency’s union.

Go through the entire layoff process at the company and ensure that each termination is supported by a significant change in objective circumstances that is linked to the actual reason for that employee’s termination. If your company has a history of terminating employees in retaliation for certain internal cultural violations, make sure these factors do not obscure the true reason for the termination. Also, carefully manage the fact that Chinese law restricts whom you can terminate, which in some cases makes it illegal to use a major change in objective circumstances as grounds for termination. The restrictions are provided in Employment Contracts Act Sections 21, 23, and the Layoffs Rules. Currently, the following types of employees may not be terminated due to a material change in objective circumstances:

1. Employees working around an occupational health hazard who have not yet completed their occupational health screening, or who are still being treated or observed for an occupational health concern.
2. Employees who sustained an occupational disease or injury at work and have been determined to be disabled or partially disabled.
3. Employees who are sick or sustained an injury unrelated to work within the designated period for receiving medical treatment.
4. Pregnant women or women who are within the childbirth or nursing period.
5. Employees with at least 15 years of continuous service with the company who have less than five years remaining until retirement age.
6. During the pandemic, anyone who has COVID-19, is a suspected case or a close contact during any quarantine period, or any employee unable to work normally due to a governmental quarantine order or other emergency order.

Second, be aware that courts throughout China differ significantly in what they consider an objective material change. The local political system has a substantial impact on precedent in China, so you must ensure that your layoff grounds are compatible with local precedents. A common comparison is between Beijing and Shanghai, where precedents differ on whether restructuring management positions qualifies as an external force beyond management’s control. If management performs poorly, causing the company’s market position to decline, and then restructures to improve management effectiveness, the resulting layoffs are attributable to the initial poor management—which was within management’s control. Layoff grounds based on internal management decisions are typically rejected by the courts and will not be accepted as valid. On the other hand, changes in government policy regarding permissible business activities, especially during COVID-19, have been considered valid grounds for layoffs. Internally, within the company, ensure that layoff rules are established and that appropriate internal resolutions are enacted; also, confirm that resolutions by stockholders or the board of directors are officially adopted. If the company has a Foreign Invested Enterprise Approval Certificate, make sure that the layoff rules comply with any restrictions stipulated in the approval.

Negotiations with the employee are required by the Employment Contract Act when terminating employment due to major material changes, so be sure to schedule a meeting with the employee to thoroughly discuss and negotiate the layoff. Although Chinese management culture is generally known for poor compliance, in recent years Chinese judges have been very strict and pay close attention to the extent of negotiation; they will reject any termination if there was insufficient discussion with the employee. In the author’s experience, Chinese management typically attempts to negotiate the termination or a severance package that includes good job opportunities at a different company. However, in numerous legal dispute cases involving layoffs seen by the author, managers were unable to lay off employees even after going through the negotiation process about the economic layoff. Judges will also review the reasonableness of the changes made to the employment contract for a layoff, hiring an expert witness if necessary, and will be looking to ensure that the employer is acting in good faith and treating the employee fairly in light of their career opportunities and professional skills. Judges will reject an employer who attempts to disguise constructive terminations as layoffs in order to impose worse conditions on the employee.

At the core of these disputes is the current Chinese business culture regarding employee termination. Managers prefer to terminate employees through an economic layoff, even when there aren’t enough layoffs to trigger the full procedure required by the Employment Contracts Act. Under §41 of the Employment Contracts Act, an economic layoff occurs if the business needs to reduce its workforce by 20 or more employees, or by fewer than 20 employees but more than ten percent of all employees in China, due to circumstances defined by the statute. Such a reduction—whether it involves 20 or more employees or more than ten percent of the workforce—can only be carried out after the labor union or all employees have been fully informed of the situation 30 days in advance, their opinions have been heard, and the layoff plan has been filed with the appropriate government agency. (The requirement to notify a regulatory agency may seem unusual to Americans, but it is important to remember that China is a socialist law jurisdiction.) The legal obligation to negotiate with employees about changes to the Employment Contract applies to layoffs based on a material change in objective conditions, yet regulatory agency review is required for layoffs carried out through the §41 economic layoff process. The law’s goal is to restrict and oversee management’s power to terminate Employment Contracts, ensuring that the process occurs under the supervision of administrative agencies.

Preventing disputes on layoff projects

Planning your layoff project in China

You will invest substantial funds in preliminary research and preparation for the layoff project. Project management must calculate scenarios and analyze the project’s feasibility. Attorneys will draft documentation and legal notices to be used as the process moves forward.

Next, management needs to organize the evidence required to justify each layoff in anticipation of a possible dispute. Prepare a written explanation of the situation along with a detailed layoff plan. Management must provide the relevant evidence to support the appropriate Layoffs Rules §41 reason selected for each layoff, as each one must have its own documented reason.

These general reasons include bankruptcy, serious business difficulties involving changes in the production line, major technical innovation, adjustments to business strategy, or significant changes in economic conditions.

The following types of documents are considered appropriate to establish these reasons:

• Adjudication decision for bankruptcy or financial restructuring
• Balance sheet
• Asset appraisal
• Tax filings
• Audit reports

Compile and assemble the appropriate documentation from this list to establish the current condition of the business, demonstrating how each Employment Contract is impacted.

The current regulatory scheme in China requires a 30-day advance notice of the layoff plan to the labor union or all affected employees, along with an opportunity to comment. The statutory interpretation suggests that due to the temporary nature of the §41 process, a supplemental month’s salary cannot be used to satisfy this requirement. Although the law does not require that the employer obtain the agreement or approval of the labor union or all affected employees for the layoff plan, for risk management purposes you should ensure that there is contemporaneous documentation of any objection from the counterparty. All communications must be accompanied by a paper trail consisting of written notices, roll call attendance sheets, audio-video recordings, and even a notarial record if appropriate.

Each local labor regulatory agency in China maintains its own specific documentation requirements for a Layoffs Rules §3a Action. Before moving forward, ensure you have a complete understanding of these requirements by making an informal inquiry with staff. These practical requirements often have little basis in the law; for example, in Shanghai the human resources regulatory agency requires documentation that the labor union has legal person status (organizational code certificate), even though no rule or regulation mandates it.

The layoff plan itself must include specific information for acceptance by the local regulator. The plan must describe the positions, the number of personnel, planned reductions, the criteria and list of affected personnel, processing time and procedural steps, termination conditions, severance compensation criteria and payment methods, and plans to settle any unpaid wages and outstanding social security payments.

The Employment Contracts Act §40 also imposes additional requirements regarding the economic layoffs list; the following types of employees are excluded from layoffs:

• Temporary or seasonal employees
• Joint venture secondees or labor dispatch agency temporary workers from their staffing pool

In anticipation of these requirements, management should consider creating and maintaining an effective program to comply with Employment Contracts Act §41’s reasonable management procedures. This program should ensure that retained employees meet the following legal requirements:

• Have long continuous service on renewable fixed-term contracts
• Are employed under an indefinite duration contract
• Have no secondary household income and have an elderly or minor child in their care

Anticipating employee rumors and labor organizing before the eventual layoff announcement can help promote social stability during the 30-day layoff project plan. Allowing employees and the labor union to express their views on the layoff criteria and on how those affected are selected is important for workplace democracy and provides an opportunity for executives to evaluate whether any changes need to be made to the proposed layoff plan.

There is some risk in China that employees will express extreme discontent, which might begin with mocking or trolling the management person on stage and escalate to pulling an executive off the stage or engaging in physical confrontation. Build a plan around this risk that includes training security personnel for crowd control, ensuring they remain as unobtrusive as possible. Additionally, contact the local police station to inform them of the planned activity so that officers will be less likely to be caught off guard. Worst-case scenarios of poor site control typically involve mobs leaving the worksite to damage property or engaging in physical assaults off-site.

Keep in mind that China, as a socialist country, has a government staffed with dedicated bureaucrats, and its labor regulatory agencies will diligently carry out their role upon receiving the required notice. In practice, you will often find that local labor regulators reject layoff plans involving the termination of a large number of employment contracts to ensure that businesses truly comply with the Layoffs Rules. There are numerous requirements that labor regulators across the country may impose, such as requiring each individual employee to sign an agreement acknowledging that they are being laid off, or providing financial records demonstrating that the business has experienced three consecutive years of losses. The best practice for approaching a layoff in China today is to first consult with the local labor regulator—informally, if necessary—to determine what the requirements will be and whether the proposed grounds for a mass layoff will be accepted before planning any layoffs.

In conclusion, it is clear that economic challenges and the need for layoffs in China continue to be critical concerns for executives. These provisions outline the business conditions for success in today’s China. Successfully operating a business will require a management team that makes bold decisions about layoffs. However, these actions should be executed with careful attention to ensuring that the entire process complies with the rules and that stakeholders are retained through effective communication and a clear understanding of their perspectives and positions.

2. Is prior notice required when firing an employee?

Managers generally understand that any termination requires giving advance notice to a labor union. However, most foreign clients do not know how to do this in China. Lack of familiarity with the jurisdiction creates uncertainty regarding how to word the notices, to whom they should be addressed, and how the labor union should interact with the business. Moreover, many foreign businesses have not established a labor union within their organization, or if they have, they may be unaware of the union’s function within the business entity.

As a result of these deficiencies, foreign businesses often lose termination disputes in China. This article explores solutions to these problems for business managers in China by first illustrating the nature of the issue using several data sources and then highlighting recent precedents in which notices served on a labor union to complete the termination procedure were litigated. After examining the characteristics of notices and their service processes that contribute to poor litigation outcomes, the article briefly summarizes steps that management can take to prevent these mistakes.

A surprising number of layoff-related labor dispute cases in China today stem from employers failing to provide the required notification to the labor union. This trend has been intensifying; in many cases, a labor dispute over a termination—for example, during an employee layoff due to economic conditions—leads the employee to claim that proper notice was not provided to the labor union.

These cases are concentrated in manufacturing, wholesale and retail, business services, transportation and logistics, and real estate. Typically, Chinese employment disputes are first heard by a labor arbitrator and then proceed through two levels of appeal in the courts. Appeals are rarely overturned compared to those in other jurisdictions, and one of the trial stages generally rules in favor of the employee about half the time. Overall, the number of these cases is increasing year by year, and businesses lose around half the time, which represents significant odds.

The poor compliance performance of employers in employment contract disputes reflects the legislative intent expressed in the provisions of the Employment Contracts Act §§30 and 43 and the Labor Union Act §21. These provisions require employers to notify the appropriate parties about termination decisions but do not provide detailed remedial measures to ensure compliance, leading to confusion even among sophisticated employers. Chinese lawmakers intended to enhance job security by defining labor unions as mass organizations for protecting workers’ rights; labor unions are notified on behalf of employees because termination significantly impacts the worker’s life.

Current Chinese law is designed to prevent employers from arbitrarily terminating employment contracts without proper consideration. The law positions labor unions as effective counter-parties in safeguarding workers’ job security by requiring them to review termination notifications submitted by employers and provide feedback according to their established processes. In addition, the law is founded on the principle that procedural justice is essential; the Supreme People’s Court has famously stated, there can be no substantive justice without procedural justice. In alignment with international Rule of Law standards, procedural violations are treated as illegal activity, with procedural referring to both regulatory compliance and civil processes. In its current, somewhat ambiguous form, the legislation imposes punitive measures requiring employers to pay damages for inadequate organization and documentation of employment matters, thereby enhancing protections for employees’ rights.

In China, it is common for businesses not to have an organized labor union. A labor union can be organized at a global business entity level or within a local Chinese subsidiary. In some labor disputes, Chinese courts are asked to consider whether a business without a labor union has a duty to notify the union before terminating an employee—a matter that depends on the specific facts of each case. In several cases, judges have characterized the business as if it did have an internally organized labor union. There is also a minority view that although a higher-level local union is typically notified, the employer has no obligation to notify any union before terminating the employee because the business has not internally organized a union. §47 of Labor Dispute Interpretation #1 states that an enterprise which has organized a union must provide advance notice to the union; otherwise, the termination is illegal and the employee may be entitled to further compensation, provided the employee has not first pursued a claim.

The majority view in China is that a business without an organized labor union can terminate its employees without first notifying any union, and such termination will not be considered procedurally unlawful. Most courts in China adhere to this perspective, for example, in several cases reviewed.

How Chinese courts approach employment termination legality by examining whether labor unions were notified and if there was a lawful basis to terminate employment is illustrated by a recent case. An example of this approach is the opinion for Labor Dispute No. 1702 (2020) issued by the Beijing No. 3 Intermediate Court, which involved a dispute concerning whether a company must notify a higher-level labor union in order to lay off employees when it has not established a labor union at its business.

In this case, the plaintiff Hong alleged that the employer should have notified the appropriate higher-level labor union to fully comply with the process required for laying off employees, arguing that the failure to do so rendered the termination of the employment contract unlawful and entitled Hong to statutory damages. The employer, along with its parent organization located in Tianjin, contended that since neither had established a labor union as required by law, they were not obligated to provide a 30-day notice to a labor union. The court found that the company was not obligated to provide notice if no labor union existed and concluded that the termination of Hong’s employment was lawful, with no statutory damages owed. This ruling aligns with the long-standing practice among local courts in China that employers without a labor union are not required to give advance notice to an appropriate labor union when terminating employees.

The second major view of the law taken by various Chinese courts is that the legislator’s intent was to ensure that labor unions could intervene during the termination process to protect employees from unlawful terminations that could cost them their livelihoods. This statutory purpose would be defeated if an employer could bypass the oversight process simply by choosing not to establish a labor union. Consequently, even if a business entity has not established a labor union, it must still provide notice to the appropriate government labor union according to a hierarchy of union sections based on geography. In some parts of China, local Employment Contract Rules require courts to follow this approach; a prominent example is the Jiangsu Province Employment Contract Rules.

In the well-known 2019 retrial case Qiao v. ABC, 3252, guided in part by the Su Min Rules, both the trial court and the appellate court ruled that ABC failed to comply with statutory procedure by not notifying the union when it terminated Qiao’s employment contract, thereby ruling the termination unlawful. ABC appealed the decision to the Jiangsu High Court, arguing that its failure to notify a labor union was lawful because it did not have an internal labor union and its legal domicile was not in Jiangsu, which meant that a union could not be notified.

The Jiangsu High Court noted the legal duty to provide prior notice to the labor union and the deadlines to cure a defective notice, concluding that a business entity cannot bypass these requirements by merely failing to establish a labor union. The court cited the Jiangsu Employment Contract Rules, which state that an employer terminating an employment contract must notify the labor union in advance and that if the required labor union has not been established, the notice should instead be sent to the local labor union where the employer is located. The court further ruled that because the employment contract was executed in Jiangsu, the business should have notified the local union in advance, and failure to do so constitutes an illegal termination. The application for retrial was denied.

In many cases, an employer does not establish its own labor union entity and therefore cannot provide notice as required. In such situations, Chinese judicial precedent typically addresses the issue by directing that the notice be sent to the local labor union, even though this local union, as a government administrative entity, may not have the same capacity to process the notice as an independent labor union. The best approach is to determine whether any state or local laws explicitly address the notice process in these circumstances. If no such provisions exist, it is advisable to research local court precedents in labor dispute case law to understand how they have resolved this issue.

Appointments require careful consideration of positioning and authority within the organization. In China, note that the term labor union is used, but it is rarely applied to white-collar jobs, where an employee representative congress fulfills a similar role. There are also appointments made within the organization, and the notice process may vary depending on the recipient of the appointment. For understanding the legal risk of termination, the law assigns the statutory obligation to the legal employer. In China, this can refer to either the business entity itself or a specific department—typically the human resources department—that has been granted statutory responsibility, as documented clearly in internal company policies.

Under the legal framework, the employer should provide notice to the labor union at the company level to inform the joint employee committee, which now serves as the collective bargaining representative. If management has not established this organization as a legal entity, the Employment Contract Rules require providing notice to the appropriate administrative division labor union, which may be at the village or township level. Clients often ask whether notice can simply be provided to the labor union president or vice president. Court precedents confirm that notice given to the president or vice president is effective, making it a safe option when sending a termination notice.

Ensure the termination notice procedure complies with Chinese law to mitigate wrongful termination liability. Chinese courts base decisions regarding whether a termination notice is appropriate primarily on documentation that establishes the employer’s intent and confirms the termination as a lawful business decision. Administrative regulations in China usually require distinct notifications when terminating workers for poor performance versus laying off workers due to economic conditions. Therefore, it is best practice for a company to implement a process that ensures retained local Chinese legal counsel prepares each termination notice and advises on the appropriate form.

Many companies in China record routine communications and transactions using WeChat, which is legally acceptable if a legal hold process is in place for preservation; however, in today’s Chinese culture the legal community generally finds paper notices to be more persuasive. The centuries-old Chinese tradition of using formal seals to validate the authenticity of documents remains influential and highly effective.

In China, there is generally no fixed time limit for how far in advance of termination an employer must notify the labor union; the Employment Contracts Act §43 only requires that notice be given in advance. Judicial precedents indicate that an employer who serves termination notice solely to the employee without concurrently notifying the trade union will not be liable for illegal termination if the union is notified before litigation begins.

Management should review litigation and labor dispute arbitration records to determine which notices have been provided to labor unions and whether the employee may have already initiated a labor dispute case. To mitigate risks, it is advisable to implement a system that ensures the labor union is notified before a case is initiated in arbitration.

Some provinces have established specific advance notice periods for labor unions, which allow them to object to terminations in advance. These provisions typically cover all types of terminations, not just layoffs. For example, the Hubei Province Rules to Implement the Labor Union Act §11 require that any employee termination be preceded by a 15-day notice to the labor union, which may then provide a written objection within 7 days if it believes the employment contract violates the law or regulations and demand corrective action.

This local employment legislation in China illustrates the legislator’s intent to allow for negotiations with the labor union before proceeding with termination. To comply with the law, an employer should verify whether any local legislation imposes specific requirements for engaging with labor unions during employee terminations. If there are no additional waiting periods or prescribed processes involving the labor union, the termination should be treated as a dispute that proceeds to arbitration and possibly litigation through the court system. Employers may be held liable for unlawful termination and required to pay a severance award.

Labor unions generally consider processing the notice to be an internal matter handled according to their own rules and procedures. Local law typically governs the labor union complaint process when contesting a business’s violation of the employment contract through the termination of the employment relationship, typically handled by the labor union’s legal service staff.

The labor union manager provides a written decision that confirms the employer’s action, recommends changes, or offers suggestions. Employers typically expect a formal written response on paper that bears the labor union’s stamp and the signature of the labor union manager.

Management in China must provide written feedback documenting their response to the labor union’s opinions, recommendations, or requests regarding the termination of employment contracts. The management should hold a meeting to deliberate the labor union’s input and consult with legal counsel to ensure that the process is legally defensible.

After deliberation, management must provide a written response to the labor union detailing the decision. Generally, decisions in Chinese culture reflect a collectivist approach rather than personal accountability. A significant business risk when terminating an employment contract arises if the labor union continues to claim that the company’s plans are unlawful while management proceeds with the layoff. Management may rationalize its course of action if it concludes that the labor union’s opinion is mistaken. Although no statutes or regulations explicitly govern this situation, major labor law disputes in the courts indicate that management can proceed with layoff plans if the labor union has been properly notified and consulted, allowing the employer to make the final decision. Fundamental points underlying this conclusion are that labor unions in China function as supervisory bodies without the power to veto layoffs and that the notice requirement is primarily procedural.

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

Properly documenting employment contract terminations while safeguarding trade secrets is essential. A key issue in this case was whether appropriate documentation had been maintained, so management should conduct an internal evaluation of the systems used for documenting terminations. Consider the hypothetical case of Employee Sun, who signed an employment contract with an HR staffing company and was assigned to work as a delivery driver on contract. On September 12, October 3, and October 16, 2017, Sun was disciplined through point deductions totaling 22 points for three infractions: failure to wear appropriate work attire, covering for someone else by manipulating a timecard, and posting insults on the company’s internal technology system. However, the point deductions were not tied to specific dates and times, which made it difficult to correlate them with the specific infractions.

Later, on October 20, 2017, Sun was absent for three days without arranging leave or obtaining permission from a manager. In response, the HR staffing company terminated Sun’s employment contract in accordance with the business entity’s rules under applicable law and provided a termination notice to Sun. Sun challenged the termination as unlawful in arbitration. In its defense, the HR staffing company relied on the earlier disciplinary actions regarding the unexcused absence during both arbitration and the trial de novo phases of the dispute, asserting that Sun’s conduct violated the employment contract. However, the courts in both the trial and appeal phases determined that the HR company had unlawfully terminated the employment contract and awarded appropriate compensation to Sun.

Today, a negotiated agreement to terminate is the primary option considered for layoffs under Chinese law. Consider why that is.

Historically, Chinese culture is characterized by a weak respect for contractual rights; however, lawyers view agreement to terminate as offering a safe pathway. In contemporary China, labor laws serve as vehicles for intervening in contractual rights to achieve social objectives, whereas freedom of contract dominates in transactions outside the employment relationship, such as the sale of goods. Chinese judges evaluate labor and employment disputes within the broader social context, resolving conflicts under provisions from State Council regulations and administrative rules rather than strictly applying contract law principles. Alternative dispute resolution methods, such as arbitration or mediation, or agreements reached outside of court, are consistently respected by judges and are therefore unlikely to be second-guessed. In employment law, this means that mutual negotiation and signing of a settlement agreement provide certainty that a business will not later become embroiled in a dispute.

Chinese law contains few explicit statutory provisions emphasizing the importance of mutual settlement agreements. One leading provision is the Supreme Court’s Employment Dispute Adjudication Rules §35, which states: An agreement reached by the employee and employer regarding cancellation or expiration of an Employment Contract, processing related procedures, payment of wages, overtime, severance pay, or damages shall be held valid so long as it does not violate law or administrative regulations and is not made under circumstances of fraud, duress, or unconscionability. Thus, modern Chinese judges respect the autonomy of the parties in an employment relationship to negotiate agreements and will not disturb the resulting contractual rights. Any currently effective Employment Contract can be terminated by mutual agreement, with any disputes resolved through a negotiated settlement.

The Employment Contract Act §42 includes a number of protections for vulnerable persons who may not be laid off without cause, including older individuals, the sick or disabled, and pregnant women. However, a mutual negotiation and termination agreement can still be used to lay off these statutorily protected persons, although the compensation required to achieve mutual agreement in such cases is generally substantially higher. Human resources professionals often frame this practice in terms of humanitarianism and fair treatment for employees.

Chinese legal scholars typically characterize the precedent on documentation for terminating employees as primarily concerning the requirement to act honestly and in good faith, noting that the grounds for termination must be fully documented in the notice provided to the employee. Chinese courts nationwide have consistently applied the Layoffs Rules in judicial opinions.

For example, in Beijing, Shanghai, Guangzhou, and Suzhou there are precedents where a termination was held unlawful when an employer supported its case with facts not stated in the termination notice served to the employee. In these jurisdictions, the courts hold that an employer may not substantiate the lawfulness of a termination with reasons not included in the notice, and an employment termination notice that fails to specify the exact misconduct and context may be rejected by the court for not fulfilling the obligation of good faith.

The China Court of Appeal civil judgment in the Ma employment dispute [Case No. (2022) Beijing 02 Civil Final 6437] involved an appeal by a Beijing company that terminated employee Ma for serious dereliction of duty and malpractice for personal gain that caused significant damage to the company. The company issued the Decision on the Handling of Ma and Other Irresponsible Persons on December 28, 2020, with a notice provided to all employees.

The company, along with a third-party auditor, conducted a special inspection and audit of all projects in Tianjin, Jinan, and other locations managed by Ma, uncovering serious operational problems and management loopholes. The notice disclosed the issues with the projects and the corresponding actions to be taken, although specific key problems and actions were left blank. It stated that Ma, acting as project manager, engaged in dereliction of duty and malfeasance that damaged the company’s economic interests and reputation. Ma’s actions were deemed a serious violation of §10-22 and §10-24 of the Employee Handbook as well as §2-6 and §5 of the Disciplinary action Policy. The employer further stated that absenteeism, falsifying contracts by forging the seal, and embezzlement were also cited as grounds for termination, although these grounds were not included in the notice provided to Ma.

The court held that an employer must set forth its grounds and the supporting evidence as part of its documentation of the termination. In the Ma case, the court determined that the employer could not rely on reasons not provided in the termination letter to justify the legality of the termination.

In the case of Liu v. Beijing Company (2020) 01 Civ. 657, the Beijing courts held that when an employer documents termination via email, all relevant facts must be included. The email in that case identified three facts as the basis for the termination, one of which was the employee’s failure to comply with company policy. The court found that the employer had failed to specifically identify which policy provisions were violated, thereby allowing for an arbitrary selection of rules deemed violated. This arbitrary selection constituted bad faith, and the court rejected the employer’s justification for the termination.

In Shanghai, the courts will not consider the legality of a discharge of an employment contract if the justification and reasons are not included in the termination notice. Instead, the matter must be resolved through alternative means. Compared with the decision rules provided in Guiding Case No. 180, the court’s position not to review disputes in which the grounds were omitted from the termination notice is reasonable; however, the recommendation to pursue alternative avenues to resolve the dispute is less well-founded.

A representative example of this issue is demonstrated in a dispute between a certain Shanghai company and You, as reported in the first-instance employment contract dispute at Shanghai’s 0117 District Court (case number (2021) 17201). In this dispute, the company provided You with a Termination of Employment Contract Notice on July 9, 2017, stating that the employee had not come to work and had not applied for leave from July 2, 2020, until July 9, 2021, which constituted absenteeism in violation of the company’s Attendance and Leave Management Policies, and, as a result, the employment relationship was terminated so that You could not seek compensation or any damages from the company related to the termination. The court held that the termination notice issued on July 9, 2021, effectively terminated the employment relationship and that the reason provided to effectuate the termination was the one documented in the termination notice. The employer argued that the employee was moonlighting and had taken company property home, but these reasons were not included in the termination notice; the court declined to examine these additional reasons in the termination case, although they could be addressed in a separate action. The employer did not provide sufficient evidence of the employee’s absenteeism, so the court found that the reasons for the termination were not substantiated and that the termination of the Employment Contract was unlawful.

In Guangdong, the courts disallow an employer from raising new reasons or material facts that existed at the time of termination if they were not included in the termination notice. An example of insufficient diligence in staff management is shown in the Guangdong civil judgment case reported as Yue 01 Min Zhong No. 26115 (2021), where the employer issued a Termination Notice to Cheng on March 11, 2020 stating that the Employment Contract was canceled and the employment relationship was terminated effective immediately due to Cheng’s falsification of expense reimbursements.

In litigation, the employer presented additional evidence of other conduct they believed constituted dishonesty, but no objection was raised to this evidence. The court, however, stated that the main fact relied upon in the notice was the falsification of expense reimbursements and that only evidence related to this issue would be considered. Although the employer alleged that Cheng had instructed other employees to prepare falsified expense reimbursements and provided evidence at trial, the court did not consider that allegation as part of the reasons for termination because the termination notice did not mention it and evidence of that conduct could have been discovered after the termination.

Ensuring that employment contract terminations are legally permissible is crucial for management’s compliance processes. In Suzhou, terminations are frequently subject to legal challenge, and courts ensure that employees have their due process rights preserved. As a result, all relevant facts and reasons for the termination must be clearly stated in the termination notice. Courts reject termination claims that rely on reasons not included in the notice, as doing so violates principles of honesty and good faith.

In one example, the Suzhou Branch v Zhao case involved an employment contract termination notice issued on October 31, 2018. The notice cited the manipulation of timekeeping records—an issue for which Zhao had already received two written warnings during the prior 12 months—as serious misconduct. Specifically, the notice alleged that on October 22, 2018, Zhao concealed a time card record by writing 0900 (forgot to tap in) and that similar behavior had been observed previously. However, the arbitrator and courts held that Zhao’s termination was unlawful because the notice failed to provide a clear and explicit statement of the legal grounds for discharging the employment contract, merely listing what the company believed Zhao had done wrong. The decision also indicated that management did not adequately control the decision-making process, as it conceded at arbitration that it could not confirm the legal grounds for terminating the contract.

Zhang’s employment was terminated on August 15, 2017. The termination notice stated that Zhang exhibited limited professional skills, was incapable of performing any other job role, and was unwilling to accept temporary assignments. It also alleged that Zhang was idle at work, wore flip-flops, and roamed around the workplace, which violated the Company’s disciplinary rules A-3, A-7, B-4, and C-18.

In the termination dispute, the Suzhou court held that only the reasons provided in the notice sent to the employee may be considered when evaluating the legality and reasonableness of the termination. An employer who provides additional reasons outside the termination notice is likely to be denied relief by the court for a lack of honesty and good faith.

When terminating an employee, begin by reviewing the key compliance hazards identified in Chinese Guiding Case 180, which establishes precedent for applying the principle of honest business practices and good faith to management’s decision to terminate an employment contract. In particular, ensure that the human resources process guarantees the termination is conducted in good faith and that no employee rights are abused.

Chinese precedents have established that the principle of honest business practices and good faith applies throughout the entire lifecycle of the employment contract, especially when the decision to terminate has legal effect based solely on the grounds stated in the termination notice. Courts in China will only consider the grounds and reasons outlined in the termination notice and will not take into account any additional reasons.

Compliance recommendations are based on China’s Guiding Case No. 180 and relevant precedents. The facts and grounds for terminating the employment contract must be clearly listed in the termination notice and should not be changed or supplemented later.

Throughout employment, management must comply with their duties in good faith and avoid any conduct that could be interpreted as an abuse of rights. Before issuing an employment termination notice, it is advisable to obtain professional advice from a qualified Chinese employment law expert to reduce the risk of disputes, reinstatement claims, or damages awards.

4. How is employment termination handled in business bankruptcy?

When a bankruptcy is filed in China, an administrator is appointed to run the business in place of former managers. Employee relationships are an important part of the legal mandates for the administrator’s role, who is expected by law to make provisions to preserve social harmony and stability.

In addition to continuing employment contracts and hiring key employees to keep the business operating, the administrator must also make arrangements for terminating employment contracts that are no longer needed. Terminating these contracts during a bankruptcy proceeding in China is fundamentally different from normal terminations, and the interests involved must be balanced against those of the creditors. This article analyzes Chinese law and practice for employee arrangements in a bankruptcy and explains the key legal issues management will face when executing an employee resettlement plan.

If the Employment Contract continues, in some cases—such as restructurings—the administrator may determine that the business should continue operating. In those cases, a formal request to allow part or all of the business to continue operating may be submitted to the court as part of the business plan, which typically requires retaining some or all of the employees and raises questions about how the rights of creditors will be affected by the rights of the retained employees.

Under §42(4) of the Business Bankruptcy Act of China, employees retained in an ongoing business process are designated as administrative priority creditors, meaning that their claims for wages and social security contributions are paid before those of ordinary unsecured creditors.

Priority claims under the Bankruptcy Act from Employment Contracts

Contrary to the typical rule in Employment Contracts for claimants with a specific priority in the Chinese bankruptcy waterfall, Employment Contracts continued after a business bankruptcy filing have their compensation and benefits characterized as priority claims that rank above general unsecured creditors. The Bankruptcy Act, §42(d), specifically lists compensation, social security payments, and other liabilities related to restarting the business as priority claims. When an Employment Contract is continued after a bankruptcy filing, it is administratively ranked above other unsecured claims and paid in full. However, the trustee’s power to continue performance on Employment Contracts is contingent on obtaining authorization from the bankruptcy court to restart business operations.

When determining which Employment Contract liabilities constitute a priority claim, the court will classify any liabilities arising from the Employment Contract as falling under the category of other liabilities. This provision is not interpreted to include voluntary severance payments made to an employee’s family to settle a labor dispute where the payment replaces required compensation under the Employment Contract. It is important to note that the definition of priority claims under Chinese law is limited to those listed in the Business Bankruptcy Act, and Employment Contract liabilities incurred after the bankruptcy case is accepted cannot be treated as priority claims.

Terminating Employment Contracts in Bankruptcy

Under Chinese law, employment contracts are treated as claims against an insolvent business, so the administrator’s duties include resolving these claims as part of maintaining social stability. §44 of the Employment Contracts Act provides that an employment contract is terminated when an employer is declared bankrupt.

The Act does not address whether employment contracts must be terminated when bankruptcy proceedings are initiated but prior to their conclusion if the declaration of bankruptcy occurs during the proceedings. Case law, however, has established precedents for terminating employment contracts earlier in the process.

Under established precedent, the legally required termination dates for Employment Contracts must coincide with the date the business entity is declared bankrupt. Courts also apply Business Bankruptcy Act §44 when management fails to provide the required advance notice or proper procedures and there is no evidence that the Employment Relationship was terminated properly. In China, however, the period between the initial acceptance of a bankruptcy case and the issuance of a bankruptcy declaration typically averages six months to a year, during which job roles contribute little or no economic value, and the insolvent business cannot afford to provide income during the debtor-in-possession period. A criticism of terminating all Employment Contracts on the bankruptcy declaration date is that even less productive employees may accrue rights or claims during this period, yet these cannot be calculated accurately until the day before the first creditors’ meeting, thereby increasing the cost of continuing the bankruptcy process and delaying its resolution while the estate evaluates these employment claims, which results in a deadweight economic loss for society.

In some cases, Chinese courts have experimented with terminating Employment Contracts after the initial acceptance of the bankruptcy case and before a formal bankruptcy declaration. In these instances, a bankruptcy administrator is appointed to manage the process and issue a public announcement stating that all Employment Contracts are terminated; the court then formally accepts this date as the termination date for all contracts. A leading case supporting this approach is the Wenzhou Zhongyi Corp informal proof of claim by employee case, in which the announcement clearly stated a termination date for all Employment Contracts and social security benefits while also providing each employee with a severance pay calculation as part of the notice. The case supports the proposition that a Chinese bankruptcy administrator is permitted to terminate Employment Contracts prior to the bankruptcy declaration rather than waiting for that date. Similarly, some judges in China have approved terminating Employment Contracts after the bankruptcy process has begun if a reorganization plan is proposed, employment claims are made public, and contracts are renegotiated with staff.

Employment contract termination at insolvent companies during bankruptcy procedures is governed by a combination of the Employment Contracts Act §§36-50 and the Bankruptcy Act, reflecting regulatory developments influenced by foreign practices familiar to practitioners in many jurisdictions outside of China. Laypersons translating the law may often misunderstand the Bankruptcy Act’s §18 provision regarding the deemed termination of contracts during bankruptcy.

The Employment Contracts Act §40 states that a material change in conditions beyond the control of the parties is grounds for terminating an employment contract, although it does not specify that filing for bankruptcy constitutes such a change. As a result, precedents pertaining to when insolvency administrators may terminate employment contracts for employers in bankruptcy focus on comparisons between cases. These precedents establish that insolvency administrators have the authority to terminate employment contracts prior to the court’s declaration of bankruptcy when a major change in material conditions occurs. Insolvency administrators should establish a staff management process to prevent abandoned workers, a problem that arises when bankrupt businesses suspend operations, stop paying wages, and are eventually declared insolvent by the court. The bankruptcy resolution process can take several years, especially for large businesses with many creditors, and during this time labor claims may be pursued. Claimants may argue that the effective layoff date was the court’s declaration of bankruptcy, increasing their claim amount due to an extended period of service.

One might wonder if the Bankruptcy Act’s provision that treats contracts as terminated can be used by the administrator to also terminate employment contracts. Under Bankruptcy Code §18, the administrator must decide whether to terminate contracts that were signed by the insolvent business entity but have not yet been performed, and if no action is taken within two months from the acceptance of the bankruptcy case, the contract is canceled by operation of law and has no further effect.

The statute does not explicitly mention employment contracts, and while it provides for cancellation by operation of law, questions remain about whether an employment contract can be terminated in this way. The dominant view among commentators in China is that terminating employment contracts is not covered by §18 of the Bankruptcy Code, and they argue that ending employment relationships requires following the Employment Contract Act’s provisions through a specific cancellation procedure. §1 of the Employment Contract Act applies to the establishment, performance, change, cancellation, and termination of employment contracts, and it provides that in the event of any other specific provisions, those provisions shall control.

If no specific provision applies, the Employment Contract Act governs. When the Employment Contract Act covers a particular type of contract and provides specific rules, those rules will apply unless another statute contains specific provisions for the contract in question.

Chinese court precedents have consistently held that the Employment Contract Act governs all employment relationships and that the Business Bankruptcy Act §18 does not apply to employment contracts; for example, see (2019) Su 05 MinZhong 5877 and (2020) Xiang 08 MinZhong No. 419. Chinese courts will not permit a bankruptcy administrator to rely solely on Business Bankruptcy Act §18 to terminate employment contracts without providing a termination notice, and those who attempt to do so risk being found in breach of the Employment Contract.

Retaining remaining employees at a bankrupt business in China is addressed in §28 of the Bankruptcy Act of China, which provides that the Bankruptcy Administrator may retain necessary personnel with judicial approval. Even before this occurs, §15 of the Bankruptcy Act imposes a duty on various parties during the early stages of bankruptcy case review to take good care of all assets, corporate seals, books, and records, as well as to participate in creditors’ meetings and answer questions truthfully.

These duties are imposed on the debtor’s legal representative and, at the discretion of the court, on appropriate individuals such as the business’s finance staff or management. The Bankruptcy Administrator is responsible for understanding the debtor’s financial position and has the right to employ any person to assist in the reorganization or liquidation proceeding. Generally, the local culture and terminology refer to these individuals as remaining or retained staff, a designation that includes the legal representative and others involved in the process.

Establishing a clear contractual legal classification and preventing wrongful termination risks is essential. Each administrator should create a clear plan that outlines which type of contractual legal classification will be used for each retained employee and defines the circumstances that constitute a breach of contract, triggering employee termination or layoffs. This helps ensure that no contracts with retained employees are wrongfully terminated.

A recommended practice is to develop a contract classification matrix that includes all possible types of employees. This matrix should detail the fact pattern for each classification, establishing in advance the appropriate contract type and identifying the circumstances that would warrant termination as part of a risk analysis. There are three possible classifications for contracts with retained employees: Employment Contract, independent contractor service contract, and service contract. Many retained employees work on short-term, project-specific contracts and could be appropriately classified as independent contractors, thereby not forming an Employment Contract. A key distinction between Employment Contracts and independent contractor status is the level of management control, which helps establish an employment relationship. The general counsel should prepare a clear set of criteria that accurately characterizes each type of employee and assesses the legal risks of each classification. For instance, an Employment Contract might account for situations such as quiet quitting, where the employee does the minimum required, unlike an independent contractor arrangement.

Employment relationships without a written Employment Contract can also be established if the appropriate conditions are met.

Under applicable law, the parties are recognized legal entities that can enter into an employment relationship, with the requisite management authority exercised over the employee whose work is part of the employer’s business. If a Chinese court is asked to characterize an agreement with a Trustee for retained personnel of an insolvent business, the analysis will begin with examining the type of business entity the Trustee has established and how the retained personnel are managed.

Based on the facts, the Trustee’s agreement with the retained personnel does not constitute an Employment Contract under Chinese law. This conclusion is supported by the fact that the Employment Contracts Act §§ 1-2 does not mention bankruptcy Trustees as organizations qualified to establish employment relationships. Additionally, the Trustee operates under the Bankruptcy Act, which does not form part of a commercial or business operation and, therefore, does not constitute part of the business. Chinese courts do not consider stakeholders in a bankruptcy to have an indentured relationship with retained personnel, nor do they argue that the retained personnel are not part of the business. For American readers, regulators interpreting the Layoffs Rules for the Employment Contract characterize employment contracts as having an indentured nature, defined as being employed by an employer and accepting that employer’s management, with legal ordinances also providing that the role must be an integral part of the employer’s business.

Secondly, the Bankruptcy Law provides specific rules governing each party in the employment relationship in the context of a bankruptcy. Sections 15-28 state that staff remaining with the administration have specific duties and obligations to the bankrupt organization, and any employment of these individuals by the administrator is subject to court approval.

In practice, the legal relationship falls entirely under the regulatory framework of the Bankruptcy Law rather than the Employment Contract Act. Administrators managing the winding-up process are not primarily focused on preserving employment for these staff members; instead, they are dedicated to efficiently completing the winding-up process by ensuring that staff tasks are carried out effectively. Another reason for avoiding the Employment Contract Act is China Employment Act section 72, which requires employers and employees to file social security payments with the relevant agency and pay the appropriate amounts. However, trustees are unable to open new social security accounts, and existing accounts under the Employment Act or Employment Contract Act are no longer used to provide social security to employees.

Under §41 of the Bankruptcy Act, the fee for hiring personnel to work on the administration is an immediately payable bankruptcy fee against the bankruptcy estate and should be paid as an expense from that estate. There is no requirement under the Bankruptcy Act for the administrator to pay Social Security on behalf of the personnel working in the administration; in practice, it is impractical to provide such coverage.

If a winding-up employee does not enter into an employment contract, they should apply for unemployment benefits. Furthermore, if the employer owed wages or Social Security contributions to staff before bankruptcy, that liability should be characterized as an employee claim.

In China, the strategies for handling employees in a bankruptcy process vary considerably depending on the perspective taken. This analysis compares the view of the bankruptcy trustee with that of employees retained to continue working once bankruptcy proceedings begin. Their legal claims and employment contract statuses can differ based on their specific roles. An understanding of these distinctions can help trustees comply with the law and minimize administrative errors when processing the claims of employees remaining with the debtor.

In bankruptcy cases, there is a common expression: in the midst of winter, a single ray of sunshine can warm the heart. To implement this idea, the judiciary and trustees are expected to discharge their duties with care and concern for all stakeholders involved.

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

If an employer illegally terminates an Employment Contract, Chinese law gives the employee options to choose from several remedies. The employee can demand continued performance of the Employment Contract or request compensatory damages. In practice, when there is a dispute about whether the termination was valid, courts often recognize that the employment relationship deteriorates due to a loss of trust between the parties. Courts and commentators acknowledge that the Employment Contract encompasses both economic and personal interests for the employee and employer, so the ability to continue performing under the Employment Contract depends on whether mutual trust has been maintained.

Generally, an employee in China will choose the compensatory damages remedy instead of demanding continued performance of the Employment Contract, and employers typically prefer to avoid continuing the employment relationship. However, in recent years, Chinese employees have increasingly demanded continued performance of the Employment Contract as a remedy despite a challenging economic environment. In these cases, if a former employer does not want to continue the employment relationship with the former employee, can the employer use the argument that the Employment Contract cannot be performed because the previously harmonious relationship has been undermined by distrust? Moreover, will Chinese courts accept this argument? This article addresses these questions through an analysis of judicial precedents and statutes, with a particular focus on Beijing.

The Employment Contracts Act §48 provides that if an employer unlawfully terminates an employment contract, performance must resume at the employee’s election unless the contract can no longer be performed. Although the provision explains that continued performance is not required under circumstances where the contract becomes unperformable, it does not offer a detailed list of the specific situations that would render the contract impracticable to continue.

In line with China’s management philosophy of addressing local problems with local solutions, local government regulators and the judiciary in each region typically provide joint guidance on enforcing these general provisions. In Beijing, the local continuing legal education agency issued the Responses, which local attorneys preparing for bar continuing education use as the authoritative source for the rules and legal interpretations defining the situations in which a court might decide that performance cannot continue.

A court order declaring the employer bankrupt, revoking its business license, or ordering it to suspend operations—or a decision by the employer’s management to dissolve the business—may render the Employment Contract unenforceable. Other conditions include the employee reaching retirement age during arbitration or litigation and the expiration of the Employment Contract term during arbitration or litigation, provided that §14 of the Employment Contracts Act does not require an indefinite term Employment Contract. The contract may also become unenforceable if the job role is essential, irreplaceable, and unique within the business, such as a general manager or financial controller, particularly when the role has been filled by someone else and no agreement can be reached to reassign the employee to a different role. Additionally, the contract may be terminated if the employee transfers to a different employer or if, during arbitration or litigation, the employer issues a notice demanding the employee’s return to work and the employee refuses. Finally, any other circumstance where it is clear that the Employment Contract cannot be performed applies.

These six scenarios focus on the impossibility of performance under the Employment Contract and do not address a breakdown of trust between the parties. Generally, a breakdown of trust is treated as a catch-all condition under situations where it is clear that the Employment Contract cannot be performed.

Between 2017 and 2021, the Beijing Labor Arbitration Commission recorded statistics showing that about 130 labor dispute cases were filed over claims of unlawful termination, including those based on a breakdown in trust that rendered the parties unable to continue performing the employment contract. At a high level, Beijing courts were willing to terminate employment contracts when the employee held a critical role for the business, such as an executive or manager, and had been replaced or employed by a different employer.

Generally, the courts were unwilling to terminate contracts when a party merely alleged a breakdown in trust without providing facts showing an inability to continue performing the contract under those conditions. However, when facts clearly established that both parties had lost trust in each other, the courts considered this sufficient grounds to conclude that the employment contract could not be performed. In most cases, the courts terminated the employment contracts based on a combination of both an objective inability to perform the contract and a mutual loss of trust.

Only a few cases specifically hold that a breakdown in the relationship of trust is not a valid reason to cancel the Employment Contract. A decision from the Beijing #3 Intermediate Court illustrates this point; in that case, the employer appealed, claiming that trust between the parties had evaporated and that the Employment Contract could no longer be performed. However, the court held that loss of trust is not a lawful reason for nonperformance, and that the job must still be done despite the lack of mutual trust.

Some judicial precedents in Beijing have held that an Employment Contract does not need to be continued solely on the grounds of a breakdown in trust. For example, in a case before the Beijing #1 Intermediate Court, the court stated that in the employment relationship, labor power is a special good that encompasses personal characteristics and social relationships. Therefore, the employment relationship between employer and employee transcends an economic exchange and embodies a human relationship of trust and collaboration; if either party no longer trusts the other, then the employment relationship does not need to be continued. The ruling concluded that the employment relationship does not have to continue due to the breakdown in trust.

However, fewer than ten of the 130 cases reviewed reached that conclusion. Most courts in Beijing consider a loss of trust as supplemental evidence; on its own, the loss of trust is insufficient grounds to cease performing an Employment Contract. Courts generally require an additional statutory or doctrine-based reason alongside the lack of trust, and sometimes the broken trust is used to supplement evidence showing that conditions have changed since the Employment Contract was signed.

To win a case based on a broken trust relationship, management must document the reasonable conclusions drawn from the employee’s conduct that indicate the loss of trust. Many courts throughout China, including those in Beijing, reject claims of loss of trust due to conflicts between employees and management when evidence is insufficient. Therefore, business managers working in China today should develop a process to ensure that they maintain documentation and other evidence of any loss of trust. Typically, this means compiling communications and correspondence about employment contract management issues or problems to identify potential conflicts.

Chinese judges apply the rule in the context of modern China. Courts first assess whether there have been any objective changes in conditions or events that would make the continued performance of the Employment Contract impractical, and if there is a concurrent loss of trust, the court determines that there is no longer a need to continue performing the Employment Contract.

Modern Chinese judges generally reject the historical context of trusting relationships and the associated mindsets. They will not find that an Employment Contract can be terminated solely due to a breakdown of trust unless there are objective conditions that justify the termination.

6. Are quarantined workers protected from job loss?

Under the current rules for Class B Quarantine, mandated by §41 of the Infectious Disease Control Act and the COVID Pandemic Notice of 2020, an employee’s base salary remains constant when they are quarantined due to a COVID-19 diagnosis. Under Chinese law, these provisions require the employee to take sick leave or, if able to work remotely, to be paid their standard salary.

Previously, employers were always required to pay the employee’s base salary whether the employee was quarantined at home or in a government facility. During the height of the pandemic, employers were not permitted to stop paying the base salary for employees with a COVID-19 infection.

As of January 8, 2023, COVID-19 is managed as a Class B disease with specific control protocols, and individuals diagnosed with COVID-19 are no longer subject to quarantine. This policy change also ended the application of the statutory provisions described above starting on that date.

Chinese law applies the status quo to various scenarios that an employee might face. If an employee was diagnosed with COVID-19 before January 8, 2023, and placed under quarantine, management is obligated to make regular wage payments during the quarantine period. After January 8, 2023, an employee diagnosed with COVID-19 who cannot work during the recovery period should apply for sick leave, and the employer should pay the sick leave wage rate during that period. However, if the employee is able to work from home during recovery, the normal wage rate should be paid during that period.

Chinese employers have asked whether, in the post-Zero COVID era, an employer can require documentation when an employee requests sick leave due to contracting COVID-19. Answer: During the pandemic, a doctor’s note from a hospital was typically required.

Currently, however, healthcare providers in China face resource shortages, making it difficult for employees who test positive for COVID-19 to obtain a diagnostic letter from a doctor or medical facility. The current policy in China is to provide home care for asymptomatic or mild cases of COVID-19, so it would be unreasonable for an employer to require a doctor’s note from a medical provider before approving sick leave for an employee who claims to have COVID-19.

During the ongoing COVID-19 situation, management should adopt a flexible approach by accepting any sick leave requests that are supported by a home antigen test result while continuing to approve all sick leave requests. When China’s medical system recovers, the normal sick leave process can be reinstated, requiring a full medical examination and a doctor’s note.

If employees are found to have produced falsified documentation of their condition, management should take appropriate action under company policy.

How do you manage an employee who self-diagnoses as being infected but neither provides a home antigen test nor comes to work? Rather than dismissing their claim as a result of diagnosis influenced by social media, it is recommended to temporarily accept the self-diagnosis as sufficient proof of their request for sick leave. While approving the leave, send a written request asking the employee to provide a home antigen test result to substantiate the sick leave request.

If the employee is unable to provide such evidence, mutually agree to allow the use of paid time off instead. Should the employee continue to fail or refuse to provide the required proof and not return to work, then appropriate measures may be taken in accordance with the Rules.

Review of Chinese law on coronavirus policy and allegations of quiet firing or layoffs. Recall that the Class B regulations were adopted to downgrade COVID-19 from being a quarantinable disease at a time when there was no longer a scientific consensus regarding quarantine requirements. Employers should collaborate with an employee’s human resources representative to determine the expected duration of the home quarantine period. Chinese law does not currently prescribe a specific duration for a self-care period, and different variants continue to produce varied symptoms among employees.

The employer should clearly establish criteria for when an employee can return to work. For example, employers can rely on organizational policies or previous guidelines from the epidemic era to set a return-to-work date and criteria. During the epidemic era, the Chinese central joint task force published Document 113, Notice on Further Optimizing and Implementing the COVID-19 Epidemic Prevention Measures, and each local government also provided policy documents. For instance, consider a health authority statement from the 432nd COVID-19 press conference held by the local authority, which stipulated a 7-day quarantine followed by 24 hours during which the employee must remain fever-free. If an employee is still exhibiting symptoms after 7 days, they may return to work only after 24 hours have passed without a fever. A final common rule is to clear the employee to return to work only when a COVID-19 test is no longer positive.

If employees contract an infectious disease under Category B, such as COVID-19, are they entitled to take sick leave? The short answer is that an infectious disease under Category B in China does not automatically entitle an employee to sick leave.

Under the Ministry of Labor Rules on Medical Leave for Employees with Illness or Non-Occupational Injury, employees may only take sick leave when they must stop working in order to obtain treatment. The policy covers residual effects of COVID-19, such as long COVID, that impair an employee’s ability to work, but does not apply to minor symptoms that do not prevent work.

When employees need to take time off work to recover, they should follow their employer’s procedures for requesting sick leave and provide any required documentation, such as a diagnosis and a doctor’s note prescribing rest. During the COVID-19 pandemic from 2020 to 2022, many Chinese businesses adopted a more lenient approach to sick leave policies since it was often difficult for employees to see a doctor, and they accepted a photo of an at-home antigen test as proof of illness. Many Chinese employers are concerned about COVID outbreaks and want to prevent the spread of the virus at the workplace to avoid disrupting normal operations. This represents a lawful business necessity that sometimes outweighs an employee’s rights, and employers generally require employees to immediately inform their managers about respiratory infections and to refrain from returning to the workplace until they no longer test positive.

When employees are infected and sick at home but not seriously ill, most can work remotely, which is widely accepted. However, if an employee’s role cannot be performed remotely, they are generally expected to stop working and take paid time off during the quarantine period.

If an employee needs to leave work for treatment, they should apply for sick leave according to the business’s sick leave policy and provide supporting documentation such as a doctor’s note or recommendation. Due to the current situation, it may be difficult to obtain a doctor’s note or recommendation, so employers should consider offering a flexible sick leave policy that allows employees to take leave if they provide proof of a positive antigen or nucleic acid test. In the future, once the healthcare system regains capacity and COVID-19 infection rates decline, employers may resume their normal sick leave process.

If an employee tests positive for COVID-19 and there is concern they may spread the infection and disrupt the organization, employers may require them to report their infection and bar them from entering the workplace until they receive a negative test result. Employers should consider permitting infected employees to work from home if their health condition allows them to perform their duties; if remote work is not possible, it is advisable for the employee to take annual leave or another form of time off.

Rejecting an employee for being a member of a protected class is prohibited under the Employment Opportunity Act. Employers with effective compliance programs train management to process any return-to-work requests from employees on sick leave as normal if the employee has fully recovered.

Make sure that any remote work policy is enforced consistently across all employees. If a remote working policy has not been adopted, the best practice is to offer the employee the option of taking remaining annual leave, personal leave, or another relevant type of leave provided in company policy to cover the absence from work. Employees who refuse to return to their job role without approval for any of these leave types should be penalized in a reasonable manner under the company’s policy.

How should a business handle a situation where an employee has a family member or cohabitant infected with COVID-19? China’s COVID-19 Policy states that no contact tracing or isolation measures are required.

Employers have several options for accommodating employees in such situations. Generally, employers may allow an employee to work remotely if a household member is infected, or provide personal leave if the employee needs to care for the sick family member instead of working remotely. In some cases, it may be appropriate to require employees to work remotely for a brief observation period and, if no symptoms develop, to subsequently return to commuting to the office. Employers should follow relevant guidelines and best practices while respecting privacy and cultural considerations.

Under current Chinese labor law, terminating an employment contract for an employee who contracts COVID-19 is governed by the standard provisions of the Employment Contracts Act. Previously, Ministry of Labor Circular 5 of 2020 prohibited terminating employment contracts for COVID-19 patients, suspected patients, close contacts, or individuals unable to work because of government quarantine orders.

However, a recent Notice has canceled all quarantine and close contact tracking protocols, rendering the provisions of Circular 5 of 2020 inapplicable. Therefore, termination of employment for an employee who contracts COVID-19 is now treated like any other termination under the law.

According to §42 of the Employment Contracts Act, an employer may not terminate the employment contract of an employee who is sick or suffers from a non-job-related injury while undergoing medical treatment if the termination is based on §§40 or 41. Therefore, if an employee is diagnosed with a coronavirus infection and stops working to receive treatment, the employee qualifies for the medical leave period requirements and the employment contract cannot be terminated under §§40 or 41. However, Chinese law permits negotiating with the employee to terminate the employment contract, and a layoff may still be possible under §39.

An employee infected with COVID-19 who is asymptomatic, continues working, or otherwise does not take medical leave does not qualify for any special protections, and the employment contract may be terminated.

How should a business handle an employee in China whose term of employment concludes while they are infected with COVID? During the height of the COVID-19 pandemic, the Chinese government issued Human Resources and Social Security Administrative Circular [2020] No. 5, which stated that for patients with pneumonia infected by the coronavirus, suspected patients, and close contacts undergoing quarantine treatment or medical observation who are unable to work due to government quarantine measures or other emergency actions, the expiration date of their employment contract would be extended until the end of the local medical leave period. In 2022, as the pandemic subsided in China, these controls were gradually replaced by a regime that classifies COVID-19 as an endemic disease similar to influenza.

Under the new regime, no special measures are taken regarding asymptomatic COVID-19 cases or close contacts, and termination procedures based on COVID-era rules no longer apply. This change also means that treating COVID-19 is no longer considered an emergency measure; as a result, individuals with COVID-19 who wish to receive medical care might need to travel abroad. Therefore, it is necessary to analyze whether an employment contract can be terminated solely based on an employee’s COVID-19 infection status by applying the Employment Contracts Act.

The Employment Contract Act §42 provides that an employee who is sick or has suffered a non-work-related injury and is on medical leave may not have their employment contract terminated under §§40 or 41. If the expiration date of the employment contract occurs during the medical leave period, §45 provides that the expiration date will be extended until the condition ends. Therefore, if an employee infected with COVID-19 cannot work normally and is taking sick leave, the employment contract continues until the employee recovers, whereas if the illness is mild and the employee is able to work normally, the employment contract terminates as originally scheduled.

In conclusion, the evolution of China’s approach to pandemic management—from a highly restrictive strategy to a targeted control program for less dangerous diseases—marks a new phase in the response effort. New policies governing employment relationships and relevant laws are expected to be issued by the Ministry of Social Security, while local government agencies will likely establish additional requirements. Businesses should monitor these regulatory developments closely and update their employment policies as necessary to ensure that their employee arrangements remain appropriate.

7. What do cases on forced ranking terminations say?

Chinese courts held that an employee receiving a poor rating from the employer’s internal performance ranking cannot be deemed incapable of performing their job. Therefore, this does not meet the legal standards for terminating an employment contract for reasons other than layoffs.

Wang was hired in 2005 as a salesperson for the company’s channel management division, and following the division’s dissolution, Wang was transferred to a regional sales role in East China. The company’s Performance Management Policy provided that performance grades—S, A, C1, and C2—would be assigned in preset ratios. Although the meanings of these grades and the criteria for their determination were not defined in the policy, the lowest 10% of employees would be graded C (C1 or C2). A grade of C2 indicates that an employee’s performance requires improvement, while an incompetent employee would be graded C2. The policy provided for specific measures to handle employees receiving a grade of C, including training during their current role with a reduced salary, transfer to a new role with a reduced salary, or termination of the employment contract.

The employment contract stated that company policies would be published online, and Wang undertook to regularly access the website to review these policies. Wang received the lowest C2 rating in late 2008, early 2009, and late 2010. Management concluded that Wang was not competent for the job and maintained that even after several job role changes, Wang continued to be incompetent. As a result, in February 2011 the company terminated the employment contract and paid part of the severance.

Wang filed a claim for unlawful termination compensation with the Binjiang District, Hangzhou Employment Arbitration Tribunal, which granted an award in July 2011. The company filed suit for a de novo trial in the Binjiang District Court in Hangzhou. The court held that the company did not have sufficient grounds to conclude that Wang remained incompetent after the job role changes and ordered the company to pay the balance of the compensation for unlawful termination. Neither party appealed, and the judgment is now final and legally effective.

In the courts, these work rules were generally described as a process in which the employer divides employees into performance appraisal levels according to quotas, or ranks employees from best to worst. A series of actions, such as demotion, transfer to another department, or termination of employment, may be taken against employees with poor rankings. Employers in China usually define these grading policies in the Employee Handbook, which is incorporated by reference into the Employment Contract.

The courts have observed that the lowest-ranked grading process has been used unlawfully as a substitute under Employment Contracts Act §40(2) for evaluating whether an employee lacks the ability to perform their job role after receiving training or being relocated to another position. In this case, the Supreme People’s Court provided a guideline to lower courts, indicating that employers may not obtain an agreement from an employee to be terminated solely because of a poor ranking. A low performance ranking should not be equated with an evaluation that an employee lacks the ability to perform their job role, as poor performance might be caused by a variety of factors unrelated to the basic skills needed for the job.

The inherent nature of rankings means that someone will always be ranked at the bottom, yet lower rankings alone should not be taken as evidence of incompetence. Even when an employee is substantively unqualified, the Employment Contracts Act §40(2) requires that further training or a job role transfer be provided first, and only if the employee remains unqualified after these measures can the Employment Contract be terminated with 30 days′ written notice or with a payment in lieu equal to one month’s wages.

It is important to note that using up-or-out employment practices in China may lead to legal liability. Unilaterally terminating an Employment Contract for an employee at the bottom of the rankings is likely to be viewed as illegal, and most judges in China have encountered cases related to this issue. Here are some additional facts that illustrate how the law works in China.

Laying off employees based solely on their internal assessment ranking is generally considered unlawful, and courts typically reject such employer arguments. Terminating an employment contract for an employee assessed as poorly performing is similarly deemed unlawful. In China, employers frequently terminate underperforming employees; however, Chinese judges believe their judiciary’s globally competitive position enables them to distinguish between employees who are merely underperforming and those who are truly incompetent. Chinese judges have drawn on the practices of Japan’s established judiciary, where dismissing a poorly performing employee is very difficult.

These precedents were extended nationwide by the Supreme People’s Court in the Conclusions of the 8th National Civil and Commercial Judicial Working Conference. §29 of that document establishes that in China, if an employer fires a poorly performing employee based solely on a low ranking or competitive application, the employee may file a labor dispute on grounds of unlawful termination of the employment contract and seek appropriate remedies. These precedents have been consistently applied by influential local jurisdictions nationwide, including Hangzhou and Shanghai, and are generally observed in all provinces.

Analyzing Termination Risks from Ranking-Based Evaluations and Résumé Fraud. Chinese courts have consistently ruled against employers who rely on rankings to discharge employees.

For example, in the 2016 Shanghai case (No. 1618), the court held that the employer unlawfully terminated the plaintiff by discharging them because of a low performance ranking and awarded damages for the unlawful termination. Under the Layoff Rules, unlawfully terminating an employee exposes a business to the risk that a court will order reinstatement of the employment contract or award damages as provided in Employment Contract Act §87.

The legitimacy of a position adjustment made pursuant to a layoff system depends on whether the adjustment is reasonable. Although a discharge of an Employment Contract is generally not regarded as a valid business decision, courts may enforce a position adjustment for employees at the bottom of the ranking if the change is otherwise reasonable. In the notable case of the PRC Supreme Court’s 2017 Su 05 Civil Appeal No. 450, the court reaffirmed that terminating an Employment Contract based solely on an employee layoff ranking policy is illegal, but an adjustment to the role or position of a poorly performing employee made under that ranking system may be upheld if certain conditions are met.

In the referenced case, the adjusted position for the employee included specific management duties, and the employer lawfully substituted a higher-performing employee into that management role. The Employment Contracts explicitly stated that the employer could adjust the employee’s role or position based on business needs, and in this instance, the employee had already been working in the new role for several months without raising any objections. Consequently, the court held that the employer had lawfully adjusted the employee’s role or position in accordance with the ranking policy.

In Guanddong 03 Civil Final No. 4498 (2019), the court ruled in favor of the employer because it maintained a well-organized procedure characterized by fairness, allowing a different job role to be selected without being arbitrary or humiliating. The court emphasized that an objective selection process occurred with procedural safeguards and appropriate supervision and approved the employer’s job role adjustment as neither arbitrary, punitive, nor humiliating.

Similarly, in Chongqing 01 Civil Final No. 8298 (2019), the court approved the employer’s implementation of a legally promulgated company policy that transferred an employee to a different job position. The decision noted that rather than terminating the Employment Contracts of poorly performing employees, the employer made an appropriate adjustment that considered their salary grade. In Beijing 02 Civil Final No. 572 (2020), an employee nearing the end of an elimination process was transferred to a different job role in a shop and required to complete training. After the employee rejected the new role and stopped working at the business, the employer terminated the Employment Contract, a move that the court subsequently approved.

The key point is that Chinese courts require due process to be satisfied and must see no evidence of bad faith on the part of the employer. An employer who wants to use a lawful forced ranking performance system will implement company policy rules that satisfy the requirements of §4 of the Employment Contracts Act, which stipulates that most internal rules must be developed through a democratic process. In a recent case, a Chinese court rejected the employer’s decision to lay off the worst-performing employees based on the forced ranking methodology and instead enforced the Employment Contract. The employer’s ranking system rules had been developed through an inclusive process; however, they were not communicated to all employees, so the court disregarded those rules and based its judgment on the Employment Contract.

Any adjustment must be fair and reasonable, cannot be punitive or degrading, and if the salary is changed, that change must fall within a reasonable range and comply with the company’s policy standards for the job role.

In the Anhui Court of Appeal Civil Case No. 2690 (2019), the court held that an employee’s bottom performance ranking does not imply incompetence for the job. The employer’s decision to transfer the employee to another position was deemed reasonable because the new role was connected to the previous one and offered a reasonable salary, making the transfer lawful.

The court further clarified that a poor performance evaluation alone is not a sufficient basis for terminating the employment contract. It stated that while courts have rejected performance management policies that automatically eliminate poor evaluation rankings, a job rotation system that incorporates a last-place policy may be enforced as long as the employment contract remains in effect.

Take action on these compliance recommendations to mitigate legal liability and achieve success with your human resources strategic goals when using a rank-and-yank system, thereby moving away from the poor practices observed in China. Set specific performance standards instead of relying solely on generic rankings. In the Xu Min case mentioned at the beginning of this article, Chinese case law precedents determined that being ranked last is not equivalent to being incapable of fulfilling job responsibilities, and these precedents indicate that rankings cannot be used as the sole basis for terminating employment contracts.

Establish specific performance indicators for each job role that include key aspects of job performance such as accuracy, efficiency, and productivity. Develop quantitative key performance indicators to measure the strategic objectives of the job role and define an evaluation methodology for assessing success. Under the Chinese legal regime, this approach provides the objectivity and fairness necessary for a judge to view the process as reasonable and strongly reduces the risk of a termination being characterized as an illegal last-place elimination by the courts.

Provide reasonable remedies that allow the use of the elimination system as grounds for terminating employment contracts while establishing a range of measures that set beneficial precedents. Position transfers and salary adjustments may promote the growth and development of individual employees, and such actions can also function as liquidated damages or severance pay when intended.

Under China’s current employment law and judicial precedents, there is some residual risk that long-term international assignments involving unilateral transfers or salary adjustments might lead to an employment contract being characterized as an employee leasing arrangement. Employment contracts or company rules may incorporate the performance management process. §4 of the Employment Contracts Act permits the inclusion of the elimination system in business process documentation by requiring business process documents to be established through discussions with all employees followed by public disclosure. This method additionally allows the Documentation Control sections of the ISO 9001 quality management system to be used for keeping comprehensive records that provide management with a full set of performance tools. Alternatively, the elimination system can be incorporated into each individual employee’s employment contract by detailing the performance management process, the eliminating criteria, and the calculation method, thereby making it legally binding independently of §4. In this way, the performance management process with elimination system criteria within the employment contract will be more enforceable in China. Effective talent management and equal opportunity require supplementing the basic elimination system with career paths such as established job role progression programs and training, as well as providing a simplified pay-by-the-hour supplement to accommodate employees who have been removed from their job roles.

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

Falsified resumes detract from employees’ perceived honesty and authenticity, undermining the trust that forms the foundation of the employment relationship. Chinese courts have applied a rule stating that a falsified resume is not, by itself, sufficient grounds for dismissal unless the service qualifications provided in the employment contract are false.

This article explains the precedents in Chinese law for terminating employees who falsify their resumes, discusses the termination actions taken by market regulators, and provides recommendations regarding employee dishonesty.

Employees or candidates who falsify information on their resumes may be discharged if this deception is discovered during the probationary period. To prevent potential disputes regarding termination, Employment Contracts Act §39 specifies explicit grounds for discharging an employee during probation, including misrepresentations about educational background or job experience. The law also requires that human resources collect and maintain contemporaneous evidence of any such misrepresentations.

An illustrative case from China is the labor dispute in Guan v. Guangdong Yaqu Pharmaceutical LLC, where a background check during employment revealed that Guan had falsified his educational background and job experience. Guan had provided a written attestation during onboarding that all the information was true and correct, and the company stated that any falsehood would mean that the candidate did not meet its job requirements. The court ruled that terminating Guan’s employment contract because he did not meet the job requirements was lawful.

Ordinarily, if an employer intends to terminate an employee for misrepresenting qualifications, the job offer letter or employment contract must clearly state that the employee is required to possess a specific educational background or qualification, and the employer must retain evidence that this requirement was communicated.

Fortunately, some Chinese court precedents have established that such explicit stipulations are not necessary to justify termination on these grounds. The employer only needs to demonstrate that the employee acted in bad faith by providing false information or omitting material details, resulting in the cancellation of the employment contract. In the Wang v. Shenzhen InfiRay Laser Technology LLC case, the employee misrepresented their work history and had been involved in multiple lawsuits in the past. Although the employer did not retain evidence that its job postings or other communications specifically stated that a truthful work history was a prerequisite for employment, the judge ruled that the employee had failed to meet the job requirements. Staffing managers should note, however, a 1995 Letter on Termination of Employment Contracts During the Probationary Period issued by the Ministry of Labor, which holds that an employment contract cannot be terminated after the completion of the probationary period even if the employee provided false information on their resume.

Termination for major violation of company policy can be an effective remedy in cases of resume fraud if the company has completed the legally required process to establish a policy clearly stating that falsifying resumes constitutes major misconduct. If evidence shows that the employee submitted a falsified resume, the company can terminate the employment contract on that basis.

An illustration of this approach is provided by the Zhang v. Xumilin Construction Technology (Shanghai) Co., Ltd  case. The Employee Handbook stated that during onboarding, an employee must accurately complete an Employee Information Form for review by Human Resources, and providing inaccurate information is considered a major violation of company policy and management rules that gives the company the right to terminate the employment relationship without liability for compensation. In this case, Zhang falsified the dates of his or her educational qualifications, and Xumilin relied on this provision to terminate the employment contract. The court found that Xumilin had lawfully terminated the employment contract in accordance with its management rules.

Due to Chinese social credit culture, employers confronting resume fraud typically consider it fraud and completely nullify the employment contract. Under Chinese courts’ interpretation of Employment Contracts Act §26(a)(1), an employment contract formed with an employee engaging in fraudulent conduct is void, mirroring common law conclusions where a major material fact has been falsified on the resume. Whether a Chinese court determines that an employment contract is void because of the employee’s fraud depends on whether the misrepresentations materially affected the employer’s decision to hire.

Under Employment Contracts Act §39(e), an employer is entitled to terminate an employment contract if it is found to be void. China’s courts may characterize resume padding as fraud under the appropriate conditions. For example, in a case between Sun and Beijing Hengchang Huicheng Information Consulting, Sun submitted a fraudulent academic transcript with the resume. The court found that this constituted fraud, noting that the employer’s decision on hiring and salary was affected by the educational qualifications, and held that the employee had violated the principle of good faith.

Risks associated with terminating an employee in China for lying on their resume require establishing and maintaining robust internal business processes to protect against losing an employment contract dispute. The Hengchang Huicheng case demonstrated that Chinese employers have various approaches to handling cases of resume falsification, yet many still face challenges when terminating an employee for this reason.

A common scenario occurs when the employer delays the termination decision. Often, employers either fail to detect the false information during the onboarding verification process or, upon discovering the discrepancy, do not terminate the employee immediately. In one case, ChangDu Rui乳业有限责任公司 v 刘某, an employer discovered educational credential falsification and attempted to reassign the employee instead of terminating their employment immediately. When the negotiation failed, the employment contract was terminated for falsification, but Chinese judges refused to enforce the termination, stating that the employer had not decisively based the decision on the degree of falsification.

For example, in the Kangdourui Dairy Co. v. Liu matter, the court rejected the employer’s attempt to terminate Liu based on a false educational background and the failure to reach an agreement during subsequent negotiations regarding job duties. This decision clarified that discrepancies in a job applicant’s educational record, coupled with unresolved employment terms, do not justify summary termination.

In the Beijing Wu Yi Technology Co. v. Liu case, the court held that even though the employee concealed their prior work history, the employer was prohibited from terminating the employment contract. The court acknowledged that while the employee’s actions were clearly inappropriate and warranted criticism, the fact that the employee had been working at Beijing Wu Yi for nearly a year without any adverse impact on their performance meant that the misrepresentation was not severe enough to justify termination of the employment contract.

Even if an employee falsifies information on a resume, if the falsification does not impact the formation or performance of the employment contract, terminating the contract for such fraud will be rejected by the court.

For example, in the case of Li Ting, who worked for Beijing Tianxin Rui’an Information Technology LLC under an employment contract in which Li falsified their educational degree, the court observed that the technology company did not require a candidate with the misrepresented degree and that Li successfully performed the job. The court held that Li’s falsification was not material to the employment contract and did not constitute fraud; therefore, the contract remained in effect.

Employers in China have attempted to claim that failing to disclose a pregnancy status constitutes fraud by the employee, but this claim is almost universally rejected by the courts. For example, in Dongguan Maike Technology LLC v. Geng (Dongguan 2017), Geng concealed her pregnancy upon being hired.

The Dongguan court ruled in favor of Geng and rejected the fraud claim, stating that pregnancy is not a reason to reject the establishment of an employment contract or the performance of job duties.

Employers confronting employee resume fraud may invoke contract law doctrines to terminate employment. Resume fraud typically involves material misrepresentations that induced the signing of the employment contract, thereby constituting a violation of company policy and providing grounds for a fraud claim under the law. However, an employer’s ability to terminate an employee in China due to falsified credentials is limited by local judicial precedents. Generally, courts do not allow termination based on fraud discovered after an extended period of employment, and the misrepresentation must be material to both the selection process and job performance.

To establish a strong foundation for terminating an employee for resume fraud in China, it is essential to state that job applicants must provide accurate and truthful information as a material condition of the potential employment contract. Company policy should explicitly specify that providing false information on a resume is a serious violation that will result in termination. It is advisable to conduct thorough background checks on potential employees as early as possible and to promptly respond to the findings, which may include terminating the employment contract. A cautious approach is recommended when addressing cases where the misrepresentations are immaterial or less significant.

9. Can employees be fired for poor performance?

When firing an employee for poor performance, management must establish that the employee is incapable of performing the job duties adequately, provide training or change the employee’s role, confirm that the employee remains incompetent, and then terminate the Employment Contract. Management must also develop and present thorough documentation for each step; otherwise, the termination may be deemed unlawful.

Consequently, the success rate for terminating an Employment Contract to terminate an employee for poor performance.

An empirical analysis was conducted on Chinese layoff employment dispute case precedents to identify trends and typical case results. Common issues encountered in layoffs due to being unqualified are examined, and suggestions are provided on how to align business operations with local Chinese employment law.

Data from 19,307 judgments prior to 2023 were obtained using the keywords incompetent, employment contract termination, and labor dispute as the case type. The data show that the vast majority of incompetence layoff disputes occurred between 2019 and 2022, with economically developed areas—especially Guangdong, Shanghai, and Beijing—having the most cases, largely due to the high levels of employment in these regions. Approximately 2,500 cases occurred in Guangdong Province, employers prevailed in only about 6% of first-instance cases, and about 85% of the cases were appealed.

Chinese courts generally characterize incompetence as situations where an employee fails to perform the job tasks required under the Employment Contract or cannot complete the same amount of work as persons employed in that role. This generic definition is accompanied by abundant case law that clarifies how Chinese courts apply these concepts in various fact patterns. It is useful to examine the historical context.

Chinese courts have long rejected the proposition that a low ranking in a competitive evaluation system in the workplace constitutes incompetence. The leading case establishing this precedent is the Supreme Court’s Judicial Model Case No. 18 of 2013, a dispute between Wang and a telecommunications company headquartered in Hangzhou. In that case, without any other evidentiary support, the employer alleged that employee Mr. Wang was incompetent simply because he ranked low in the workplace’s competitive evaluation system, but the court found this evidence insufficient to prove incompetence. Later, however, the Supreme Court in its Dai case published in the 2021 Supreme Court Bulletin clarified that the forced ranking evaluation methodology is lawful under Chinese employment law and permitted lower-ranked employees to be reassigned to other posts with different pay levels. In the Dai case, the court also established minimum standards of legitimacy for employment actions based on this methodology, requiring that such actions be connected to the business needs of the organization, comply with applicable law, and be authorized under the business entity’s internal rules. Claims by employees regarding reassignments with different pay levels based on these requirements will not be entertained by Chinese courts. These precedents indicate that a low ranking on a competitive performance evaluation system does not automatically equate to incompetence, and the broader assessment of an employee’s ability to perform their job is not solely determined by evaluation rankings.

In China, performance evaluation results are typically used by businesses to determine whether an employee is capable of performing their job. However, Chinese precedents hold that these evaluations cannot be unreasonably subjective and must be based on objective data.

The same principle applies in the West; proving that subjective impressions of performance are objectively accurate is possible using contemporary technology such as work planning and reporting systems. The Li case established a precedent by limiting an employee’s performance evaluation system to peer and manager assessments. The court of first instance and the appellate court noted that the employer did not provide evidence regarding the individuals who made the evaluations, nor was there any evidence to corroborate the ratings. The courts found the performance evaluation system to be biased because it was entirely based on the subjective impressions of colleagues rather than on objective standards, and ruled that the performance evaluation was unacceptable, concluding that Li was terminated unlawfully.

Chinese courts require a preponderance of objective evidence when determining that an employee is incompetent, and employers must maintain clear documentation that the incompetence occurred. In the case Ding v. Beijing Network Technology LLC, the court held that when an employer terminates an employee based on an alleged incompetence—a judgment that is inherently subjective—management is obligated to support their claims with objective, recordable facts and quantitative data.

The court further determined that, in Ding’s case, management failed to meet their burden of proof by not demonstrating that their subjective assessment of incompetence was grounded in objective evidence, and therefore, the termination was deemed unlawful.

Another common dispute is whether an employer can substitute a second performance review for additional training or a job transfer. A typical case reported by Zhejiang labor arbitrations illustrates this issue: an employee named Geng received a rating of needs improvement in two consecutive performance reviews and was subsequently terminated for alleged incompetence, but the arbitrator ruled that the termination was unlawful.

Between the two reviews, the employer was required to provide additional training or a job role transfer for Geng, which might have enabled competent performance and thereby demonstrated that the grounds of incompetence were incorrect. Before using incompetence as grounds for termination in China, employers must adhere to statutory procedural requirements by providing additional training or a job transfer before conducting a subsequent performance review.

Performance Management and Evaluation in Labor Disputes

Chinese courts do not consider Personal Improvement Programs to constitute training. Many managers terminate poorly performing employees after completion of a personal improvement plan without providing any additional training, even when training is procedurally required. However, this approach does not comply with the Employment Contracts Act, as demonstrated by several cases from Guangdong Province.

In He v. Software Company, the employer placed the employee on a Performance Improvement Plan that the court described as a set of work goals rather than a training program. At the conclusion of the plan, the employee failed their performance evaluation and was terminated on the grounds of being incapable of performing their job after training. The court found the termination unlawful and awarded damages. In contrast, in Deng v. Investment Company, both the arbitrators and the court on appeal deemed the termination lawful after the employer produced extensive email records, performance management documentation, and a comprehensive performance improvement plan. The evidence showed that a staff mentor was provided to assist the employee at the start of the plan and that the employee was given more than ten specific and clear tasks to complete, with no issues arising from the employee handbook’s provisions. Generally, a Performance Improvement Plan without training is rejected by Chinese courts as grounds for termination, whereas a thoroughly documented performance improvement process covering all required bases is acceptable.

In Chinese employment law cases, a transfer involving a significant decrease in pay is often an issue, with legal precedents connected to cases of incompetent employees. In one case, Li was transferred to the Ready Center—a common layoff pool facility—because he was deemed incompetent under his employment contract. The employer, without providing additional training, later offered Li positions as a photocopy operator, kitchen assistant, and janitor, all of which he refused, leading to the termination of his employment contract.

The court held that an employer making unilateral transfers is entitled to lay off an employee with unreasonably poor job performance, but it is obligated to provide a position that is comparable in nature to the previous employment contract and that fully utilizes the employee’s professional skills. Li’s contract was for a technical role, and the available positions would have required a major career change. The Court found that the transfer was impracticable for a Chinese enterprise operating within the context of China’s current socialist reforms and was therefore unreasonable.

In China, managers are not permitted to reduce pay without a reasonable basis when implementing job changes. This principle is illustrated by the case of Jin v. Shanghai Free Trade Zone Accounting Firm,[8] in which an accountant’s salary was reduced from 20,000 to 5,800 due to alleged professional malpractice.

The court determined that Jin’s transfer resulted in an unreasonably large reduction in salary that exceeded socially acceptable limits. It ordered the accounting firm to reimburse Jin for the difference in compensation.

Chinese judges vigorously enforce procedural rights, as exemplified by the case of Chongqing Power Co. v. Fu, where the employer terminated Fu for incompetence and paid in lieu of notice. In the initial trial, the judge determined that the employer had done nothing because it failed to present any evidence that a 30-day termination notice was provided, and consequently, the termination was deemed illegal.

On appeal, the company’s lawyers submitted evidence establishing a paper trail showing that the employee had received a 30-day termination notice, obtained the labor union’s consent, and noted that Fu was paid the statutory financial compensation prescribed by the Layoffs Rules. The higher court ruled in favor of the employer, concluding that the termination complied with Chinese law. This case illustrates the importance of obtaining the labor union’s consent, which is mandated by Chinese law but not required by employment laws in other countries, and demonstrates the need to substantiate a paper trail with comprehensive internal documentation to verify that all procedural requirements have been met.

Organizationally, the employer should establish a well-integrated set of documented internal rules and standard operating procedures for conducting performance reviews and ensure that all staff adhere to these procedures when evaluating employee performance under the Employment Contract. The process should begin with providing a clear job description or specification that defines each role and sets forth performance expectations.

During a labor dispute that proceeds to arbitration or court, it will be necessary to produce evidence demonstrating that the employee’s performance did not meet the clearly defined job expectations due to a lack of ability. Company rules should specify that all job roles are shown on the organizational chart, clearly describe the reporting structure, and outline specific duties, responsibilities, qualifications, and skills. Documentation should explain how these duties affect an employee’s decision-making power and authority within their role, and forms should be used to require a detailed list of job duties with performance evaluated separately for each duty. The overall qualification may be determined by the highest score on an individual duty if necessary to achieve an overall evaluation of competence. In a dispute, the judge will require a detailed explanation of the process and reasoning used by the reviewer to reach their conclusion, so it is essential that these procedures and thought processes be documented thoroughly and in a clear, objective manner.

Next, make the performance evaluation as quantitative as possible by using key performance indicators similar to those in the business world, ensuring that metrics are comparable across different positions. The process should be documented and include defined procedures to establish objective performance metrics.

Management should present job roles and performance evaluation processes to employees in advance using a documented and inclusive process, with each employee signing a written acknowledgment. Evaluations must adhere to the management policy, be conducted objectively and fairly, and avoid subjective, arbitrary, or discriminatory outcomes. Employees must sign acknowledgment of the evaluation process and conclusions, receive written notice of the evaluation results, and have the opportunity to provide a written response before a final written evaluation is completed. Retain adequate documentation of each step in this process.

How to Manage Employee Training and Transfers

Managers in China have two major tools for handling poorly performing employees: training plans and job role transfers. However, their actions must be reasonable, so it is important to use a consultative approach that encourages employees to voluntarily agree to the recommended training or job role transfer. Managers should prepare documentary evidence of the employee’s poor job performance and work cooperatively with the employee to draft a letter agreeing to the training or transfer. It is also essential to establish internal company policies that provide systems in each business line, ensuring that managers implement effective procedures in Chinese subsidiaries.

Design training courses tailored to the employee’s specific weaknesses and job role requirements. For example, since tradesmen and engineers may not thoroughly read documentation, include a section in the course that emphasizes the importance of reviewing documentation. Ensure that the training requires a reasonable amount of time to complete; if it is too short, the employee may not master the skills, yet if it is too long, the duration could become burdensome. Incorporate a specific ‘results improvement plan’ into the company policies or employee handbook as a training methodology, and ensure that each training course follows a designated curriculum. Next, define a structured course unit outline within the curriculum and establish objectives for each unit that clearly explain how the course will address the employee’s performance issues.

There are three methods to adjust an employee’s position in China. The first method is to obtain the employee’s consent for the job change. The second method is to rely on special provisions in the Employment Contracts Act that provide the employer with an explicit right to make a unilateral job change. The third method is to rely on an implicit right to make a unilateral job change as part of the employer’s prerogative.

The sole explicit right under the Employment Contracts Act is to transfer underperforming employees to a different role. This is a legal concept applied by judges that does not appear in the literal terms of the statute. A typical Chinese judge will expect the employer’s policy and process for changing an employee’s pay package and position to be formally documented in the company policy and to clearly establish the employer’s right to change an employee’s job under the Employment Contracts Act. Chinese case precedents clearly state that the connection between the original and new job roles must be reasonable for an underperforming employee. There must be a relationship between the job duties, or if the new job role lacks such a relationship, the difficulty or workload must be reduced in proportion to the change in pay. A fact pattern that the court will reject is one in which an employer motivates an employee to resign by drastically reducing the employee’s pay as part of changing their position.

Ensure that your human resources department has a process for evaluating an employee’s training or performance in a new role to determine whether they are capable of competently performing in the position. Provide the employee with a written notice explaining the performance evaluation process and timelines when they are transferred to a new role or integrated into their training plan. The notice should provide a reasonable timeline for the evaluation; an unreasonably short timeframe may be viewed by the courts as rejecting the employee and not giving them a fair chance to succeed, while an unreasonably long timeline may increase uncertainty and hinder a lawful termination.

Generally, competency evaluations for managers take at least three months, while skilled trades jobs usually require at least one month. However, the evaluation period depends on the unique circumstances of each industry, business, and job role, so it is recommended to determine a reasonable timeline based on the specific context.

Two performance assessments establishing poor performance are required before an employee’s employment contract may be terminated, and these assessments must occur consecutively. If an effective performance assessment showing adequate performance takes place between the two poor performance assessments, the process resets and termination cannot occur based on the earlier assessment.

Furthermore, if an employee receives a poor performance assessment but then achieves a passing score after training or a transfer to a different job role, a later poor performance assessment is not sufficient to justify termination at that time. Employers should maintain copies of all relevant documentation regarding employee training and job role changes to provide a basis for any future assessments of poor performance.

Several common legal precedents regarding layoffs for incompetence under Chinese law involve employees alleging that their fundamental rights were denied, including the right to union representation and the right to raise a family. It is advisable to use an external legal service to audit layoff procedures and determine whether an employee could allege a violation of these rights.

Common procedures outlined in the Employment Contracts Act Layoffs Rules have provided a basis for legal disputes. Even when there is evidence of an employee’s incompetence in education or job performance, management must follow the procedures prescribed by the Layoffs Rules, including a 30-day advance notification to the union and financial compensation, typically interpreted as severance pay.

10. Can a fired employee demand reinstatement?

• 48 of the Employment Contracts Act provides that an employee whose contract is terminated unlawfully may choose between two remedies: reinstatement or financial compensation. Employment in China is seen as closely tied to the individual personality of the employee, and if a business manager believes that the working relationship has deteriorated beyond repair, the manager will typically hire a new candidate rather than reinstate the employee. This shift represents a significant change for China. Traditionally, under a Confucian culture, Chinese businesses favored collective success in which individuals adjusted their behavior to serve the interests of the group. Now, China’s legal culture also protects employees who insist on returning to their original job role and continuing to contribute, even if their manager disapproves, reflecting a cultural and legal expectation of individuality.

Several issues remain that have not yet been addressed by Chinese courts. These include determining the appropriate standard for calculating wage backpay and identifying available remedies when management refuses to reinstate the employee.

The judge also knows that simply declining to reinstate the employment relationship will violate the worker’s rights, and the dishonest employer could violate the law by terminating employees they dislike. The judiciary’s motivation is to ensure that the full balance of power intended by the Employment Contracts Act is available to workers, and it is evident that the courts have been willing to partially disregard both the intent and plain language of the Act to achieve this policy objective.

Layoff dispute precedents can vary considerably depending on the region in China. This article examines the reemployment layoff precedents in China within the broader context of employment dispute precedents from Beijing, Shanghai, Guangzhou, and Jiangsu, and evaluates which cities have established administrative guidelines for setting these dispute precedents.

How Chinese judges balance the interests of employers and employees in reinstatement cases

Even though §48 of the Employment Contracts Act does not mention the employer’s consent and provides only the employee with a choice of remedy, courts in some parts of China consider whether the employer is willing to continue performing under the Employment Contract when deciding whether to reinstate it. These precedents reflect that an Employment Contract is fundamentally relational, involving the management and control of the individual and requiring a working relationship based on goodwill and trust.

In essence, an Employment Contract cannot be effectively performed unless both parties are willing to continue the relationship. As a result, Chinese judges typically examine the willingness of both parties when deciding whether to compel specific performance of the contract through reinstatement, although attitudes toward the relevance of the parties’ subjective willingness vary considerably across different regions in China.

For example, judges in Guangzhou and Jiangsu have set precedents indicating that when an employer clearly objects to continuing work under the Employment Contract, the original conditions of equality and voluntariness deteriorate, making it unrealistic to continue the contract. In these cases, an Employment Contract will not be ordered to continue, and employers unwilling to reinstate the contract can succeed if the conditions precedent no longer exist.

In contrast, labor arbitrators and judges in Beijing and Shanghai generally view the reinstatement of an Employment Contract by an unwilling employer as contrary to the principles of Chinese law. Nonetheless, they consider the willingness of the employer a material fact that may affect the outcome. In these jurisdictions, judges weigh other factors that may have changed, such as whether the job role still exists or has been filled and whether the employee has been hired by another company, which could interfere with the judge’s order to continue the original Employment Contract.

It is important to determine whether an employee’s past behavior suggests they would be disruptive if reinstated. For example, can the employee return to their former position without replacing someone already in that role, and what are the financial costs of replacing the current employee if they are removed? Additionally, one must consider whether the current employee in that role would be left without a suitable alternative work opportunity and if the position involves specialized skills that require unique training or orientation specific to the business, whether the work performed during the separation period would become obsolete.

Consider an alternative scenario in which the role was a low-cost position at the time of separation, but the business later had to recruit higher-cost talent. In such cases, if the employee were reinstated, they might need to be placed in a position that requires expensive skills for which they are not qualified.

Evaluate whether the position still exists or if it was eliminated. If the role is currently vacant or similar positions are being advertised, then the position exists; however, if no advertisements are open because it was eliminated as part of an organizational restructuring, then it does not exist.

Examine whether the employee’s conduct during and after the layoff indicates that they are no longer suited to work for the employer. Consider whether the employee continues to assert their rights calmly, maintains lawful claims, and communicates amicably with management rather than engaging in disputes that disrupt operations, cause property damage, or attract law enforcement attention. Also review any external agreements or incentives, such as equity incentives provided by a third party, that might be affected if the employment contract is not resumed. Additionally, assess personal factors that may impact the employee’s family, including whether their employment status influences their ability to maintain household registration in a particular city, which could, in turn, affect their children’s eligibility to attend public schools.

Common employer legal violations in labor disputes are illustrated by three common categories in China: expatriate agreements, harassment allegations, and terminations. In the context of expatriate agreements, the typical adjudicated claim is 700,000 RMB, which means that even a small error in the expatriate management program can lead to a substantial loss. In cases involving harassment allegations, employers typically terminate the accused employee, who may then challenge the termination through labor arbitration, seeking reinstatement or damages for unlawful termination.

Generally, decision makers tend to rule in favor of the terminated employee in harassment-related disputes, regardless of the evidence presented, due to the underlying values reflected in the employer’s policies. The calculation of back pay and damages for reinstating the employment relationship varies significantly depending on the city’s employment regulators and courts. For example, Employment Board Circular 2001-2 states that the employer must pay back wages for the period during which the employee was unable to work as a result of unlawful termination in violation of national law or the Employment Contract. However, China does not have a unified national approach to calculating reinstated back pay, as different standards are applied in Beijing, Shanghai, Jiangsu Province, and the Pearl River Delta.

Generally, the average regular wage rate paid before termination is used. This approach is widely accepted in China and explicitly provided for by local statutes in several jurisdictions. The Shanghai Wage Payment Rules, under §23, state that an employee’s pay rate is the average monthly wage for the 12 months preceding the termination of the contract. The Guangdong Wage Payment Act, under §29, specifies that an employee’s average hourly wage for regular working hours over the preceding year should be used. The Beijing Harmonized Labor Policy Rules, under §24, are noteworthy because procedural defects require the minimum wage rate, whereas substantive issues require the regular wage rate during the reinstatement period.

Local statutes provide clear guidance, though legal traditions vary regarding how compensation components such as performance pay, overtime pay, or allowances are incorporated under the regular wage rate rule. A litigant may present a strong case by drawing parallels between the case facts and established precedents that address the treatment of these compensation components.

If the employee is at fault, the amount of reinstated pay will be offset, resulting in a lower payment by the employer. The legal basis for this is provided in §23 of the Shanghai Wage Payment Rules and §7 of the Jiangsu Employment Dispute Resolution Policy Statement. Chinese courts may exercise judicial discretion to account for the respective fault of the employer and employee when determining the appropriate amount of back wages to pay under the relevant circumstances.

For example, in the APpeal of Shanghai case (2021) No. 1965—a typical health and safety case—the court held that the employee was rightfully terminated for major misconduct, but the employer also bore fault because it failed to conduct an offboarding interview to test for occupational disease. The court’s determination of the party at fault, which formed the basis for ordering the reinstatement of the employment relationship, was grounded in the provisions of the Occupational Disease Prevention Act, with careful attention given to the specific legal provisions in its rules to support the determination of fault. In this case, the court ordered the employer to pay the minimum wage as the appropriate back wage amount.

If a court orders reinstatement and payment in lieu of reinstatement, the payment will typically be made according to the local minimum wage. Statutory provisions specifically require this remedy; the Beijing High Court in its Joint Discussion on Labor Dispute Law Matters Minutes (para. 24) states that if a procedural flaw occurs in the employment termination process, the employer must pay the minimum wage to the employee for the period of reinstatement ordered. If a settlement is not reached, a motion should be made to the court to enforce its order to reinstate the individual to employment.

There has been growing interest in recent years in China regarding the court system’s general failure to enforce these orders. Courts and commentators generally believe that there are two main reasons for this noncompliance. Courts do not monitor a business’s management process to ensure that a reinstated worker is given an appropriate role, as they do not want to interfere with the employer’s autonomy. Additionally, many believe that judges are not adequately qualified to understand all aspects necessary for properly restoring the employment relationship in a given business context, such as job role, position, salary, and length of service. Different approaches are taken across various jurisdictions in China.

Certain courts have refused to enforce employment contracts and characterize their enforcement as involving personal management, which differs fundamentally from a simple financial dispute. They have applied the doctrine of unenforceability in this context by refusing to confirm an effective judgment, as seen in Guangzhoutianqu (2018) minchu No. 28504.

Similarly, in the United States, an employment contract is not enforceable by specific performance. The enforcement application in Beijingshunqu (2022) No. 2975 was not accepted because the court held that the specific performance ordered in the judgment was ill-defined.

The enforcement action is taken against the business entity to coerce compliance with the court order. Chinese court precedents generally do not distinguish between the capacity for personal service and the resumption of an employment relationship; instead, the legal personhood of a corporate entity is treated equivalently to that of an individual. However, the remedy is enforced indirectly by employing various coercive measures available to the court until the judgment is honored.

For example, in Application Document No. Shanghai [2007]135(2)(3) issued by the Shanghai High Court as a guiding precedent, the court noted that an application to enforce a judgment ordering the resumption of an employment relationship filed by an employee should normally be accepted as a case. The enforcement division shall coordinate with the labor regulatory agency and adopt appropriate coercive judicial processes against the legal representative of the employer to pressure the employer to comply with the judgment ordering the reestablishment of the employment relationship.

Chinese courts generally treat wage payment as the primary obligation under an employment contract. Even when a judgment is labeled as a restoration of the employment relationship, courts frequently modify labor arbitral awards to substitute monetary compensation as a remedy.

A typical case heard on appeal by the Beijing High Court under enforcement oversight case number 28 (2021) involved an employer who paid the employee’s salary in accordance with a lower court judgment. The court held that the employer had fully performed its primary duty under the employment contract by paying wages and, therefore, had complied with the judgment to continue performing the employment contract.

Under Chinese law, it is essential to document the legality of layoffs and ensure that your business process meets all procedural requirements. This careful documentation can help ensure that all legal aspects of the layoffs are properly maintained.

Prepare for the possibility that a judge may mandate the reinstatement of an employment contract since Chinese judges are typically reluctant to allow a contract to be abandoned. Even if an employee is reinstated to their previous role and location, continued performance under the contract may be required.

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

Domicile discrimination in China is addressed by the statutory Employment Contracts Act, which provides constructive notice of policy, meaning that every employer should be aware of this issue. According to §39 of the Employment Contracts Act, an employer has the authority to terminate an employee who seriously violates company policy.

Although the Act does not otherwise grant specific authority for disciplining or terminating an employee, courts interpreting Chinese employment law recognize a right to lay off employees when continuing employment is impossible due to external events. Consequently, if proper notice is provided to employees, an employer may terminate an employment contract for a specific serious violation of company policy without later contestation of the notice. In practice, many employers refrain from exercising disciplinary power, which can allow employees to violate policies with impunity and negatively impact the business.

This article explores how the principle of proportionality guides employers in China when determining whether to terminate an employee. It examines how judges are currently considering proportionality in employment dispute cases and offers suggestions for management on applying this principle when processing employment contract terminations.

The guidance provided aims to help protect businesses from potential liabilities while ensuring compliance with the law and respect for employee rights.

The proportionality principle originated in contemporary Chinese law, specifically within its administrative system, where it seeks to balance the interests pursued by the administration with the rights of the individual. If pursuing an administrative interest negatively impacts individual rights, those negative impacts must be limited to the minimum necessary and applied proportionately.

Presently, judge-made law in China applies this principle to employment law to achieve a balance between the rights of employers and employees, particularly when employers’ disciplinary procedures infringe on employees’ rights under the Employment Contracts Act. Chinese precedents generally portray employers enforcing discipline as the stronger party, while employees lacking access to unions or other representation are considered vulnerable to management abuse. Consequently, some Chinese courts have applied the principle of proportionality in employment law cases involving disciplinary actions and termination to assess whether an employer’s policies and procedures are reasonable, with the goal of improving labor management in China.

Chinese judges have characterized the proportionality principle in employment law by stating that employers have the right to discipline employees for errors in performance, but they must not be overly harsh. They further explained that any punishment must be commensurate with the degree of the employee’s fault and applied in a gradual and progressive manner.

Under the proportionality principle, an employer must apply its rules and policies proportionately when addressing rule violations. A decision on disciplinary action should match the nature, circumstances, and harmful effects of the employee’s conduct, with the punishment bearing an appropriate connection to these factors. Management may not use its internal discretion or culture as justification for applying the most severe action, termination.

Chinese courts handling termination cases typically begin by determining whether the employee’s conduct constituted a major violation of the employer’s communicated rules or policies. They also consider whether management made a good faith effort to employ reasonable alternatives to termination as a disciplinary measure, weighing these alternatives against the principle of proportionality.

The court’s conclusion, based on this analysis, ultimately determines whether the termination was legal.

Judges consider a variety of factors, including how long the employee worked at the company, the reasons for the violation and its consequences, the character of the employee’s conduct (including intent), and whether other persons are at fault, such as through poor management supervision that fails to provide adequate internal safeguards against misconduct. The results of the court’s analysis are measured against the material standard.

The judge will avoid dismissing the employee’s conduct as a material violation of policy if the behavior does not have significant consequences or occurs for a credible reason. The judge will also scrutinize the nature and degree of the behavior in connection with the employee’s intent.

This means that the decision to terminate an employment contract must be based on a procedurally fair policy that is applied proportionately given the specific facts of the violation and the employee’s financial contribution to the business. A well-known Chinese court case, Guangdong (2021) Civil Case No. 21520, 0306, illustrates this point. In that case, an employee was terminated for a serious rule violation after engaging in a workplace fight during working hours.

The court confirmed that a fight occurred during working hours but, upon further investigation, found that the terminated employee had acted in self-defense after being struck first by another employee. Nearby employees quickly intervened to prevent serious injury. The court determined that the employer’s decision was arbitrary because it failed to consider the circumstances that led to the fight and the actual severity of the incident. As a result, the termination was found to be unlawful, and damages were awarded.

In the 2018 Beijing 02 MinZhong No. 970 case, an employee posted a screenshot of an internal email from a company executive to their WeChat Moments. The email stated that the company was facing operating difficulties and would temporarily be unable to pay full wages on time. The employer treated this conduct as a material violation of its internal rules and terminated the employee’s employment contract.

The court ruled against the employer, finding that while the social media posting was inappropriate, the employee was pursuing lawful means of redress. The employee’s actions did not violate the law or cause serious harm to the company, and the company’s own actions were the root cause; therefore, the termination was deemed unlawful.

The need for proportionality in disciplinary action was clarified in the (2022) Guangdong 01 Min Zhong 26564 case. The court stated that the principle of proportionality means an employer is entitled to discipline an employee for wrongful conduct, but that discipline cannot be excessive and should escalate based on severity. Disciplinary action must be commensurate with factors such as the employee’s intent, the nature of the action, and its consequences.

In the (2020) Guangdong 02 Min Zhong No. 2039 case, the court explained that, to constitute a material violation of rules or policies, the context of the violation should be examined by considering factors such as motivation, the number of occurrences, the consequences, the impact, the severity of those consequences or impact, whether the violation was repeated, whether the losses were major, and whether it affected the normal order of business processes. In the case at hand, an employee shared a TikTok video on the company WeChat channel alleging that the employer was not purchasing social security for its employees. The court found that the employer indeed was not purchasing social security and that the video’s content was accurate, not disinformation. Therefore, the policy against spreading false rumors to damage the company’s reputation did not apply, and because it did not affect business processes, the employee’s actions did not constitute a material policy violation.

When someone other than the employee is responsible or at fault, the court does not permit the employer to impose harsh disciplinary action on the employee for violating company policy. This can occur when another employee or even a third party outside the organization contributed to the event.

A recent example of such an employment dispute occurred in the Guangdong 01 Civil Appeal No. 9122 (2020) case. The facts of the case were that the employee handled a shipment of goods that were the wrong model and more expensive than the original goods, yet he accepted them at the full price of the intended items. The employer considered this a serious policy violation constituting dishonesty and terminated the employee. However, the court found that other staff members were responsible for monitoring the goods from procurement through installation, and in the context of the organization, the employee was not individually responsible.

During an 11-month period, there were 973 recorded policy violations. The business was a conglomerate, and the violations were discovered during an annual audit. At the individual business division level, management maintained the employee’s regular salary and conducted performance reviews throughout the year without discovering that the employee was skipping workdays, which resulted in full payment without deductions.

The court determined that the organizational or business unit level process management was negligent, characterizing the failure to monitor tardiness as the ultimate problem. The employer was required to assume the business consequences of this negligent management, and the judge ruled that the termination was illegal.

Chinese courts have developed a doctrine regarding the rights of long-tenured employees. Even an employee who commits a minor violation of company policy may be entitled to reinstatement and full back pay if their long service and contributions to the business are taken into account. In such cases, the employee’s age and difficulty in finding new employment are considered extenuating circumstances, and employers are required to carefully assess these factors before imposing major disciplinary actions in accordance with the principle of proportionality.

For example, Beijing No. 2 Civil Appeal Division Case No. 10263 (2021) involved a flight attendant with decades of service who was terminated by the airline for a minor policy violation. The court ruled that the termination was unlawful because it failed to consider the employee’s long-term contributions and the challenges the employee would face in securing alternative employment. The court remarked that a proportional response to the violation would have been a warning or censure rather than termination.

They also expect the employer to impose disciplinary measures gradually and in proportion to the employee’s underlying conduct, rejecting an employer who terminates the employment contract immediately without first attempting measures such as critiquing the employee, providing an opportunity to improve, or giving an oral warning. Chinese judges have previously expected the employer to demote the employee and impose a corresponding pay reduction.

In the Zhejiang Province case No. (2022) Su 02 Civil Final 801, the judge commented that the employer should maintain modesty, exercise the right to terminate the employment contract prudently, and try to give the employee the opportunity to correct mistakes; if the employee fails to rectify the situation after the imposition of other penalties, then terminating the employment contract is appropriate. In the Guangdong Province case (2019) Yue 01 Min Final 13821, the employer was criticized by the court for terminating the employment relationship immediately instead of trying lesser penalties such as a warning, placing a demerit on the employee’s record, or suspending pay, and the court concluded that the employer’s actions were not proportional.

The principle of gradually escalating proportional discipline was applied by the employer according to the facts outlined in the Beijing Court of Appeal decision (2021) No. 2234. This decision involved terminating an employment contract because the employee failed to respond to messages in a timely manner during a remote work period, and generally, an occasional failure to respond is not serious enough on its own to warrant discharge.

However, in this case, the employer issued three written warnings emphasizing the importance of responding promptly to messages, yet the employee continued to fail to respond and did not provide a reasonable explanation. Ultimately, the employer terminated the employee, and the court upheld that the termination was effective.

Court precedents hold that employers in China may not circumvent socialist employment protections by relying solely on disciplinary termination rights. Instead, the Chinese legal system requires managers to use all available legal measures to manage performance effectively while protecting employee rights.

To achieve a termination deemed proportional by a Chinese judge, managers must make specific findings regarding how an employee violated policy and the resulting consequences. They should collect evidence to support these findings and build a clear narrative for potential litigation. Chinese law also requires management to engage in a progressive discipline process and exhaust all reasonable corrective measures, such as verbal criticisms and the implementation of a performance improvement plan, before proceeding with a disciplinary termination.

To reduce the risk of being ordered to reinstate an employee who claims an unlawful termination, the following steps should be taken. First, establish detailed rules that encompass all types of employee policy violations and the corresponding disciplinary actions, including termination for the most serious violations. Next, conduct a thorough investigation of each policy violation by gathering evidence regarding the cause, extent, consequences, and the employee’s state of mind before determining the severity of the violation. In particular, establish whether the violation occurred in the context of another entity that might be responsible or if it resulted from management negligence in controlling business processes.

Ensure that business processes and management techniques are in place to detect employee policy violations, and take effective action promptly to prevent escalation. When an employee violates policy, provide constructive criticism and a warning about the infraction, along with a reasonable opportunity for the employee to rectify their behavior or performance.

12. How can an employer defend against reinstatement demands?

In China, employees who have been unlawfully discharged have several remedies available to them. They can either demand reinstatement along with back wages for the period they were unemployed or elect to claim double severance pay provided by law. A significant portion of recent cases and legal precedents in China involve employees choosing reinstatement rather than the double severance pay option.

Reinstatement cases in China are influenced by unique legal and social factors. Foreign investors should note that reinstatement often results in harsh outcomes for businesses, as Chinese courts have explicitly stated that they do not apply a clean hands doctrine when employers terminate employment contracts. Terminating an employee who has breached their contract does not necessarily protect the employer from a reinstatement claim. Local management generally sees reinstatement as potentially disruptive to the organization because re-hiring problematic or unproductive employees can negatively affect morale and discipline. They also identify a financial disadvantage, since a reinstated employee receives back wages for the period between discharge and reinstatement, which in some cases can exceed the amount provided under the 2N double severance pay option.

For example, if an employee commits a crime against the employer resulting in termination and then sues to contest the grounds for termination, the employer will generally be able to prove that the employment contract should not continue. Chinese judges and arbitrators note that in China’s system, labor is considered a commodity, albeit a unique type that embodies human and social characteristics. They explain that the employment relationship encompasses not only economic exchange but also trust and cooperation, and that when either party loses faith in the other, continuing the relationship becomes inappropriate.

It is important to understand the significant difference between how Chinese judges define a loss of trust and how many Chinese managers might define it. The discussion analyzes the legal doctrine used by Chinese courts today, focusing on recent precedents from the major Beijing courts, and provides practical suggestions for strategies when faced with a dispute regarding the legitimacy of a termination that has entered the legal system.

What are some common characteristics of a dispute that do not result in the kind of trust breakdown that makes the Employment Contract unenforceable? Some common characteristics that Chinese employers often assume constitute a breakdown of trust include situations in which the parties engage in litigation against one another. In traditional Chinese culture, litigation is believed to end the relationship, so the party seeking legal action is viewed as terminating the relationship and, therefore, as untrustworthy.

It is also assumed that an employee who fails to perform their job competently or violates company policy contributes to a breakdown of trust. Additionally, conflicts between employees and their managers or colleagues are culturally associated with issues of trustworthiness. However, modern Chinese courts and arbitrators do not accept these scenarios as grounds for terminating the Employment Contract.

Traditional Chinese culture and its legal system value harmony, and courts generally support maintaining a harmonious employment relationship for both parties. This has led business managers to expect that a dispute reaching the courtroom will involve both parties vigorously contradicting one another and making accusations, thereby making the employment contract unworkable.

However, Chinese courts view the initiation of employment arbitration or the filing of a lawsuit as a legal right for the employee, and the mere existence of an employment law dispute does not necessarily mean that the employment contract cannot continue to be performed harmoniously. This viewpoint was expressed in a recent Chinese Labor Court case, (2023) Beijing 01 Min Zhong No. 11628. In that case, the employer argued that the employment contract could no longer be performed harmoniously because the parties had already litigated several disputes. The court rejected this argument, stating that each party has the right to protect its rights through arbitration or litigation, and exercising this right does not constitute grounds for ending the performance of the employment contract. Another example of this reasoning is found in (2023) Beijing 02 Min Zhong No. 5232, which held that an employee asserting legal rights is not sufficient grounds to conclude that the employment contract may not be performed harmoniously, even if several employment disputes have been litigated.

Following the approach established by Chinese legal culture for dispute resolution, managers are taught that termination is an irreversible last resort to address management issues. Because termination is irreversible, the employer argues in court that this suggests an employment contract cannot continue effectively.

As an example, consider Beijing Civil Petition No. 976 (2021), where the employer terminated an employment contract after discovering that the employee had materially breached it and claimed that the breach eliminated any possibility for a relationship of mutual trust. The court explained that the current Chinese labor law process is designed to protect employees as much as reasonably possible; therefore, the employer needed to provide sufficient evidence that the employee committed the breach. Failing to do so meant that the minimum level of protection required by Chinese labor law was not met, and the court consequently found the termination unlawful and agreed with the employee’s request to be reinstated to their former position.

Establish clear human resources policies that outline the organization’s processes for disciplinary action and layoffs. Generally, Chinese judges will reject a termination as unlawful if it results from informal management attitudes regarding workplace morale or effective collaboration. In the Chinese business environment, business managers may conclude that an employee is no longer trustworthy and should be terminated if conflicts occur with their manager or colleagues, although judges do not believe that conflicts necessarily lead to a loss of trust.

Two recent Chinese court precedents illustrate this trend: Beijing 01 Civil Appeal Nos. 7107 and 8873. In case 7107, the employer claimed that the employee had a significant conflict with a senior executive, but the judge observed that the personal emotional conflict between the employee and the senior executive did not result in a loss of trust. In case 8873, the dispute between the employee and their line manager over pay led the employer to terminate the employee; however, the judge held that the conflict did not extend to the employer as a whole, making the termination unlawful.

In contemporary PRC employment law, several factors may lead a judge to determine that trust has been broken. In cases where the employer can produce evidence, judges are more likely to reject a claim for reinstatement. The most common scenario today involves the termination of an employee during the probation period; the judge typically finds that the employment relationship has not had sufficient time to establish trust and therefore rejects the employee’s claim for reinstatement.

This result was evident in the 2022 Beijing Civil Review Docket No. 4846. The court stated that a probation period is an opportunity for the employer to assess the employee’s abilities and for both parties to determine their suitability to work together, noting that trust in the employment relationship has not yet been established.

Confirm that the employee genuinely intends to work for the organization rather than harboring a hidden lack of motivation. A key factor the courts consider when determining whether to continue the employment contract and award back pay is whether the employee secretly lacks motivation and has an alternative objective.

To demonstrate a lack of trust, the employer should provide documented evidence showing that the employee does not truly wish to continue working for the business. Evidence that may persuade the court that the employee is no longer motivated includes, but is not limited to, previous negotiations for termination and severance, the submission of a resignation form accompanied by a transfer of duties to others before departure, or refusal of an offer to continue employment. In these instances, the Chinese court will typically determine that the employee does not currently intend to work for the business and will not order the continuation of the employment contract.

In Chinese employment law, if a court orders reinstatement for an employee, a party cannot argue that the Employment Contract should not be reinstated simply because the individual is dissatisfied with the organization beyond the basic employment dispute involving the employee’s status. In these disputes, the organization typically has complaints or dissatisfaction regarding the employee, whereas the employee is dissatisfied solely because of the claimed unlawful termination.

Generally, the court will reject a reinstatement claim if the employee is dissatisfied with management over issues unrelated to the unlawful termination. For example, in the 2023 Beijing Minzhong 2114 case, during the employment relationship the employer consistently gave the employee the lowest possible performance evaluation, and the employee consistently refused to communicate with management about their evaluation. The court reasoned that these facts demonstrated a lack of trust on both sides: the employer did not trust the employee’s work ethic or job competence, and the employee did not trust that management was evaluating their performance fairly or following proper procedures. The court also noted that the employee’s grievance involved not receiving an annual bonus for two years. It was explicitly found that the parties had deviated from their original cooperative intentions when they executed the Employment Contract, and that continuing to perform the Employment Contract would not be conducive to establishing a stable working relationship, making it an inappropriate remedy.

If numerous disputes arise outside the scope of the labor dispute, the court may determine that the Employment Contract should be canceled. In Beijing Min 2020 No. 622, the dispute involved an employee who had unrelated claims against the employer regarding reputation and sought RMB 400,000 from the employer, associated entities, and beneficial owners.

In Beijing Min 2020 No. 4913, the employee filed police reports, labor inspector complaints, and labor arbitration complaints while the employer was involved in a defamation claim. In Beijing 01 Minor 2023 No. 545, in addition to an employment law claim, the employer sued the employee for RMB 80,000,000 in damages. In each case, the court of appeal found that the trust between the parties had deteriorated and canceled the Employment Contract.

It is common for Chinese court judges to determine whether there are special characteristics of the employee’s role or the employer’s industry that are relevant to the trust relationship. In such cases, judges generally try to assess whether an employment contract for a position of trust has been compromised, with this position typically referring to an executive or professional role.

A recent example is the case Beijing (01)Min-Zhong 802 from 2022. In that case, the judge found that the employer had wrongfully terminated the executive, explicitly rejecting the argument that the termination was lawful due to employee fraud. Instead, the judge examined whether the trust relationship had broken down by focusing on the executive’s role and considering the balanced interests of the parties. As a result, the judge concluded that sufficient trust did not exist for the employment contract to continue.

Proof of economic compensation and taxation. Additionally, in certain sectors the nature of the industry carries a high expectation of individual integrity, which may be considered by a court. A good example is provided by the recent case translation number (2019) Beijing Civil Petition No. 1628, where an employee was terminated for losing artwork while managing trusts for a trust company employer. The court characterized the employer’s actions as unlawful because no objective basis was provided for the decision.

The court also noted several key points regarding how an employment contract can be terminated. In the context of the trust industry, a trust involves the entrustor granting control over their property rights to the trustee to be managed or administered for a specific objective, with the entrustment stemming from the entrustor’s trust in the trustee. Honesty and strict adherence to the arrangement’s rules are fundamental to the trust industry, and trust industry professionals must act with more diligence and responsibility than those in other industries, the Chinese judge wrote in the opinion. The court concluded that these general requirements apply even without an objective analysis that considers fault.

Employment law disputes that persist through prolonged litigation may justify ending the Employment Contract. For example, in case 2023 Beijing Min No. 1496, the employment dispute lasted five years. Chinese judges ruled that forcing the parties to resume the Employment Contract would disrupt current business operations, complicate human resources management, and negatively impact the employee’s career progression.

In China, judicial precedents indicate that when a court order restores an employment relationship following an illegal termination claim, the same employment relationship is not typically reinstated again shortly thereafter. The legal reasoning is that once reinstatement has been ordered, any subsequent employment dispute undermines the mutual trust required to maintain a working relationship. See Beijing Min Shen 11137 (2021).

Generally, courts are reluctant to reimpose an employment relationship where previous actions have led to its reinstatement, as doing so could imply ongoing disputes that have eroded confidence between the parties involved.

In conclusion, the Chinese judiciary’s interpretation of the erosion of trust is often surprising to management in wrongful termination cases. It is important to note that common termination reasons at the management level, such as enforcement disputes, policy violations, or an employee’s interpersonal conflicts with managers or colleagues, are not sufficient to constitute an erosion of trust.

There are certain factors that may sway a court’s decision in the opposite direction and determine that the trust relationship has been destroyed. For example, under Chinese law a judge determines what constitutes a trust relationship and what is required to destroy it based on personal background and lived experience, as there are no specific requirements in the precedents. Generally, there is a guiding principle in the precedents that the trust relationship is essentially synonymous with the working relationship and that facts showing the working relationship can no longer continue suffice to meet the necessary conditions. This principle is consistent with the Layoff Rules, which characterize the Employment Contract as an employment relationship that may be affected by economic reasons.

Factors that might indicate a destroyed trust relationship include termination during the probationary period or after only a short duration of employment, an indication that the employee does not intend to continue performing under the Employment Contract, substantial grievances against the employer, numerous or a major dispute between the parties aside from the current employment dispute, the employee holding a senior management, important, or unique role, the employer being in a unique industry, or the dispute between the parties having persisted for an extended period. If a court has previously ruled that the layoffs were unlawful and that the Employment Contract must be reinstated, but then a labor dispute recurs, the court is more likely to find that the underlying trust relationship has been destroyed. To increase the likelihood of success in an Employment Contract dispute, the dispute should be methodically analyzed through the framework established by the precedents rather than relying on a snap decision based on intuition. Parties should prepare for litigation by collecting and preserving all evidence related to the dispute, which will also decrease the risk if the court orders reinstatement of an Employment Contract.

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

This explainer provides a case study to explain in detail the current state of Chinese law regarding employment contract severance pay rules. The analysis identifies key lessons that assist general counsel or other individuals responsible for managing Chinese legal risks in understanding how to remain compliant with the law.

The leading case interpreting this rule provides critical insights into the legal framework and obligations. These insights help clarify the principles and practical considerations necessary for ensuring compliance with Chinese employment law.

What events require financial compensation under Chinese law? The Layoffs Rules §4 outlines the circumstances in which an employer is required to provide financial compensation, as detailed in the table at the bottom of this section. Generally, Chinese law allows for financial compensation when an Employment Contract is terminated by negotiation, when an employee is unable to work after the expiration of medical leave required to recover from an illness or non–job-related injury, when an employee cannot perform their job role even after receiving training or being transferred to another position, and when there are significant changes in objective circumstances.

Economic layoffs are also grounds for financial compensation. The Employment Contracts Act, which took effect on January 1, 2008, provides more specific and comprehensive requirements for determining when financial compensation is due and the amount to be paid.

The Employment Contracts Act §46 now provides the complete set of grounds for paying financial compensation. In addition to the established compensation rules, the Act requires compensation for constructive termination when the employer fails to pay wages, compensation, or benefits required by law, fails to provide adequate working conditions, fails to make required social security contributions, or implements unlawful company policies to the detriment of the employee.

Financial compensation is also required if the employment contract is terminated due to material changes in circumstances or a layoff. Since 2008, if the end of a fixed-term employment contract is not renewed by the employer, financial compensation is required even if there are no other grounds. The Act stipulates that financial compensation is required for any of these violations by the employer that results in termination.

How is financial compensation calculated if an employee has several short-term contracts with the same employer? Can financial compensation be paid for more than 12 months? The outdated Layoffs Rules provided that an employee would receive full financial compensation of one month’s wages even if they worked for less than a year. However, under the current Employment Contracts Act, employees who worked less than six months are entitled to half a month’s financial compensation.

• 47 of the Employment Contracts Act establishes a double cap system. If an employee earns an above-average salary, the length of service used to calculate their financial compensation is capped at 12 years. For example, the provincial statistics bureau calculates that the average salary in Shanghai is ¥114,962 annually, or about ¥9,580 a month. Therefore, for employees with above-average earnings, the annualized salary cap limits their monthly financial compensation to a maximum of ¥28,740.

How should severance be calculated for an employee whose tenure began before January 1, 2008, and continued after that date? For employees who began working before the effective date of the Employment Contracts Act on January 1, 2008, and continued employment beyond that point, the tenure should be divided into periods before and after that date, with each period calculated separately and then summed.

The severance payment should be determined according to the law applicable to each period. The law applicable before the Employment Contracts Act was the Regulations on Financial Compensation for Employment Contract Breach and Termination (Ministry of Labor Document No. 481, 1994); however, those rules were repealed in 2017. Chinese courts currently apply the repealed regulations in severance disputes involving employment that began before 2008. For example, the Shanghai High Court, in its Opinion on Several Questions About the Employment Contracts Act (Shanghai High Court Document No. 73, 2009, §21), provided a clear interpretation of this issue.

Specific examples of employment contract terminations in practice include disciplinary discharges and economic layoffs conducted in accordance with a compliant procedural plan. In a procedurally compliant economic layoff, a business can follow the required process to set an employee’s last day of work as January 1, 2008, and provide exactly 12 months of financial compensation if the employee’s wage was below the prior year’s average.

A separate layoff process provides for maximum financial compensation that becomes effective 24 months after the employee’s last day of work. An employee terminated for cause under the Employment Contracts Act will receive financial compensation based on the entirety of their employment period calculated from the hire date, with the total amount capped at 12 months’ wages.

Employees with work periods extending across 2008 should be grouped into segments for analysis. It is necessary to determine whether a 12-month severance compensation cap applies under the Economic Compensation Rules and then whether a 3x average monthly salary cap applies. Different provisions apply to various contexts; these options are detailed in the accompanying table and are summarized below. The severance compensation must be calculated based on the statutory options for an employee whose work period extended across 2008.

For employees who started work before January 1, 2008, the calculation methodology is primarily based on temporary rules from the 1990s, generally providing for a maximum of one month of severance compensation in all cases. There are also provisions for agreement to terminate, resignation, and termination due to an economic restructuring, as well as for termination before the conclusion of medical leave for a non-occupational accident. However, if the Layoff Rules §5(d) apply, a maximum of six months is provided by these older rules. If termination occurs after January 1, 2008, the daily rate should be calculated by dividing the average monthly wages for the prior year—announced by the local government agency for the employer’s industry—by 21.75. This daily rate is then multiplied by the actual number of days (N) of severance compensation, incorporating the effects of any recent policy changes where applicable.

For example, consider an employee who worked from 1994 through the end of 2020 with an average monthly salary of 20,000. If the employment contract was mutually terminated at the end of the period, the employee would have been employed for 12 months prior to 2008, thereby qualifying for 24 months (12 + 12) of severance compensation. In contrast, if the employee was terminated as part of a layoff, they would have accrued 18 months of compensation prior to 2008 under Layoff Rules §5(d), resulting in a total of 30 months (18 + 12) of severance compensation.

The calculation includes the social security and housing fund amounts withheld from the employee, but it does not include personal income tax or the amounts paid by the employer on top of the salary for social security and the housing fund. In business settings, employee salary is defined as including both gross salary and average actual income received.

Gross salary comprises everything the employee is legally entitled to receive for providing labor services, including overtime, piecework compensation, bonuses, stipends, allowances, and any other income received under special circumstances. The average actual monthly income reflects all amounts withheld for taxes, social security, and the housing fund.

The Employment Contract Act Regulations §27 provides that monthly wages for financial compensation shall be calculated based on the wages an employee is entitled to, including hourly wages, piece wages, and monetary income such as bonuses, allowances, and stipends. If an employee’s average monthly wages in the 12 months prior to the cancellation or termination of the employment contract are less than the applicable local minimum wage, the local minimum wage shall be used for the calculation.

If the employee has worked fewer than 12 months, the average monthly pay shall be calculated based on the actual number of months worked.

The Circular on Issues Related to the Shanghai Employment Contract Ordinance §22 provides that financial compensation is based on total wages, which include salary, bonuses, allowances, and stipends in accordance with national and local law, and excludes any taxes or fees the employee is required by law to pay. Further, income from stocks, options, dividends, and other investment gains is excluded from the financial compensation base.

Compensation is based on the employee’s gross monthly wage, which includes base pay, bonuses, commissions, allowances, and stipends. It excludes wage deductions for income tax or for the employee’s portion of benefits plan contributions for the three social insurances (medical, retirement, and unemployment) and the Housing Fund, which are part of the social security system. The employer’s portion of these social security obligations is not included in the gross wage calculation. When reviewing the employee’s wage statement, a gross wage amount is shown along with deductions that specify the amounts allocated to income tax and social security contributions. It is important to use the monthly wage as defined by Chinese employment law, which is determined by the average wage over the twelve months preceding the end of the employment contract.

The financial compensation calculation, using statutory definitions of wages, includes base wage, bonuses, commissions, allowances, stipends, and deductions for individual income tax and the employee’s portion of the three insurances and Housing Fund. The employer’s portion of the five insurances and Housing Fund, along with any stock or investment gains such as dividends, are excluded.

Tax Treatment of Financial Compensation and Evidence for Embezzlement by an Employee in China

Unlike typical severance calculation practices in other countries, in China the amount exempt from taxation is capped at three times the average wage from the previous year, as published by the local government. §5 of the Notice on the Changes to Preferential Policies Pursuant to the Amendments of the Individual Income Tax Act (Cai Shui [2018] No. 164), jointly issued by the Ministry of Finance and Tax Administration, established that individuals receiving a lump-sum payment due to the termination of their employment relationship should have such payments—whether financial compensation, stipends, or any other allowances—treated separately from income earned in the same tax year and taxed using the appropriate income tax brackets.

It is typical for employers providing severance pay as financial compensation to make a single lump-sum payment. This approach ensures that severance payments are distinguished from other income and are subject to the designated taxation methods.

Examine whether work years for a temporary staffing engagement can be included when calculating severance pay. Former temporary staff may obtain credit toward severance pay if certain conditions are met. For instance, the rules issued under the Shanghai Employment Contract Act include a provision explaining that for staffing agency employment contracts, the severance pay base should be maintained by the staffing agency; however, if an employee’s base pay is not available, the government-published average wage for the city will be used.

Consider Mr. Li’s case. He initially worked with a temporary staffing agency under an employment contract, but now he seeks severance from his current employer that includes the temporary staffing period. A precedent on this issue was provided by the Supreme Court Rules, which state that if a worker is assigned to work for a new employer by a prior business entity for reasons not attributable to the employee and the prior business entity did not pay severance, and if the employment contract is subsequently terminated by the employee pursuant to the Employment Contracts Act §38 or by the new employer, the statute of limitations for bringing a court action to request that prior work years be included in the calculation of severance begins on the earlier of the date the employee actually leaves or stops working with notice provided by the employer.

The domestic Chinese legal system states that if an employee continues to work at the same work site and in the same position yet the employment contract is now held with a different employer, the employee is considered to have been assigned to a different employer. This determination is made on the basis that the arrangement is not due to any fault of the employee.

Under these conditions, the assignment is recognized as a transfer rather than a change in the employee’s status. The law clarifies that the shift in the employer holding the contract, while maintaining the same work environment and job role, absolves the employee of any responsibility for the change.

In this case, The Employee worked at Employer X for over 15 years. After an acquisition, his work location and position remained unchanged, but the staffing agency was replaced by a new employer, and no severance package was provided. The Employee should be able to claim 15 years of service and receive a severance package equivalent to 15 months’ salary based on his average salary over the previous 12 months.

According to the Employment Contracts Act §38, an employee may terminate their contract if they are not fully compensated in accordance with the law, in which case the employer must pay double the agreed severance package. Alternatively, if the employer terminates the employee, the court may award twice the severance package amount in the event of an illegal layoff or termination.

Foreign companies doing business in China today in a slowing economy may find themselves having to implement layoffs or other economic reductions. Foreign managers need to understand where Chinese law differs and what the specific Chinese legal rules and requirements are to ensure full compliance and avoid employment law disputes.

Management should understand that Chinese human resources practitioners describe filing and litigating disputes as picking up the legal weapon to defend their rights. In addition, the organization and tactics used by management when communicating with employees about the termination of an employment contract receive close scrutiny. Attorney consultations should be obtained in advance to ensure a smooth compliance process when applying these procedures to former employees in China, and the arrangement and negotiation processes must be conducted in a manner that conforms to local cultural expectations and law.

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

The Beijing Superior Court issued the Supplemental Interpretation on the Application of Labor and Employment Law, which has been divided into three major sections. This article is the second in the series summarizing these sections, and the first article discussed several important outcomes.

The court recognizes that under certain conditions an employer has the right to unilaterally change job roles and that if specific major conditions occur, continued performance under the Employment Contract may be impossible. It also provides more flexible legal standards for reviewing layoff terminations during the probationary period. This article continues the analysis initiated in the first article of the series.

The Guidelines define material change in objective circumstances as changes that occur after entering into the Employment Contract and were not foreseeable by the parties when the Contract was formed. Such changes make it impossible to perform all or the main provisions of the Employment Contract, or they render achieving the original intent of the Contract impracticable due to unfairness or excessive cost.

After defining this term, the Guidelines enumerate several events that materially change the objective circumstances on which the Employment Contract is based. These events include a force majeure event caused by a natural disaster such as an earthquake, fire, or flood; a major change resulting from modifications in applicable laws, regulations, or policies that require the business to relocate, transfer its assets, halt production, or change its product line or organizational structure; and a change in the business’s franchise.

The Employment Contract Act §40(c) establishes that employment contracts may be terminated when there are significant changes in the objective environment. This provision is commonly invoked in cases involving major layoffs or even in situations where all the employer’s employees are affected, such as during a complete shutdown. Managers at Chinese companies often view this provision as an easy way to manage mass layoffs.

The Layoffs Rules §2 interpret the law’s requirements for major changes in objective circumstances as limited to unforeseeable events occurring after the employment contract is signed that make continued performance impracticable or render the costs unreasonably high, thereby undermining the contract’s purpose. The Rules enumerate three specific examples of employment contract terminations: force majeure due to natural disasters; changes in law or policy that force a business to relocate, shut down, or change its product line; and business model changes involving the sale of assets. Additionally, the Rules address changes in the business qualifications for franchised business operators.

According to the Supreme Court’s current interpretation, these three examples are not intended to be exhaustive but merely serve as specific examples. Beyond these, a material change in objective conditions should be identified using the general definition provided earlier. Therefore, a manager terminating employment contracts due to a material change in objective conditions should determine the specific changes that have occurred and, in the event of a dispute, present these facts along with the legal analysis showing why the change falls within the general definition.

Under Chinese employment law, a company’s policy documents are characterized as its rules and procedures, so if an employee commits a major policy violation covered by these rules and procedures, the employment contract can be terminated. The rules and procedures must be very specific; for example, an employee cannot be terminated for merely lying to colleagues unless the rule specifically provides for it, otherwise the case may face an uphill battle in court. Many specific violations not listed in the rules and procedures may still be interpreted as breaches of employment discipline and professional ethics. The Chinese Employment Act §3 stipulates that employees must adhere to employment discipline and professional ethics, and the Supreme Court’s interpretation in the Questions and Answers indicates that an employer may terminate an employment contract based on major breaches of these standards.

It is recommended that company policies enumerate and classify every possible violation and outline the relevant disciplinary procedures and penalties. Experience with these cases has led Chinese judges to conclude that the success or failure of such cases often depends on how well the company’s policy handbook is written. What happens when an employee misses several days of work without notice, or is found watching movies on the job? Businesses without a comprehensive human resources policy to handle these situations are at significant risk if disputes escalate to arbitration or the courts.

The current Answer provides an effective solution for employers by clarifying that an employee who is otherwise in compliance may be terminated for major violations of workplace discipline and professional standards, and that this provision applies even when the violations are not severe. This provision is intended to bolster Employment Contracts Act §39.

Make sure that your employee handbook defines employee discipline and professional ethics and that the definitions are extended to cover your organization’s specific needs. In international business, local managers frequently encounter disputes over whether the employment contract may be terminated when it lacks a general provision for termination under these rules.

The appropriate manager should conduct a reasonableness analysis and review the local laws relevant to the specific behavior issue. If the employee terminates the employment contract prematurely and the remaining term was proportionately allocated to the value of a benefit, then the remaining portion of that benefit, or its entirety if already paid to the employee, may be canceled and clawed back. In practice, it is advisable for the employer to include a contractual provision that explicitly specifies this calculation.

In China, these are known as bonded service provisions and are most commonly used to require a minimum employment period in exchange for certain compensation benefits, such as commissions earned toward a housing subsidy or vehicle allowance. Under the Employment Contracts Act, parties are not permitted to agree to liquidated damages for early termination of an employment contract when the minimum service period has not been completed. Chinese regulators have made it clear that, in the context of employment contracts, a liquidated damages provision may not be used and that a bonded services provision must be employed instead. In the absence of such an agreement, the employer may either decline to provide any additional compensation or require that the employee repay a proportional amount of the pre-paid compensation.

A fixed-term employment contract remains valid even when an open-ended employment contract is mandated. The Rules provide that when an employee is eligible under the Employment Contracts Act to enter into an open-ended employment contract but is subject to an existing fixed-term employment contract, the employee may not request conversion to an open-ended employment contract. However, the employee may prove that the employer committed fraud, duress, or unconscionable conduct.

Numerous precedents have established that Chinese courts will not require continuing to offer non-fixed employment contracts after two fixed-term employment contracts have been concluded unless the employee specifically requests or agrees to switch to a non-fixed contract. In addition, an accumulation of 10 continuous years of employment may serve as a basis for entering a non-fixed employment contract.

The policy rationale is that employee and employer choice, or party autonomy, should be respected. Therefore, if both parties erroneously enter a temporary employment contract, the contract remains enforceable, and the employee cannot unilaterally change it to a non-fixed contract. However, the employee may argue that the fixed-term contract resulted from fraud or economic duress, which could render the contract unenforceable, and the employee bears the burden of proof to establish that it was procured by these means.

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

Establishing an attendance policy or timekeeping system is crucial for most businesses, and enforcing accuracy generally relies on a time clock system as a key compliance mechanism. Different types of violations of Chinese company policy can result in time theft, where an employee receives wage payments they are not entitled to.

In some cases, employees may leave the worksite shortly after clocking in or just before clocking out. In other instances, an employee might have a coworker record their attendance when they are unavailable.

Can an employer terminate an employment contract for disciplinary reasons due to faked attendance? Although there is no statute or regulation explicitly addressing the legal consequences of faked attendance, employers in China have successfully terminated employment contracts based on this misconduct.

An examination of how Chinese courts handle cases of faked attendance provides valuable insight into the judicial approach to such matters.

A good example of a situation where Chinese HR professionals and managers prevail in court is found in Xie v. A Corp from the Shenzhen Intermediate People’s Court. In this case, the manager reviewed security camera footage showing that Xie had not physically approached the time attendance machine, revealing that a colleague, Wang, had falsified the clock-in record. Management terminated Xie under the Employment Contract for falsified attendance.

Xie’s defense claimed that Wang had clocked in on her behalf without her knowledge or consent, but the court determined that Xie was aware that another person had clocked in for her and had participated in a practice prohibited by A Corp’s reward and penalty system. This policy was adequately publicized internally to employees and did not violate any laws. Consequently, the court found that Xie’s termination was conducted in accordance with the law.

Legal grounds for terminating an employment contract in China can be established based on the interpretation of precedents. Chinese courts have supported an employer’s decision to terminate an employment contract if the employer can prove that the employee engaged in timecard cheating.

The termination in such cases was upheld under the Employment Contracts Act § 39(b), which states that an employer may terminate the employment contract if the employee materially violates the organization’s rules or policies. Therefore, the employer must provide evidence of the timecard cheating as well as the relevant policy that justifies the termination.

If the employee has committed a serious violation of the law, then the Employment Contract may be terminated. The severity of violating business policy is a critical issue that must be proven, so time fraud must be categorized as a major violation of policy that provides a basis for terminating the Employment Contract with the employee; otherwise, the court may find the termination unlawful.

Business management may characterize time fraud as a dishonest practice that undermines the employer-employee relationship and constitutes a major violation of policy.

Ensure that your company’s policy management adheres to all procedural requirements. Under the Employment Contracts Act §4, policies must be adopted inclusively through a public notice process. In the Chinese context, employee handbooks must be adopted through the representative union process, as established by the Cheng precedent on November 26, 2015.

In that case, employer B implemented a policy requiring employees to clock in and out using a specific app but failed to secure the required feedback and consultation with the employees’ congress and labor union. Although Cheng occasionally failed to clock in, the court held that the termination was unlawful because the employee handbook and clock-in policy were not properly established and therefore were not binding on Cheng.

When establishing that an employee falsified their time records, the employer must first find evidence of specific actions by the employee that meet the criteria for falsifying time records set out in the company policy or other rules as formulated by the employee congress. These actions typically include being absent without recording the absence, providing inaccurate or deceptive time records to management, or having someone else clock in on their behalf.

Next, the employer must establish that the employee was actually absent from work. Generally, employers in China view an unexcused absence as the primary factor indicating falsification. For instance, if an employee secretly has someone else clock in for them while actually working in the workplace, this is not considered dishonest. Therefore, the employer should ensure there is clear evidence confirming the employee’s absence.

In typical cases where an employee falsifies attendance records, the employer relies on video surveillance evidence combined with witness testimony to prove that the employee was not at the workplace. However, a judge might not be convinced if there is a possibility that the employee worked undetected by the camera, exposing the employer to a significant risk of losing the case. Clear management rules and procedures, coupled with a rigorous monitoring program, can help address these weaknesses.

A recent Chinese court opinion in an employment dispute between a pseudonymous employer Company C and an employee surnamed Chen illustrates this point. The court held that employers who track attendance have a duty to maintain the integrity of those records. Company C attempted to show that Chen’s absenteeism was concealed by falsifying timekeeping records using video evidence. However, since this video was submitted to the employment dispute arbitrator after the fact and was not properly established as a business record, the employer failed to lay the proper foundation to make the evidence admissible, and the arbitrator refused to consider it. In conclusion, the trend of employees quiet quitting or lying flat in the workplace can be countered in a legally compliant manner by establishing comprehensive management rules and procedures to cover potential timekeeping fraud, thereby maximizing a business’s chance of prevailing in arbitration.

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

Chinese Law Overview on Employee Work Discipline and Company Policy Rules

The concept of disciplinary action under Chinese law is roughly equivalent to employment policies in the United States and serves as the foundation for evaluating employee misconduct. In this context, discipline refers to the minimum standard of behavior required by the Employment Contract that all employees must follow.

In a business organization, disciplinary action consists of rules designed to maintain order in production and operations so that the Employment Contract can be fully performed. These rules cover all aspects of teamwork, employment, and work-life balance and are intended to ensure that business productivity remains stable.

The Employment Act §3 provides that employees must complete their work tasks, improve their skills, implement safe and healthy working practices, and observe disciplinary action and professional ethics. The Employment Act §25 states that an employer may terminate an Employment Contract if the worker seriously violates disciplinary action or the employer’s rules and regulations.

The former Ministry of Labor issued a set of Explanatory Rules on the Employment Act, and §25(b) explains what constitutes a serious disciplinary action violation. These rules noted that such a violation is associated with the Enterprise Rewards and Penalties Rules and the Temporary Provisions on Terminating Employees for Discipline Violations, ensuring that culture rules from socialist state-owned enterprises apply to all workplaces. Although these Ministry of Labor rules have since lapsed, they clearly indicated that disciplinary action includes two types of rules and constraints on employee behavior. One type applies to industrial production and includes health and safety standards, technical operating guidelines, and process operational rules, while the other type pertains to everyday behavior, including attitudes toward work, punctuality, and responsibility.

A major difference between poor work discipline and company policy violations is that the right to terminate an employee for poor work discipline is provided under Employment Act §25, whereas termination rights for company policy violations are provided under the Employment Contracts Act §39. The Employment Contracts Act specifically excludes the Employment Act’s provisions on disciplinary action for basic employee terms.

About a decade later, the Chinese legislature redefined the concept of poor work discipline as company policy violations in §4 of the Employment Contracts Act. This change reflects the modern reality that employees work for organizations according to a company policy rather than a broad notion of work discipline. Today’s employers must address terminations for poor work discipline and company policy violations in different ways, with distinctions based on the applicable statutory provisions and methods of handling such cases.

Employment rules at a Chinese business can be enforced against employees even if they are not formally notified, provided that the rules are general obligatory principles. However, to enforce a specific policy or procedure, the business must have actually provided individual notice to each employee.

All employment rules and policies in China must be established in cooperation with the employees through a meeting of all employees. Most businesses instead establish a labor union, which has fewer statutory rights, while enforcing general principles does not require discussion with the employees. Current Chinese law does not contain many specific provisions for canceling employment contracts when an employee commits a serious violation of disciplinary action; instead, most of the details are provided by local judges and case precedents, with the requirements for company policy detailed in both statutory and case law. Therefore, enforcing general principles, such as a code of conduct, can serve as a basis for terminating employment without prior notification to the labor union or representative body, whereas terminating an employment contract for a serious violation of the company’s internal policy requires first establishing that the policy was developed through the appropriate process—usually involving a labor union—and that adequate notice of the policy was provided to the employees.

Generally, each province has its own local precedent addressing whether a termination is lawful when based on a serious disciplinary violation by the employee, which complements the general provisions in the Employment Act. A comparison of several local precedents reveals the different approaches taken by Chinese judges.

The Ningbo Court’s Decision Guide on Answering Difficult Questions about Employment Law Disputes (May 19, 2015, Section 8) poses the question of whether management has the right to terminate the employment contract for serious company policy violations in cases where the company has not adopted a company policy or the existing policy does not address specific instances of rule-breaking, such as absenteeism or multiple instances of fighting on the job. In cases where the employee is in clear violation of professional ethics and the circumstances are egregious, termination is lawful. Whether the circumstances are considered egregious should be determined based on the facts, evidence, social mores, and common sense.

The Shenzhen City Intermediate Court’s Judicial Adjudication Guidelines for Labor Disputes (Sept. 2, 2015) state that an employer is authorized to terminate an employment contract based on a serious company policy violation under Employment Act §25. This guideline serves as an authoritative interpretation of the law regarding termination for serious policy breaches.

The Beijing Municipality Superior Court and the Labor and Personnel Dispute Arbitration Commission’s Answers to Questions on the Application of Law to Labor Dispute Cases (Apr. 24, 2017) examine the situation where there are no explicit provisions in the company’s written rules and no agreed terms in the employment contract, yet an employee commits a serious company policy violation. The document addresses potential legal outcomes in such cases, implying that serious policy violations may still warrant termination even without clear contractual language.

Common causes of action for terminations in today’s China include ensuring that companies follow the legally required layoff processes and determining whether an employee’s dismissal was a proportionate response to serious violations of company policy or ethics. A handbook is required under Chinese law to establish company policy guidelines, as is generally expected worldwide, yet there are additional statutory requirements that allow management to discharge employees for serious policy violations even without such a handbook.

Chinese law, for instance, mandates under §3(c) of the Employment Act that employees comply with workplace rules (laodong jilü) and uphold ethical standards. In Ningbo, the court notably focused on professionalism—in light of China’s primary industry of international export manufacturing—and emphasized that a handbook is not necessary, thereby closing potential loopholes in the employment contract process. In contrast, Shenzhen courts interpret §39 of the Employment Contracts Act literally, which necessitates a handbook, while courts in Beijing, known for strict legal compliance and administrative efficiency, avoid loopholes by establishing a bottom line or minimum standards within employment contracts.

Common fact patterns in case law applying the Chinese employment law concept of material violation of employment discipline have emerged in several Chinese jurisdictions. Judges have issued precedents outlining that material violations typically involve issues such as poor attendance and physical altercations with other employees.

In the case of Shanghai First Intermediate Court, Ji Fengshan v. Shanghai Rixu Environmental Cleaning Service Co., Employment Contract Dispute [(2015) Shanghai First Appeal #496], the court found that Ji Fengshan became violent with a colleague during working hours, striking the colleague and causing an injury. The court held that this constituted a material violation of employment discipline based on the termination provisions in the Layoffs Rules and rejected Ji Fengshan’s claim for damages on the grounds of illegal termination, finding that the law and facts did not support recovery.

Ji argued that because he did not inflict serious injury on Mr. B, the penalty should be less severe than termination. However, the court rejected his argument, stating that violence in the workplace constituted a serious company policy violation and, therefore, justified the termination decision.

The court also denied Ji’s request for compensation for unlawful termination. Although the employee did not inflict a serious injury, the court ruled that management acted lawfully since complete on-the-job violence is a traditional rule within China’s workplace discipline norms.

In Liu Weili v. Henan Qing’an Chemical Hi-Tech Co., the court held that an employee must comply with their employer’s rules and industry professional standards. Qing’an initially approved a one-day leave request for Liu on June 27, 2012, but Liu later extended her leave by two months without approval, constituting absenteeism.

Liu claimed that after taking a day off, she asked Huang An for permission to return to work but could not provide any proof of having made the request. On August 3, 2012, Qing’an served Liu with a notice of employment contract termination by mail after more than a month of continuous absence, which constituted a major disciplinary violation; before terminating Liu, Qing’an notified the trade union of its decision as required by law.

Thus, the court found that Qing’an complied with the China Labor Code §25 and the Employment Contracts Act §42 when it terminated the employment contract with Liu due to a material violation of the employer’s rules. The court emphasized that the proper termination procedure under §43 was followed by serving Liu a termination notice in due process of law and that the employer fully documented the termination with the labor bureau. The court concluded that the statutory and procedural requirements for a lawful termination were met.

Punctuality constitutes a fundamental legal obligation for employees. In this case, Liu failed to apply for a leave of absence, which might have established that they were not in violation of their rights. A noteworthy aspect of this precedent is that even though the employer’s rules did not mention termination for absenteeism, the court still found that the employer was entitled to terminate the employment contract.

Case Preview: This employment case involved a violent labor dispute at LISEGA Pipeline Bracket Technology in Shanghai, where over 20 employees engaged in organized violence against management due to complaints about working conditions. Management terminated the employment contracts of Mr. Wang Haibin and several colleagues, citing a serious violation of disciplinary action. At major Chinese corporations, terminated employees often report being treated as if they have been ghosted by the company, which refuses to explain the situation. A similar incident occurred with Qualcomm’s China subsidiary, which was recently disciplined for this behavior, a practice often referred to as quiet firing.

Legal Reasoning: In this case, the quiet firing practices were not at issue. The judge began by confirming that the law requires employees to perform their job duties and comply with disciplinary action rules and professional ethics. The court found that the employees stopped working and abandoned their job roles without a valid excuse before leaving for another factory, where a fight broke out. The court was not impressed by the labor union organizers’ handling of the industrial action and concluded that the employees had violated disciplinary action rules.

Analysis of Layoff Compliance with Layoff Process and Company Policy Violations. Under Chinese law, a company policy can serve as a basis to terminate an employee, even if they are otherwise qualified, when they commit a serious violation of that policy.

According to the court’s statement, The Appellant and their colleagues left their posts and stopped working without a good reason, which is prohibited and contrary to general work obligations. The termination of the Employment Contract by the Appellee from the Appellants on the grounds that there was a serious violation of company policy and generally applicable professional ethical principles is made on an appropriate legal basis and is therefore supported by this Court. Therefore, the Appellant’s demand for compensation on the basis of a claim of unlawful termination of the Employment Contract is not based on fact, and is not supported by this Court. In the referenced case, the group of workers causing a ruckus was considered a mass incident under Chinese law. The employees failed to adhere to the appropriate schedule, and their disruptive behavior led to fights that interfered with normal industrial production at the worksite. The Court determined that these actions jeopardized social stability and order, which aligns with the specific harm associated with a mass incident under Chinese law.

The case of Luo Dongsheng v. Shenzhen Securities Services Ltd., (Guangdong Civil Appeal No. 7552 (2017)) is a good example of this principle. In this case, Luo Dongsheng signed an Employment Contract with Shenzhen Exchange Administrative Company, establishing an employment relationship in which he was obligated to perform work at the specified location and in the job role provided by his employer in exchange for wages.

During the term of the Employment Contract, his employer, Shenzhen Exchange Administrative Company, adjusted his job role because it was necessary for its business operations, and the adjustment was lawful. The case illustrates how employers may modify job roles within the bounds of legal and contractual frameworks to meet operational needs.

The court found that SZSE Administrative’s adjustment of Mr. Luo’s position did not violate the law. Mr. Luo was provided with clear notice of the new job role and position; however, he rejected the new role, and his failure to report to the new position constituted neglect of his duties. Luo was notified on May 10 about the position but had not reported by May 19, which amounted to seven days of neglect and a major disciplinary violation. SZSE Administrative stopped paying wages to Luo as of May 19, and the court found that his termination was both valid and supported by fact and law, therefore rejecting his demand for damages due to unlawful termination.

The retrial judgment from the preceding court found no error in terminating the Employment Contract as of May 20, noting that Luo refused to provide his services to the company and characterizing his refusal as a material breach of the contract warranting termination. The court’s review relied solely on Employment Act §25 rather than examining each employer’s rules, reaching the conclusion that terminating the Employment Contract was valid.

Chinese courts hearing a dispute over whether a termination was lawful focus on whether the employee violated the generally accepted rules that all employees must follow. The court examines whether the employee’s behavior breached these standards in a severe manner.

Under Chinese law, termination is only permitted if the employee’s actions meet a specific standard of severity, whether the violation involves generally accepted behavior or company policy. The court will analyze the employee’s specific job role, the nature of the actions, the degree of impact, and the community’s social norms to determine if the violation justified terminating the Employment Contract.

Distinguish between labor and work rule violations. In English translations of Chinese labor law, arbitrators often conflate discipline violations with work rule violations in case analyses. A more accurate translation would be to use professionalism violation instead of discipline violation to better reflect the intent of Chinese legal culture, while work rule violation should refer to any breach of the organization’s general operational policies.

It is recommended to use the duty of candor as the metric for evaluating professionalism violations. This category is inherently vague, but common law recognizes that integrity is fundamental to the proper functioning of businesses and that honesty is central to economic life. Additionally, the duty of candor requires individuals to make a good faith effort to pursue government policy objectives, particularly in labor contexts aimed at achieving a harmonious society.

Recall that the Employment Act of 1994 §25 has never been repealed, and it continues to provide that a business can terminate an employment contract with an employee if they commit a serious violation of workplace discipline or of their professional role. Therefore, when doing business in China there is an effective compliance strategy under today’s law by combining §39 of the Employment Contracts Act with the Employment Act §3 and §25, and setting expectations in the employment contract that the employee will follow all of the provisions.

An employee who commits a serious violation of workplace discipline, professional role, honesty and integrity, or public morality could be terminated under the authority of the Employment Act §25. A translator’s note is required to interpret the implications of public morality in a modern Chinese context. The term used, liangsu, carries connotations in modern China of following socially established norms to achieve harmonious living among the people. Generally, all Chinese labor law regimes expect employees to comply with internal policy rules, as is evident in the established precedents of the Japanese and Korean system, from which Chinese law borrows, where public morality is an integral part of the employment compliance culture.

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

In China, employment law disputes typically involve an employee claiming that a termination violated their legal rights. Managers in China should be aware of several termination types, including termination when the employment contract expires, termination during the probationary period, termination for violations of workplace rules or other disciplinary reasons, and termination where the layoff is not due to any fault of the employee.

A large portion of today’s employment law disputes involves disciplinary grounds for terminating employment contracts.

Layoffs in China are strictly regulated, in addition to the general principles regarding process and documentation. As a result, management often loses around half of the legal disputes related to layoff terminations. The following discussion examines how to effectively terminate an employee for disciplinary reasons, particularly for violations of company policy.

Chinese labor law has its roots in early Chinese culture, when Confucian thought began to dominate, and later evolved into what is now known as Legalism. Compliance with the law remains extremely important in modern China, and a common Chinese proverb, the law cannot punish everyone, reflects the belief that minor legal breaches may be tolerated. Generally, compliance with company policies is expected; more important is ensuring that policies are enforced properly within the legal framework. Legal disputes over terminations for policy violations often favor the employee, even when violations are clear, typically because management fails to meet the burden of proof. It is essential to fully document disciplinary actions and establish robust processes to successfully defend against any legal dispute over terminations.

Take for example a fictionalized case similar to actual precedents: Wang Xi began working in August 2006 as a restaurant manager for a food and beverage company, and in 2012 signed an open-ended Employment Contract. By 2016, Wang was no longer following the rules on moonlighting, and in October 2016, when Wang discovered that employee Yu had worked 9 hours in a single day, Wang deleted those 9 hours and instead added them to another day on November 1.

A subsequent audit of the restaurant on November 7, 2016, revealed that the timesheet had been falsified. Management confirmed with Wang that working hours were being deleted and shifted to comply with company policy. About a month later in December, the company terminated the Employment Contract on the grounds that Wang had violated employment policy, but Wang disputed the decision and instead pursued litigation, claiming a termination penalty under the Employment Contracts Act. The central issue in the dispute was whether Wang’s actions constituted a major violation that the company policy defined as warranting immediate termination.

Under §13 of the Interpretation of the Supreme People’s Court on Certain Questions of Law in Employment Dispute Cases, if an employer makes a decision involving discharge, removal, termination of an employment contract, reduction of pay, or a change in the employee’s length of employment that results in a dispute, the employer bears the burden of proof.

In a dispute over whether the employee’s behavior constitutes a major policy violation warranting termination of the employment contract, the employer must provide evidence that Wang falsified the employee’s time sheets, that the company policy clearly defines such behavior as a major violation subject to termination of the employment contract, and that the company policy was formulated and approved by the labor union or employee representatives and that Wang was informed of this policy.

At trial, the employer provided documentation showing that in 2009, and consistent with the Employment Contracts Act of the People’s Republic of China, a meeting was held with employee representatives and labor union personnel present to reach an agreement on the specific provisions of the Employee Handbook, which was published on the company’s website. The handbook’s chapter on work discipline categorized deceptive or dishonest acts, including falsifying or fabricating records or information, as a serious violation of internal rules warranting termination of the Employment Contract under the Employment Contracts Act or as otherwise provided by law.

The employer made material changes to its rules and policies at various times, which were also published on the company’s website. Wang acknowledged that he understood his obligation to check the website to stay informed of the latest company policies. The labor union provided a document titled Confirmation of Consent to Termination of Wang’s Employment Contract, in which it explicitly endorsed the termination of his contract by the employer.

The arbitrator found that the company had clearly established the facts and complied with the law in its process for terminating Wang’s Employment Contract, and as a result, denied all of Wang’s claims. In China, there is significant uncertainty regarding what a court will determine when management terminates an employee’s contract in accordance with company policy.

A key approach to minimizing this risk, as demonstrated in this case, is to establish a complete factual record detailing how the employee’s behavior violated specific provisions in the company’s rules and how the termination process complied with legal requirements. Employers in China should pay careful attention to these factors when building a case for this type of employment action.

Ensure robust procedures are in place to collect, authenticate, and retain evidence of employee misconduct. Chinese court precedents often show that management fails to support misconduct terminations not due to a lack of factual knowledge, but because evidence was not preserved. This represents an important best practice for foreign managers working in China.

The current legal culture places a high priority on being able to authenticate evidence by explaining the chain of custody and the circumstances under which it was collected. Since management typically cannot obtain a confession from the employee, focus on gathering substantial circumstantial evidence and retain the original copies. Additionally, maintain copies of all policies and regulations along with a log of their effective dates to prove the applicable rules at the time the misconduct occurred.

When using the employee handbook or documentation as evidence, these materials may sometimes conclusively establish alleged employee misconduct if the employee does not contest the facts. In many cases, however, the employee may deny the allegations, necessitating additional circumstantial evidence to prove misconduct. Reliance on third parties, expert analysis, or technology is advisable to obtain reliable, contemporaneous documentation of the employee’s actions.

Ensure accountability in employee rules and handbooks under Chinese law. In China, all employee handbooks must be enacted through a democratic process, and the rules established therein become enforceable under law, giving businesses the prerogative to enforce those rules against employees who violate them. To establish a foundation for enforcing a legally compliant employment contracts management system, an employer must implement detailed rules governing all human resources processes that comprehensively define all major categories of employment law noncompliance. In particular, the Chinese legal system requires that policies include explicit consequences for each type of event or condition that may occur (recall that a policy regarding overqualification is not considered debasing).

The rules and regulations must be created through a democratic process that involves the employees and are subsequently made available to them. Under the Employment Contract Act §4(b), the rules must be submitted as a proposal and reviewed by either the employee congress or a general meeting of all employees, where they are negotiated on an equal basis by labor union representatives.

Furthermore, documentation of these processes must be provided to the employees to serve as sufficient evidence for the court that an employee was terminated for cause.

The disciplinary process in China requires that the labor union receive a copy of the final termination decision. §43 of the Employment Contracts Act mandates that the reasons for the discharge of the employment contract be provided to the labor union in advance. If the employer violates a law, administrative regulation, or employment contract provision, the labor union may request corrective action. The employer must consider the labor union’s feedback and provide written notice of the final outcome.

Furthermore, Chinese judges have contextualized this statutory requirement in their opinions, explaining how it reflects the central cultural value of procedural justice. Terminating an employment contract without first notifying union representatives is always procedurally unjust.

Business management in China often neglects the obligation to notify the union in advance, especially when the union has little presence in the business. Generally, employment contract terminations must be documented, and a methodology should be established to ensure that service of process is achieved in all cases. The Layoffs Rules require that specific processes be followed to document that a proper effort has been made to serve process. Extensive research into Chinese labor dispute cases indicates that a vast majority of management lacks proper processes for ensuring service of process. Chinese law requires either the unlawful termination penalty or specific performance as a remedy for terminating the employment contract.

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

Fraudulent reimbursement practices among medical representatives and salespeople in China’s pharmaceutical industry have led to numerous employment disputes. Detailed analysis of these cases shows a significant impact on employment outcomes.

In an examination of 167 employment dispute case precedents involving pharmaceutical companies, 36 employees—representing 22 percent of the cases—were terminated for violating reimbursement policies. This finding underscores the importance of adhering to established policies within the industry.

Medical sales representatives in China frequently generate business results by converting falsified reimbursable expenses into cash. This cash is then used for entertaining clients or providing illegal kickbacks that may also financially benefit the employee.

Major Chinese pharmaceutical companies maintain internal policies that strictly prohibit this practice due to the significant compliance risks it poses with government regulators.

The Chinese legal system interprets this type of misconduct as a major violation of company policy due to its deceptive and unethical nature, warranting severe punishment. Chinese courts will enforce internal pharmaceutical industry policies that designate false expense claims as major misconduct and authorize immediate termination of the employee on a no-fault basis.

The court will enforce termination even if the employee contends that the amount was minor or insignificant, because false expense claims are deemed inherently dishonest and deceptive. It is this dishonesty itself that constitutes the major misconduct forming the grounds for termination.

Chinese employment law imposes a higher burden of proof on the employer than in other jurisdictions. The employer must prove any dispute involving the termination of an employment contract or a wage dispute. Management should ensure that it can factually substantiate the grounds for termination and that the action is a legally appropriate response to the employee’s misconduct.

In practice, Chinese courts require a complete, high-quality chain of documentary evidence that clearly shows what happened and effectively rebuts any alternative interpretations. For example, a discrepancy between the receipt and the credit card payment slip, mismatched receipt contents and the expense claim, or an alternative explanation provided by the employee could lead judges to favor the employee’s account over the employer’s version of events.

Another characteristic of fraudulent expense reports in China is that they are often highly covert. An employee will fabricate a full set of documents to lend plausibility to the claim; in addition to the receipt, the documentation may include credit card slips, meeting sign-in sheets, photographs, and meeting minutes, all of which may be falsified.

Fraudulent expense reports are a significant source of employment disputes in China, with employers often terminating employees for dishonesty, a decision that is frequently contested. A common dispute involves an employee who submits expenses based on false receipts for otherwise genuine costs. In such cases, the employee typically claims that the receipt was obtained from a third party without their knowledge that it was false. A typical example from contemporary China occurs when an employee pays with a QR code via WeChat or Alipay, and the restaurant owner issues a receipt through their accounting system.

Judicial reasoning generally holds that outside the context of intentional violations, an honest error in verification that results in accepting a falsified document may occur for a wide variety of reasons. In isolation, such an error is not sufficient for management to conclude that an employee committed expense reimbursement fraud. Instead, management should follow rules of evidence to prove the employee’s fraudulent intent by connecting the false receipts to the expense reimbursement violation. Management may attempt to demonstrate this fraud by showing that there are a significant number of fake receipts, that they appear consistently over a long period, that the total amount of the fake receipts is high, or that the employee is submitting more than one type of fake receipt. Collusion or working in concert with a third party may also serve as evidence of the employee’s ability to consistently procure fake receipts.

In the case of Wang v. CIIC, Shanghai Court of Appeal No. 01-10993 (2016), Wang was recruited by China International Intellectech Corporation (CIIC), an employer of record that staff-leases employees to other Chinese corporations, in May 2013, and on the same day he was assigned to a pharmaceutical company as a senior medical representative. In August 2015, the pharmaceutical company terminated Wang on the grounds that he had submitted numerous false expense reimbursements in serious violation of their compliance policies, after which CIIC terminated his employment contract. The employer obtained detailed proof of Wang’s falsification by commissioning an independent investigation of the receipts, and they were able to substantiate that the receipts were indeed falsified.

Takeaways for how to be successful as a manager in China include careful oversight of company expenditures and adherence to policy. Effective management at the pharmaceutical company established several examples: A receipt dated December 22, 2014 from Beijing Company A documented the purchase of 30 boxes of chocolates for 5,607 yuan, yet the employee actually bought shopping cards, which are explicitly prohibited by company policy. An audit report from the Beijing Local Taxation Bureau showed that four receipts from Beijing B Hotel and 16 receipts from Beijing A Hotel were inconsistent with the agency’s records and therefore could not be used for reimbursement. The report confirmed that refusing these receipts and submitting a report was authorized.

Additional discrepancies were noted when Wang submitted 70 receipts from Beijing A Hotel, which tax authorities confirmed did not include a purchasing organization, thereby requiring authenticity certification from the tax administration before they could be used. Authenticity certification was later obtained from the Beijing Chaoyang tax board on May 12, 2016. The tax board traced 86 fixed-price receipts to Beijing A Hotel and found that the hotel was not registered with the tax authorities and was not using a tax-controlled system to generate receipts.

Management identified Wang’s accomplices by visiting the merchants on-site and interviewing them, discovering that Wang had colluded with merchants who provided him with false receipts. The Chinese courts ruled that the employment termination was lawful and denied Wang any compensation.

One lesson learned from this case is that the employer succeeded where thousands of others have failed because it provided thorough evidence. The employer went beyond the typical approach by processing the receipts through Chinese government systems for authentication and by collaborating with the merchants to gather testimony regarding Wang’s collusion, which supported the conclusion that Wang acted with intentional bad faith.

This type of fake expense claim involves purchases made on official business that are documented with valid receipts; however, these claims violate the business’s reimbursement policy. Violations may occur because the purchase is prohibited, the receipt does not match the reason for the reimbursement, or the reimbursed amount exceeds the policy limits.

Chinese judges often excuse these fake expense claims when the employee accurately describes the circumstances and obtains full approval from the business. They consider whether the reimbursement pattern was accepted in practice by both the employee and management and whether no objections were raised over time, making a subsequent objection by the business unlikely to succeed in court. Employers should focus on establishing that reimbursement policy violations are not tolerated and that violations are enforced vigorously.

Type 3 involves misrepresenting key facts. Factual misrepresentation occurs when fundamental facts and documents modified to support a reimbursement request are falsified. This includes reporting expenses that were never incurred and issuing fake or irrelevant receipts. Chinese judges consider such misrepresentations the clearest indication of fraud and assign a very high level of subjective malice to them.

The courts tend to decide against the employee if the employer can establish a preponderance of evidence showing that the expense did not occur. Consequently, management should prepare a litigation evidence acquisition plan in advance that carefully pieces together the critical documentation necessary to prove that the employee falsified fundamental facts. A key element of this strategy is using a diverse variety of evidence to demonstrate the falsifications. In China, common techniques include checking the authenticity of receipts by accessing the certificate on the Chinese tax administration’s website through the QR code printed on the invoice; visiting service providers in person to verify the authenticity of hospitality, travel, transportation, or other entertainment expenses; and visiting medical facilities where pharmaceutical sales representatives claim to conduct professional education events to confirm the authenticity of the location and attendees.

A common situation involves managers and employees claiming that doctors attended an academic conference and providing an attendance list, only for it to be later discovered—by visiting the doctors directly—that those doctors never attended the conference. In such cases, judges typically uphold an Employment Contract termination. Another example occurs when a manager claims that an academic conference was held at a hospital and provides documentation to support the claim. An employer can verify whether the conference actually took place through a site visit. If the conference did not occur, the employer may prove that the employee falsely claimed expenses, which can lead to termination of the Employment Contract. Judges also frequently issue orders subpoenaing documents from third parties to conclusively establish the facts of a dispute.

In one leading case (2016) Su 0591 Minchu 107, the employer alleged that the employee had submitted falsified POS receipts. Because banks in China maintain detailed records of the exact transactions on bank card statements, the court ordered the employee to produce their bank card statement. When the employee failed to comply, the employer applied for a judicial investigation order to obtain the data directly from China Merchant’s Bank. The data established that 12 of the employee’s past POS receipts were falsified, leading the court to conclude that the employee had indeed falsified these receipts, and that the employer had lawfully terminated the Employment Contract. Another similar case is (2017) Su 01 Minchu 511, in which the court issued a judicial investigation order to the shopping center where the employee purchased the product. Data obtained from the third party demonstrated that the employee’s claims of purchasing catered meals were false. Generally, when required to prove fake documentation in China, applying to the court to issue a judicial investigation order is the most effective method to secure the necessary evidence.

Resolving disputes involving fraudulently claimed employee expenses can be challenging. In many cases, employees contest allegations of fraudulent behavior by arguing that a manager’s prior approval of an expense claim verifies its legitimacy and, therefore, negates any disciplinary violation. However, even if an expense was approved, this does not prevent an employer from disputing the legitimacy of the reimbursement if it is later found to be fraudulent.

A case that illustrates this point involves Mr. Jia, who signed an employment contract with a pharmaceutical company in September 2003 that extended through September 2015. Mr. Jia worked in Guangzhou, China, as a senior medical sales representative selling medical products to anesthesiology departments. In March 2013, following an internal investigation, Mr. Jia received written notice terminating his employment on the grounds of fraudulent expense reimbursement.

Proving false expenditures in Chinese courts: The Chinese courts require a business alleging falsified expense claims by an employee to provide evidence; a company cannot deduct amounts from an employee’s salary or impose discipline without conducting an investigation. To illustrate this process, consider the employer’s approach in one case. The investigation established several key facts about the receipts. The business activity listed on the receipt issuer’s license was always business or other services, not food services. The food expense item on the invoice was designated as dining service, which corresponded with its vague business activity category but was not as specific as one would expect from a restaurant invoice, meaning these receipts, although issued by a service business, were reimbursed as though they were from a restaurant.

An on-site investigation of the receipt issuer revealed that their registered premises lacked tables or a kitchen, casting doubt on any actual operation of a dining business. Additionally, the expenses were exclusively for meat dishes and did not include drinks or vegetables, which is unusual for standard meal arrangements, and some receipts were issued before the payment was made. Jia claimed that all of these receipts were for genuine business expenses, with company approval, thereby disputing any falsification.

The trial court held that for each reimbursement the employee provided meal receipts, point-of-service receipts, and a list of the dishes ordered. These documents corroborated one another and proved the authenticity of the employee’s dining expenses, having been approved during the audit process. The employer’s later claim that these expenses were fraudulent lacked a factual basis, and because no objections were raised during the audit, the previous acceptance of the expense claims is binding. Consequently, the court found that the employer engaged in unlawful termination of employment and must pay compensatory damages to the employee.

The employer appealed to the intermediate court, arguing that employee expense claims were first submitted to head office for approval using an electronic form. After approval, the physical documents were sent to the finance team, which reconciled them with the financial data. The financial team does not verify whether the expenses were actually incurred; instead, fraudulent claims are only detected through subsequent random audits.

In 2012, Jia was reimbursed ¥90,000 for meals using hand-written fapiaos from five companies that did not operate restaurants. The expense claim was approved through a thorough process by management in various departments.

During the appeal, the court required details about where the meals associated with the selected fapiao were consumed, but Jia stated he could no longer remember the location because too much time had passed. Jia argued that he was only required to obtain hand-written fapiaos, which generally lack the business qualifications of a restaurant license that consumers typically verify. He maintained that the receipts were authentic because they were approved by all managerial levels within the company and accurately represented the costs incurred. Management at the pharmaceutical company did not raise any objections regarding the reimbursement until about a decade later when the company underwent a round of layoffs related to a restructuring of the business.

On appeal, the higher court found that the company was conducting reasonable spot checks on its expense documentation to ensure that employees making reimbursement requests had actually paid and obtained the appropriate documentary evidence. By conducting these checks, the company discovered clear evidence that the reimbursement documents were falsified, which constituted a material violation of company policy. In this case, the company’s lawful objective was to reimburse employees for the cost of meals when attending meetings. The court noted that the policy of using only authentic receipts to reimburse actual transactions is standard practice at nearly all companies today.

The court also observed that reimbursement requests were honored by the company’s finance department after approval by several layers of management, based primarily on trust in the employee and a routine review by finance. However, the processes accepted by management and finance did not guarantee the legitimacy of the reimbursement requests. The employer ultimately regarded the conduct as a false expense reimbursement claim.

Based on the facts of the case, a Chinese court concluded that an employer may take action against an employee who used inadequate internal controls to secure reimbursement if the employer later examines the authenticity of the underlying transaction and determines it to be false. The court noted that if management suspects that an employee is fabricating a reimbursement request, the employer has the right to request additional documentation, such as details on business locations and the parties involved, in order to verify its legitimacy.

In this case, the employee claimed more than 90,000 yuan in dining expenses in a single year, and management considered the amount suspiciously high. They requested extra documentation describing the diners and providing a more specific receipt for the meeting, but the employee was unable to do so, and the claim was rejected. The court found that the employer’s internal controls over expense reports were adequate and established that an employer can claim that a previously approved reimbursement claim is falsified. The court’s opinion, when compared with newer precedents favoring employees, is likely to vary depending on how thoroughly the employer’s management and accounting staff review the reimbursement claim.

Fake reimbursement claims: Type I. Analyzing the basic facts often reveals fraud by the employee. A common example is the use of a fake invoice to support an otherwise genuine reimbursement request. Fake and altered receipts are common in China, and many businesses offer fake receipts as a service. Fortunately, the authenticity and validity of an official Chinese invoice can be verified online with the tax bureau. In some cases, this type of fraud slips past the finance team’s review due to negligence or ineffective organizational processes, and Chinese judges generally do not allow management to rely on such deficiencies as an excuse to avoid liability.

Judges recognize that employee dishonesty often reflects broader management issues. In some rulings, the court examines which party was more at fault and may allocate the majority of the liability accordingly. However, management typically cannot avoid liability solely because of a lack of competence.

The second type of employee fraud involves underlying legal facts and real receipts, but it violates the expense policy. This situation occurs when an expense falls outside the scope of the policy, even though a valid receipt is provided. When an employee has been deviating from the expense policy for an extended period and this deviation is implicitly permitted, Chinese courts may consider the organization’s expense policy modified. Consequently, if the business suddenly raises an objection to a reimbursement as fraudulent, the court is unlikely to sustain that claim.

The third type of employee fraud involves entirely falsified facts. Generally accepted accounting principles require that employees incur business-related expenses and provide appropriate receipts before reimbursement is requested. Normally, the employee must incur expenses for genuine business reasons, and the employer will then reimburse those expenditures. Even if the employer authorizes reimbursement based on the employee’s claim, that authorization does not ratify the fraudulent action. If it is later discovered that the employee did not actually incur the expense and provided fraudulent supporting evidence, the employer may terminate the employee for a material violation of the duty of good faith and company policy, which can be done unilaterally.

The problem is particularly common in China’s pharmaceutical industry, where bribery and kickbacks occur; however, similar issues can arise in any industry. Preventing fraudulent reimbursements begins with establishing workplace policies that include a clearly defined process and effective internal controls designed to detect unlawful behavior. Basic internal controls involve requiring management approval for all employee expense reimbursement requests and implementing procedures to verify the authenticity of receipts and receipts, for example, by checking receipt or invoice numbers on the appropriate local tax regulatory agency website.

To ensure there is sufficient evidence to prevail in an employment dispute and uphold a termination in court, the investigation into employee misconduct must cover a broad range of factors and create a clear chain of evidence. If there is a subsequent dispute regarding the veracity of the evidence during an employment dispute, the Chinese judiciary generally encourages the parties to apply to the court for further investigation and evidence collection.

19. How should employers respond to sexual harassment claims?

The Rights of Women Act, combined with the Rules for the Protection of Female Employees, provide claims and remedies for women facing sexual harassment. Women have the right to file complaints with their employers or the appropriate government agency to pursue administrative action against violators, and they also had the option to file a civil claim in the courts. §11 of the Rules for the Protection of Female Employees required employers to take steps to prevent sexual harassment in the workplace, but the rules did not specifically define what conduct constitutes sexual harassment or what a business entity’s legal liability should be, making it difficult for victims to enforce their rights.

The Civil Code now defines sexual harassment in §1010 as unwanted sexual harassment directed at others by using words, text, images, or physical conduct. Earlier cases have expanded this definition by extensively discussing what constitutes unwanted sexual harassment, and these cases hold that sexual harassment fundamentally involves degrading a person’s rights and dignity while including physical acts such as hugs, kisses, and incidental body contact, as well as lewd, lascivious, or suggestive oral, written, or visual communications.

Although this section of the Civil Code represents a major advance in Chinese law, it did so by repealing provisions of earlier legislation that viewed sexual harassment solely as a male problem. That earlier law was part of the Women’s Rights Act and the Special Rules for the Protection of Female Employees; in contrast, anyone can now bring an action for sexual harassment under the Civil Code as interpreted by the courts.

In the past, the legal risk from sexual harassment claims in China was generally low. However, the Women’s Workplace Protection Rules now explicitly require that employers prevent and stop sexual harassment of women at work. The Civil Code mandates that businesses take reasonable preventive, complaint, investigation, and enforcement actions to address sexual harassment in their operations.

Sexual harassment is no longer considered a private matter resolved between individual employees. The traditional Chinese business practice of maintaining harmony by being indifferent to conflict may now result in legal liability if management fails to act. Chinese courts can impose liability on businesses that pursue an investigation without taking the appropriate steps. A common practice is for a manager conducting a sexual harassment investigation to review an individual’s WeChat account, search their mobile phone, examine personal belongings, and review company camera footage. However, legal precedents have established that an employer who fails to maintain confidentiality during an investigation invades the parties’ privacy and commits defamation. Additionally, Chinese courts have held that terminating the employment contract of an employee accused of sexual harassment without a prior investigation can lead to a labor dispute claim.

Anti-harassment compliance strategy for businesses in China. Organizations should implement an anti-harassment policy and document a clear prohibition against sexual harassment in the workplace while establishing a process for receiving and addressing complaints so that employees who experience harassment can assert their rights and receive appropriate remedies.

Ensure that management understands its authority to investigate and that investigation procedures adequately protect employees’ reputations and privacy. Establish enforcement measures against harassers and define their impact on the Employment Contract; for example, state that engaging in sexual harassment constitutes a material violation of company policy, which may result in termination of employment without severance.

Chinese statutes require consulting with employees before establishing company policy. Specifically, the Employment Contracts Act §4 mandates holding a meeting of all employees to discuss the proposed rules and regulations, submitting a plan for comments, and engaging in negotiations on an equal basis with the labor union or employee representatives to determine which rules to enact. The business must then make a public announcement of all rules that impact employee rights and major decisions or provide notice to each employee.

Engage a qualified attorney to provide detailed guidance on achieving full compliance with this process while ensuring the enforceability of the policy, such as by updating the employee handbook. Provide comprehensive sexual harassment compliance training for managers and awareness training for employees using the applicable laws, rules, or standards against sexual harassment. Employees should fully understand what constitutes sexual harassment and how to assert their rights if harassment occurs.

Ensure that the company’s procedure for handling sexual harassment reports protects the privacy of both the accused and the victim. If the harassment involves unlawful activity, refer the matter to the police promptly.

Protect the privacy of the victim wherever possible to minimize additional harm related to the harassment disclosure, and provide supportive counseling when appropriate.

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

Lack of controls and poor oversight is common in China, and some employees may take advantage of these shortcomings to misappropriate company property. What measures can be taken to prevent embezzlement in a Chinese company, and how can companies investigate and respond quickly and effectively when such misconduct is suspected? This article provides practical solutions for compliance personnel to improve internal processes, prevent employee embezzlement, and protect the company’s rights and interests.

Under Chinese law, §271 of the Chinese Criminal Code uses the term abuse of office to refer to individuals who use their position of responsibility or authority to unlawfully convert an organization’s property for their own use. The term personnel is defined more broadly than the American concept of employees, and although some translations refer to this crime as abuse of position, it is considered equivalent to common law embezzlement. The offense can be applied if the value of the misappropriated property is sufficiently large; otherwise, the conduct may be punished as a violation of the company’s internal rules, civil law, or regulations. A business organization has the right to demand that the employee return any ill-gotten gains and, if the scheme has harmed the business in other ways, obtain compensation necessary to restore their original position. Management should be able to document and resolve incidents of embezzlement internally to ensure that there are no permanent losses.

Typical examples of employee misappropriation in Chinese business organizations include fraudulent expense reimbursements and providing side payments to other parties in exchange for transferring company property to an employee. Managers with purchasing authority may operate an external company that makes sales to the organization, and diversion of customers and business opportunities is also common.

Notably, the corruption and bribery case involving GlaxoSmithKline highlighted two common forms of fraudulent misappropriation. Executives arranged affairs with fake travel agencies to generate fraudulent receipts and diverted funds from income designated for continuing medical education to promote products, while also providing bribes directly to doctors through local agent service providers. Business leaders need to understand how various forms of misappropriation interact with China’s comprehensive statute that imposes criminal liability for mismarking receipts. The law applies liability if there are more than 100 falsified receipts or the aggregate amount exceeds 400,000 yuan. In the context of China’s ongoing digital tax transformation, the Public Security Bureau has begun pursuing cases involving falsified fapiao, whereas 20 years ago enforcement primarily focused on tax-paid VAT fapiao, and liability will be enhanced if fake special VAT fapiao that include fraudulent tax-paid certificates are issued. In a business environment, management typically detects employees submitting financial vouchers for the reimbursement of minor expenses for business travel or client entertainment, so the discussion here focuses on prevention in that context.

China’s Penal Code makes it a crime to possess counterfeit receipts, and the prosecutor only needs to show that the defendant had constructive knowledge of their nature in order to secure a conviction. This means that if management discovers an employee holding more than 50 fake receipts or receipts totaling more than 200,000, the employer is deemed to have constructive knowledge. Failure to take action to prevent the crime can expose the employer to criminal liability.

In a tax context, these fake receipts are most commonly used to reduce the amount of business income and VAT liability, which is also a crime. The appropriate remediation for a business that discovers fake receipts have been used in its tax filings is to file an amended business income or VAT return and remit the additional taxes owed. It is very important to make voluntary disclosure to the China tax administration about the issue, as this is more likely to prevent criminal liability and may reduce penalties.

An employment position combined with the misappropriation of property constitutes the crime of Employment Position Misappropriation. The Chinese Criminal Code § 271 does not expressly define several important criteria and instead merely sets the penalty for larceny. However, Chinese courts have applied consistent general principles to determine what constitutes the crime in the context of typical business activities.

In modern Chinese business organizations, this crime encompasses all personnel operating within the organization, whether or not they are employees. A hired or retained person is not necessarily required to have a written employment contract with the organization to hold an employment position, as one may have an employment relationship without a written contract. A person working for the company has an employment position if they lawfully wield authority over organizational assets due to their qualifications to perform a specific business function. The concept of a business role under modern management theory is therefore a functional description of how an individual can have an employment position under Chinese criminal law. Even if a person lacks the formal status of an employee at the company, the individual is nonetheless considered to be in an employment position if they have been delegated managerial authority over the organization’s assets. Typical examples of individuals with a lawful employment relationship with the organization, yet lacking a written employment contract, include temporary workers hired through a staffing employment agency, interns, outsourced personnel, retired but rehired personnel, and other kinds of informal working relationships.

Fiduciary positions are required. Traditionally, earlier Chinese law from the Republic of China formulated this requirement such that the defendant must use the convenience of their position, but that way of thinking is quite foreign to Americans. A more understandable approach is that the person committing the conversion was in a position of trust or had a fiduciary duty. The common factor in all these positions is that convenience results from dominant control, which in turn makes it easier to convert the property.

In China, merely taking property off the premises without authorization is considered theft, not embezzlement, which carries a harsher penalty. The property in question must have belonged to the organization or to an individual or entity involved in a consignment, bailment, or similar business relationship for goods in transit, storage, or under management. The party must have intentionally converted the property for personal, illegal use. Negligent or unintentional conversion to personal use is not considered a crime.

Addressing Embezzlement Under Chinese Law

China’s business law community recently implemented a rigorous anticorruption campaign, and business managers need to understand how the law defines embezzlement and how the courts handle such cases. The definition of embezzlement is applied to identify appropriate legal causes of action. In China, the phenomenon referred to as flying orders, where employees direct orders to third-party companies instead of the employer, is not categorized as embezzlement; instead, employers are usually advised to charge the employee with bribery, as the courts tend to consider the third party complicit in the crime rather than a conspirator with the employee who would themselves be liable for embezzlement.

In a typical commercial bribery scheme involving flying orders, a sales employee whose position receives orders may change the recipient company on an order to a business entity that they control, earning a significant profit from the price difference. From a business management perspective, the risk management process is straightforward; managers can contractually prohibit such behavior in company policies and agreements with sales employees. In another variant, the employee establishes a relationship with external businesses that are not under the employee’s control and receives a commission or rebate in exchange for referring the customer, instead of making the sale through the employer. Although no formal working relationship exists between the employee and the external business, the goods or intellectual property being sold belong to the employer and should be classified as embezzlement, even though Chinese courts tend to characterize this as bribery.

Major penalties under the Criminal Law are established in the China Criminal Code §271, which states that any employee of a business or organization who appropriates the organization’s property for personal gain by exploiting their position can be sentenced to up to five years in prison or detention. If the amount involved is substantial, the sentence is at least five years, and the court may, at its discretion, appropriate the convict’s personal property.

The threshold amount required to obtain a case number from the police or prosecutor to open a felony record is 60,000 yuan. This threshold applies to all common white-collar crimes such as bribery or embezzlement and is defined by the Interpretation on White Collar Crimes issued by the Supreme Court. If an employee at a company embezzles 60,000 yuan, forms can be filled out at the police station to report the crime and initiate a process in which the employee will be held criminally liable.

A relevant example of how a Chinese business can seek justice when an employee commits embezzlement is illustrated in Hunan case number (2019) 湘0502刑初113号. In that case, two employees conspired with the company’s purchasing manager to place orders for unnecessary products, which were then jointly resold, with profits split with the supplier. At trial, the prosecution used expert financial analysis and testimony to establish the amounts purchased from suppliers and the payments made, clearly illustrating how the embezzlement occurred. The court found that the employees had used their position within the company to unlawfully convert company property for personal gain, and they were consequently found guilty of embezzlement.

Corporations are generally unable to obtain solid evidence of embezzlement because they lack investigatory power outside the company. Often, employees collude with one or two individuals outside the company who retain records of what actually occurred, and these records constitute the best available evidence. In particular, Chinese embezzlers try to ensure that as much of the transaction as possible takes place in cash to avoid creating reliable records, and very often these colluders work together in a separate company.

In these cases, the Public Security Bureau’s detectives and investigators may be needed to establish the facts surrounding the embezzlement. The police will subpoena the organization’s financial records, obtain the appropriate bank account documents, and review all relevant tax filings. They may also pursue other channels that vary from case to case, such as sending a detective to collect a witness statement from a knowledgeable individual. Authorities will not accept the case unless strong preliminary evidence of the embezzlement is already in hand, so a preliminary step often involves retaining a law firm specializing in white-collar crime defense, financial statement auditors, or a private investigation agency to help acquire all possible preliminary evidence within the organization.

In civil tort litigation related to employee theft in China, claims often involve trade secret misappropriation. Employees may misappropriate significant company resources by exploiting access to confidential information such as a company’s client list or the contact list for its purchasing agents. The client list can be used to solicit customers, while the purchasing agent list may be used to solicit kickbacks. In either case, the employee may be subject to an injunction to cease the harmful activity and be liable for damages incurred by the company. It is important to understand that substantiating a trade secret claim relies heavily on maintaining detailed internal records and documentation, as well as having a clear idea of what success looks like in Chinese trade secret litigation.

In one example, before being sued, an employee formed a corporation, purchased goods at a low price from the employer, and subsequently sold those goods to the employer’s customers at a profit. The court found that the employee committed unfair competition by misappropriating the employer’s trade secrets and ordered the defendant to pay damages. When such facts arise, pursuing criminal prosecution against the former employee may be advisable, as the threat of a criminal conviction can lead to a more lucrative settlement. Specifically, the Supreme Court provides that if trade secrets are misappropriated and either the trade secret owner suffers at least 300,000 yuan in damages or the misappropriator receives 300,000 yuan in proceeds, criminal prosecution may be initiated.

Two common litigation strategies under Chinese law are to frame the grounds of a suit as including trade secrets or, alternatively, as alleging a breach of the duty of loyalty. Specific requirements exist in Chinese law to protect trade secrets, and meeting these requirements may be challenging due to both the unique demands of the law and the judicial approach taken by Chinese judges.

The Anti-Unfair Competition Act defines trade secrets as technical or business information that is not disclosed to the public, has economic value, is useful, and is protected by reasonable measures to ensure its confidentiality. The establishment of an internal company policy with measures in place to protect information is a key factor in determining whether it will be treated as a trade secret in court. Common practices to protect trade secrets include signing employee nondisclosure agreements, encrypting electronic files, locking paper files in a cabinet marked Confidential, and providing employee training on nondisclosure policies. Protecting customer lists as trade secrets is a significant challenge for businesses. According to the Anti-Unfair Competition Act Rules §13, customer lists may be considered trade secrets if they include details such as customer identity, address, contact information, transaction preferences, intentions, and other nonpublic information; a list containing only customer names and contact information, however, does not meet this threshold.

Practical Methods to Prove Trade Secret Damages Against Employees in China. Data concerning a specific customer or a small group of customers that includes only names and contact information is not considered a trade secret, but a consolidated dataset containing purchasing history and volume information would be. In addition to client lists, Chinese courts universally hold that a request for quote (RFQ) or request for proposal is a trade secret due to its selective nature and its distribution only to the intended business party, which is not available to the public. This process can generate an economic benefit for the companies receiving the proposal.

A substantial challenge in Chinese court litigation arises from the requirement to establish a specific monetary value for the damages incurred by the trade secret owner, and this difficulty is one of the main reasons for rejected applications for employee layoffs by government labor arbitration tribunals. Often, employees who purchase products at below-market rates from their employer claim that the price was approved by management, is not necessarily below market, or that other factors, such as quality control issues, justify the price. If an employee conducts business with distributors by referring the order for fulfillment through a third party, the employer must demonstrate lost profits. However, this claim can be countered by showing that the distributor offers faster shipping times or more favorable payment terms. Since it is generally difficult in Chinese courts to precisely establish lost profits even by expert analysis, courts typically award damages in an amount deemed fair and reasonable based on the unique facts of the case. To approach an accurate damage calculation where discretion is available, judges use financial data from several businesses in the same industry to calculate an average profit margin, and then multiply that margin by the lost turnover to determine the total amount of damages.

A common legal action in these situations is a breach of contract claim for violating an employee’s confidentiality obligations. China’s Employment Contracts Act §29 provides that both the employer and the employee must fully perform their contractual responsibilities, and §90 allows for enforcement of damages against an employee who breaches a confidentiality or non-compete agreement, causing a loss for the employer.

When an employee misappropriates trade secrets while under an Employment Contract, the employer can claim breach of contract and recover damages. Numerous court cases in China have resulted in damage awards under these circumstances. For example, in the civil case with appeal number 1860 (2015) before the Beijing Number 2 Intermediate People’s Court, an employee working as a sales engineer secretly established a separate company to divert sales orders from customers intended for their employer. The employer continued supplying goods through the employee at a lower rate, and the employee kept the price difference. The court applied Employment Contracts Act §3, which states that an Employment Contract made in accordance with law is legally binding and that both parties must fulfill their obligations. The contract required full performance, and any amendment, termination, or cancellation had to be conducted in accordance with the Employment Contracts Act, the Employment Law of China, and any relevant provincial or local laws, making any breaching party fully liable for the resulting loss.

This form of embezzlement typically involves a material violation of employee handbooks and policies and is often characterized as a serious violation causing significant harm to the business. As a result, management usually opts for immediate termination of the employment relationship. There are typically three equally valid legal theories for plaintiffs in an embezzlement case: a labor dispute, a trade secrets dispute, or an employment opportunity dispute.

Pursuing a labor dispute in China presents a major disadvantage because Chinese arbitrators are not independent from the local executive branch agency that appoints them. Therefore, it is preferable to pursue a trade secrets or employment opportunity dispute, which fall under the ordinary civil law courts. One issue with labor disputes is that, unlike trade secrets disputes modeled as tort claims, a labor dispute is generally considered a breach of contract, and Chinese judges will not award damages unless the specific amount can be proven. In contrast, the trade secrets dispute, as an intellectual property tort claim, can secure damages based on reasonable attorney fees, even when specific damages cannot be precisely determined.

Prevent employee theft before it occurs with an effective employee compliance and audit program. Employee theft can be extremely detrimental to the business. In many cases, such theft is carried out by executives who are adept at concealing their activities and destroying evidence, making it challenging to obtain proof. Management must therefore focus on deterring, detecting, and investigating suspicious activities to gather the evidence required for legal action.

Improving policies outlined in the employee handbook is a critical first step in enhancing both deterrence and detection of employee theft. The handbook should clearly state that any form of dishonest behavior—including conflicts of interest, fabricated expense requests, and the theft or misappropriation of company resources—is strictly prohibited, with violations resulting in disciplinary action and the possibility of having to make restitution. Employees often weigh the risks of engaging in dishonest activities against potential gains, so it is essential that they understand the detailed policies and consequences associated with such behavior. The handbook should also outline specific transactional compliance steps that employees are required to follow and designate a compliance manager to conduct random audits. For instance, employees might be required to sign an annual certification letter stating that they are not engaged in any prohibited activities and that they will promptly report any known violations. In the event of an investigation, employees should agree to cooperate fully with investigators to establish the facts necessary for pursuing legal proceedings.

Audit processes may be improved by enhancing information collection, providing effective training for staff, and empowering personnel to maintain a culture of integrity by reporting concerns and preserving evidence. An effective process for collecting relevant information about employees while respecting their privacy rights can significantly strengthen organizational compliance efforts. In China, for example, it is common to request a resume, emergency contact information, and address from new employees.

Senior management should provide regular compliance training so that employees understand which behaviors constitute integrity violations and recognize the potential legal consequences of offenses, such as embezzlement, which may include prison time in China. Chinese organizations typically maintain records of attendance for compliance training and retain training materials. It is important to establish a whistleblower helpline or similar process because internal reporting systems can provide an early warning of compliance issues. The integrity reporting system should be user-friendly, with a direct email address and telephone number available. Additionally, a formal organizational structure should be established to receive and investigate reports. In China, an anti-fraud committee or investigating task force is commonly used, with internal rules governing investigation procedures, methods of communicating with the whistleblower, and criteria for transferring cases to external counsel.

In vendor management, common forms of employee embezzlement include collusion with external vendors and the creation of secret companies to bill the employer. Employees with purchasing authority should not be solely responsible for selecting or approving vendor purchases, so each vendor’s background must be verified to ensure legitimacy. Additionally, periodic audits or reviews should be conducted throughout the vendor relationship to ensure that vendors continue to meet qualifications and pricing standards; these assessments may include surprise inspections of vendor premises, and vendor contracts should include a right-to-audit provision with non-cooperation resulting in termination of the contract.

In China, employees often commit embezzlement by submitting fraudulent receipts for reimbursement, a problem that arises when management does not establish adequate internal controls for the reimbursement process. Organizations should perform regular audits of employee reimbursement requests by thoroughly checking supporting documentation, and reimbursement requests should be approved by at least two managers.

Response Plan

In the event that employee embezzlement is discovered, the business should take immediate actions. First, recover the employee’s computer devices immediately to prevent any potential tampering with digital evidence, and place the employee on a leave of absence while the investigation is conducted.

Preserve and analyze the data by having a forensic image of the computer taken immediately by a qualified technology professional, or have an investigative services firm conduct a forensic analysis so that evidence is preserved. Additionally, if screenshots of a website are needed, have them taken by a notary. Finally, use an attorney to help collect evidence, implement systems to prevent future occurrences, and represent the business in any negotiations or legal actions; an outside attorney, as an independent third party, is free from internal dynamics that could compromise objectivity, and can assist with filing a police report if the misappropriation is serious enough to constitute a crime.

If tracing digital forensic evidence or cybersecurity issues is a factor, local private investigators are available to provide these services. China’s local private investigators typically offer professional assistance and are often former employees of various law enforcement agencies. Business process auditing and accounting expertise play a significant role in many Chinese employment crime cases, particularly those involving workplace embezzlement, where a manager assumes control of the employer’s bank account and transfers all the funds. In such cases, an auditor uses established managerial accounting principles to track these transactions.

Once an investigation is completed, the employee should be interviewed and given an opportunity to explain their side of the story. This step is important because China’s historical communist influence has resulted in an employment law system with unique characteristics; despite a dynamic private sector and the presence of Fortune 500 companies, Chinese employment law remains heavily focused on protecting employee rights during layoffs and does not follow an at-will employment model. If an internal investigation confirms that an employee engaged in fraud against the company, appropriate management actions supported by solid evidence are usually effective. In situations where the loss is minimal, many businesses opt to terminate the employment contract while reaching a settlement agreement with the employee to recover funds or claim damages. If management chooses to pursue litigation, a termination notice is served on the employee and a lawsuit or police report is filed in China to recover the funds. For many employment law issues that do not involve recovering money, such as workplace harassment or discrimination, a preventative approach focused on compliance is necessary. Generally, it is advisable to evaluate the potential for future claims and to implement appropriate compliance programs and training to minimize legal liability.

21. Termination following severe disciplinary violation

• 39 of the Employment Contracts Act states that an employer may immediately terminate an employment contract and is not required to pay severance if the employee seriously violates company policy, is severely negligent in their duties, engages in personal dishonesty or corruption, and causes significant harm to the employer.

This article clarifies how Chinese law has applied the Layoffs Rules regarding the standard of proof required for managers to establish a major violation of company policy.

The first case concerns an employment dispute brought by Zhao against a hotel management company. Zhao joined the hotel as a front office manager on April 22, 2015, and on October 22, 2019, the hotel served him a termination notice; the notice cited that Zhao had shared his computer username and password with others and falsified customer satisfaction survey responses. The hotel characterized this behavior as dishonest and in violation of the Employee Handbook and Progressive Discipline Rules. Zhao filed a lawsuit for wrongful termination and claimed the statutory termination penalty.

During the trial, Zhao admitted to sharing his password with five subordinates but testified that management was aware of the practice and chose not to take any action, noting that password sharing was common among employees. The employer presented evidence that Zhao had received copies of the Employee Handbook, Progressive Discipline Rules, and IT Security Policy, all of which were in effect at the hotel, and argued that these documents clearly defined password sharing as a major violation warranting termination. The court accepted the termination of the employment contract as a lawful exercise of business rights. [Case No.: (2020) Shanghai 02 Min Zhong No. 10462]

Another example is a labor dispute involving an investment company in which Mr. Chen was hired as an assistant sales manager in 2007. He was terminated in 2019 and subsequently took the case to court. During the trial, the employer presented internal audit records, signed statements from employees, emails, the employee handbook and acknowledgment form, and business plans from its parent company as evidence. This evidence was intended to prove that Mr. Chen committed two primary work rule violations: during 2017–2018, he gave gifts to clients without approval, and in 2015 he purchased products from distributors at an unreasonably low price without paying fair value.

The Chinese court noted a strong paper trail of documents processed by senior management that showed the gifts had been approved and found no evidence that the gifting violated company procedures. Although internal reports documented Mr. Chen’s failure to pay fair value for transactions with distributors, the court required additional evidence and ultimately found that the employer did not meet the burden of proof. The Chinese judges determined that Mr. Chen’s termination was unlawful. [Case No.: (2020) Shanghai Number Two Civil Court 6341]

The Supreme Court of China Interpretation No. 44 (on Employment Disputes) states that in employment disputes resulting from a termination decision, the employer holds the burden of proof. To prevail in an employment contract dispute based on a serious violation of company policy, it must be demonstrated that the company policy is valid and effective under Chinese law. Under the Employment Contracts Act §4 and Characteristic Socialism (also known as Article X of the Constitution), an important initial procedural step taken by Chinese courts is to determine whether the company’s policy was established through a legally sufficient and inclusive process. After establishing legitimacy through this process, there is an obligation for employers to notify employees of the policy and provide them with a copy and explanation.

Next, Chinese courts determine if the policy’s substance conflicts with or is pre-empted by existing law, and any invalid provision will not be enforced. In recent precedents, the law has ruled that company policy provisions are unenforceable if they require hazardous work under coercive conditions, discriminate against women, fail to provide reasonable accommodation during pregnancy, or authorize excessive overtime hours.

Chinese law requires that Employment Rules be adopted through an inclusive process that involves employees. If it is not demonstrated that this process was followed, the Employment Rules may not be enforceable against employees, even if an employee has signed an acknowledgment of the rules. In determining the validity of Employment Rules, Chinese judges consider factors such as the nature of the job role, how critical that role is to management’s business plan, the extent of harm caused by an employee’s violations, and the employee’s overall attitude toward the organization.

A common example of an illegal termination in China is a situation in which an employee’s violations are minimal, cause no harm to the business, and a less severe penalty is available under the rules. Many managers of multinational enterprises in China report that they are unable to hold staff meetings, even though such meetings are necessary to comply with Chinese law. The compliance strategy involves distributing the Employment Rules and any updates in writing, providing notice of a comment period, and then collecting employee feedback. Courts generally view Employment Rules that follow this process as having adequately provided for inclusivity and evaluate the reasonableness of the process on a case-by-case basis.

Comply with requirements to ensure employer policies remain binding and preserve evidence of employee violations. If disciplinary action taken under these rules is contested, the employer must prove that the employee acknowledged receipt of the rules, either by signing an acknowledgment of receipt or by using automated technology that tracks when a digital copy is read.

Avoid the practice of publicly posting internal rules in common areas, especially when major changes have been made. Instead, preserve all relevant evidence of any material violation of company rules sufficient to establish that a major disciplinary infraction was committed. In Chinese employment dispute trials, each party provides all of its evidence to the court and adjudicator at the first hearing, along with an oral statement of its position, and the adjudicator makes findings of fact based on the evidence presented. Documentation, photographs, witness statements, video surveillance, and attestations from information custodians are common methods to establish that an event occurred, so it is essential to maintain complete records of all relevant evidence relating to any alleged policy violation.

Chinese courts strictly follow the principle of natural justice by requiring that disciplinary action for an employee’s violation be taken promptly, and they do not allow an old violation to be revived later as grounds for further punishment. Judicial precedents in China have established that employers have a two-week window from the date the violation is discovered to impose disciplinary measures. If an earlier penalty or even a warning successfully addresses the employee’s violation, a second penalty for the same offense is generally disallowed. Although the Employment Contracts Act does not explicitly include a principle against double punishment, this concept has been adopted from Western legal traditions and is now applied habitually by Chinese judges.

For example, if a TEFL teacher commits a serious violation of company policy but continues to receive positive performance evaluations and raises for six months before being terminated, the delay is viewed as a waiver of the employer’s right to impose disciplinary action. In such cases, the manager’s decision to withhold immediate discipline in favor of recognizing the employee’s overall performance may prevent later termination on the same grounds. Chinese judges, influenced by the maxim “bad deeds will be known widely” (好事不出门，坏事传千里), often hold managers accountable for failing to address violations promptly. As a result, judges are unlikely to permit the revival of a previously waived offense as a basis for terminating an employee.

The legally required process for terminating an employee in China is set forth in Employment Contracts Act §43, which requires an employer to notify the union of the reasons for termination before terminating an employee. Although judges generally do not enforce this requirement as a prerequisite for termination, an employer should consider providing additional notice to the union after the termination occurs. In the Chinese judiciary, notifying the union remains an important procedural requirement.

Consider two example cases. One hotel provided an Employee Handbook, an Updated Progressive Disciplinary Action document, and an Information Protection Agreement as evidence for a termination; the documents defined sharing of usernames and passwords as serious misconduct with clearly outlined disciplinary actions. The employee argued that sharing usernames and passwords was standard practice at the hotel; however, the court determined that this position was inconsistent with the purpose of the employer’s rules and the normal expectations for information systems management, and the employee did not provide any evidence that such a standard practice existed.

In the case of the investment company, the employee acknowledged receipt of the employee handbook and the termination procedure was followed without issue. However, the employer did not have direct evidence of the alleged violation, such as an employee admission, nor did it have sufficient circumstantial evidence like a complainant statement or email record to prove that a violation occurred, and therefore the termination was deemed unlawful.

Under China’s current legal landscape, employers are advised to gather more evidence in human resources before terminating employment and to conduct a legal review to evaluate the strength of the evidence. In more complex situations, an internal investigation should be continued to collect additional evidence as appropriate.

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

As a business in China expands, it may face complex regulatory compliance risks if employees misuse their roles to obtain improper benefits. Management should mitigate these risks by understanding regulatory compliance requirements and implementing sound corporate governance practices in the Chinese market. Businesses need robust systems managed by individuals familiar with China’s legal landscape to control potential abuses.

This article provides an overview of methods to prevent employees in China from exploiting their positions for improper gains. It first discusses the legal regulations in China that address certain types of improper or illegal conduct, and then outlines best practices in corporate governance to help prevent these issues within organizations.

In China, the Employment Act, Company Law, Administrative Law, Criminal Law, and applicable regulations provide comprehensive coverage of how businesses handle embezzlement and malfeasance by their employees. The laws define these issues with specific elements for various causes of action and provide appropriate punishments or remedies.

The Employment Contracts Act outlines the process an employer must follow to terminate an employment contract in accordance with company policies. Management must establish internal rules and policies to lawfully address misconduct by ensuring that their approach is proportionate to the misconduct’s characteristics and severity, and that the definition of misconduct is comprehensive.

The Employment Contracts Act §39(c) provides that a major dereliction of duty or self-dealing that causes significant harm constitutes grounds for disciplinary termination of the employment contract by the employer. By law, the employer must terminate the employment contract when an employee’s self-dealing has resulted in major economic harm to the business organization. However, Chinese labor arbitrators and judges generally impose the burden of proof on the employer to establish that the employee engaged in self-dealing that caused major harm.

Chinese judges typically favor business organizations that successfully meet this burden of proof and have defined, through internal employment rules, the specific types of harm classified as major. Courts usually defer to these definitions but may conclude that the internal disciplinary system is overly strict if the minimum dollar amount for major harm is set too low. In the absence of specific provisions in the internal employment rules, Chinese judges exercise judicial discretion in determining what constitutes major harm based on the nature of the harm, the broader economic risks associated with managing a business of that type, the financial condition and available working capital of the organization, and the level of responsibility and role of the employee within the entity.

A company’s employee handbook or workplace policy can define specific types of misconduct under general workplace norms that are tailored to the business context, and it should enumerate prohibited conduct comprehensively. For example, a company operating in China can define conflicts of interest to include situations where an employee recommends a supplier with whom they have a close personal relationship or appoints a distributor or sales agent without appropriate authorization.

Even if there are no direct economic losses to the business, company policy may provide for disciplinary action for violations that cause no economic harm, which could result in constructive discharge. The Law on Business Organizations provides statutory duties of loyalty and diligence for officers by establishing that the company represents the primary stakeholder’s interest and that an officer may not obtain individual profits or harm the business by exploiting their position. Any personal interest obtained by an officer through such exploitation is attributed to the business organization and may be treated as a constructive trust imposed to prevent unjust enrichment from using organizational resources, usurping business opportunities, or circumventing non-compete obligations.

The disgorgement amount can be based either on the monetary gain achieved by the executive from their misconduct or on the losses sustained by the company. However, determining the appropriate basis and the specific amount to be disgorged can be challenging because it is necessary to establish either the amount gained or the specific company interest that was infringed upon by the executive.

The full narrative of the incident should be proven with reasonable certainty by preparing thorough documentation that includes all bank flows, relevant contract documents, and analyses demonstrating the causal connection. Different forms of misconduct may be associated with varying disgorgement amounts, depending on the facts of each case.

Approximately half of cases in China involve constructive or actual fraud using a business’s funds. These funds may be embezzled, transferred at above-market rates, or used for loans to third parties without charging adequate interest. In such cases, the constructive trust imposed by the Chinese court includes the principal amount as well as the applicable interest rate over the relevant period, with the interest rate calculation based on either the Loan Prime Rate or the specific type of transaction. Precedents also indicate that the constructive trust requires disgorgement of any profits obtained.

Executives caught violating their duties under a non-competition provision must disgorge compensation, equity interests, stock, and other profits received from the employer. Generally, the poor records maintained by Chinese businesses make it difficult to substantiate these amounts effectively. When an executive takes a corporate opportunity for themselves or starts a business that competes with the employer without authorization at a shareholders meeting, tracing the specific amounts involved is particularly challenging given Chinese business records. In such cases, China’s business regulations authorize third-party professionals, such as accounting firms, to audit financial data and reconstruct the tracing process for the court. When deciding the amount in these cases, judges may consider the profitability of businesses in the same industry and other financial metrics to determine an appropriate award.

These acts are usually penalized and fined by administrative law authorities because they constitute unfair competition under the Anti-Unfair Competition Law. A litigant would generally bring a cause of action under Chapter 2 of the Anti-Unfair Competition Law for trade secrets in cases where financial income is secretly received from external parties in exchange for employees’ services.

In cases involving minor misconduct not specifically enumerated in the statute, such as insider trading that does not involve actual trades, §2(i) of the Anti-Unfair Competition Law may serve as a catch-all provision by prohibiting any business activities that disrupt market competition and harm the lawful rights of other businesses or purchasers. Judicial precedents suggest that this broad application is appropriate. A Chinese judge typically begins with the proposition that clear boundaries must be defined between what constitutes unfair competition and the lawful freedom to engage in fair competition, and that the government should exercise its authority with restraint and humility.

Where other laws such as the Civil Code, Employment Contract Act, or Company Law could adequately resolve a case, the general provisions at the beginning of the Anti-Unfair Competition Law are not used as a catch-all for any type of commercial misconduct. Chinese judges apply the doctrine of primary jurisdiction, which holds that the more specific and directly applicable law should be preferred over general provisions.

The courts have established precedent that illustrates how judges evaluate whether a claim can be stated under §2 of the Anti-Unfair Competition Law. They consider whether other provisions of law or the Act expressly regulate that type of business conduct, and only after concluding that no other provisions are better suited do they proceed to analyze whether §2 applies. If no other provisions apply, the court will determine whether the business conduct occurred in a context of dishonesty or unethical practices, and if so, find liability.[8][9]

China’s legal system provides criminal penalties for long-term offenders. From the standpoint of deterrence against employee fraud, criminal law in China is considered the ultimate solution for regaining control over employee misconduct. The police have investigatory powers and can efficiently collect evidence, and they may also impose lengthy prison sentences that are believed to deter all but the most irrational wrongdoers.

The most common white-collar business crime charged in China’s criminal justice system is the crime of conversion. Under this offense, an employee, including members of the management team such as the CEO, appropriates property for personal use or holds it wrongfully if a financial threshold of ¥30,000 is reached. The core offense involves the unauthorized taking of property, and common scenarios include an employee who collects cash and pockets it while falsifying documentation to conceal the crime. Another common pattern is procurement fraud, where an employee forges contracts or creates agreements with significantly inflated prices or volumes, resulting in excess payments being made to a front company secretly controlled by the employee.

The evidentiary threshold for a conviction of embezzlement in China is quite high. Chinese law requires the prosecutor to establish the illegal appropriation intent element beyond a reasonable doubt, which typically complicates proving liability in such cases. If an employee simply appropriates and uses the business’s property without authorization, that alone is insufficient to prove the crime; it is necessary to demonstrate that the employee had a conscious intent to commit wrongdoing. A classic example is when an employee transfers funds from the business’s account to their personal account without authorization, yet owes the same amount of money to the business, constituting a debt collection matter that is treated as a civil rather than a criminal violation.

Conversely, if an employee makes personal purchases using the company’s payment card without authorization but without falsifying its intended use, this act is treated as an unauthorized funds transfer rather than embezzlement. The elements of the unauthorized funds transfer crime are defined in Criminal Law §272, which penalizes employees who exploit the convenience of their role to transfer funds to themselves or others under the following conditions: transfers of 50,000 CNY not repaid within three months, transfers of 50,000 CNY or more for profit-making activities, or transfers of 30,000 CNY or more used for illegal activities.

Under Chinese law, funds are misappropriated if they are used for personal purposes or lent to a third party without authorization. An investigation generally requires a documented trail that shows an employee transferred money or property to their own account or to the account of a financially related third party, such as a family member or friend.

An employee who takes corporate funds and deposits them into their private company is misappropriating funds under Chinese law. The offense is also established if an employee transfers funds to another company in their own name in exchange for a personal benefit. However, an employee who transfers money from the organization to another company without authorization, but does not receive any personal benefit such as a kickback, has not committed a crime, even if the transfer benefits another business organization that they control.

Under PRC Criminal Code §219, an employee entrusted with trade secrets and bound by a duty of confidentiality is guilty of a crime if they disclose, use, or allow others to use the trade secret. For an employee without such a duty, stealing trade secrets through theft, bribery, fraud, coercion, computer hacking, or other inappropriate means is criminal if the business suffers a loss of at least 300,000 yuan or if other major consequences arise. It is also a crime to unlawfully acquire trade secrets, even if they are not disclosed or used.

For example, in the first AI chip trade secrets case, Shanghai High Court Harmonization Case No. 176, the court valued the unlawfully acquired trade secret based on the reasonable royalty rate for licensing. In numerous recent trade secrets cases involving job hopping, if a new employer is aware that an employee unlawfully acquired trade secrets from a previous employer and then uses those trade secrets, both the new employer and the employee may be found guilty of conspiring to commit a trade secrets crime.

If an employee solicits or accepts money in exchange for benefits related to their position or in the course of business, §163 of the PRC Criminal Law prohibits this conduct. The employee shall not accept any form of commission fee for personal benefit, and the monetary threshold for prosecution is 30,000 RMB.

The statute of limitations ranges from five to ten years from the time the commercial bribery occurs, and the penalty is up to five years in prison. These provisions cover a wide range of potential gains; remuneration can include anything of value, such as tourist expenses, debt forgiveness, or short-term housing accommodations.

The 2024 amendments to the legal system now include several new white-collar crime offenses aimed at curbing dishonest behavior that had previously escaped the notice of prosecutors. Executives can now be imprisoned in China for practices such as funneling profits to a business controlled by a relative or friend, or for secretly establishing a personal business outside the company that diverts its clients. Prior to these amendments, corruption in private businesses that did not involve bribery had been largely ignored in the Chinese criminal justice system, and it became rampant. Legislators took notice of the problem when 65 members of China’s congress submitted requests for new legislation to address these crimes starting in 2013.

Crimes such as unlawfully benefiting friends and family, or operating a competing business, which were previously used to enforce integrity among state-owned enterprise management, are now being applied to deter employees from acting against the interests of their company. The changes officially took effect on March 1, 2024, under China’s 12th Criminal Code Amendments and are now being vigorously enforced nationwide. Chinese businesses have a new deterrent available to management to ensure that employees act in good faith, and reporting certain violations to the police may be an effective way to protect a company.

The crime involves using one’s position to provide illicit gain for friends or relatives. It is defined in China’s Criminal Code §166, which imposes liability on an employee who, while acting in the course of their job, engages in any of the following actions that cause significant losses to the business entity: entrusting the entity’s profitable business to a friend or relative; purchasing goods or services from a related party at an elevated price or selling to a related party at a depressed price; or providing substandard goods or services from a related party.

The Penal Code specifies that, under certain circumstances, engaging in these actions on behalf of a relative or friend is not illegal. Additionally, the Companies Act, as amended in 2023 §183, states that an employee who first reports to the Board of Directors or shareholders and obtains their approval based on a resolution is not liable for these actions.

The Chinese Employment Contracts Act includes separate provisions on competing business activities by employees, establishing both civil and criminal liability under different conditions. Civil liability applies when there is no significant financial harm to the business, and management may use it as a basis to provide notice and a hearing regarding any disciplinary action taken against an employee.

An employment contract may be terminated if the employee engages in dishonest behavior. For business activities that are very similar, the failure to disclose a conflict of interest may serve as grounds for termination. Criminal liability under §165 of the Penal Code may be imposed if an employee operates a competing business and causes significant financial harm. However, the revised Companies Act of 2023, §184(A, B) provides that if the employee notifies the board of directors about the proposed business activity and the board approves the activity with a resolution, the employee will not incur liability.

Our analysis of Chinese labor arbitration judgments leads to the recommendation of best practices for corporate compliance management in China. Ensure that the company policy includes detailed provisions establishing effective management practices and appropriate disciplinary measures, covering topics such as conflicts of interest, disclosure of trade secrets, and other unethical conduct. A typical Chinese company policy provides a blacklist of prohibited actions, including doing business with suppliers when there is a personal interest, secretly founding or controlling affiliates with related business, disclosing the company’s trade secrets without authorization, and receiving bribes by abusing a position. Concrete examples listed in the policy enhance its effectiveness.

Employees should be required to acknowledge the company policy by including it in the employee handbook and providing training, ensuring that they are aware of its provisions and the consequences of violations. When enforcing the policy, management should strictly adhere to all procedural requirements to avoid potential disputes and legal risks. Disciplinary actions should consider the specific circumstances and verify that a violation is material before proceeding. For example, minor conflicts of interest that do not materially harm the company can be addressed with a written warning, while serious unethical conduct or honesty violations that cause material harm to the business should warrant termination of the employment contract.

In this regulatory context, businesses must ensure policy compliance through aggressive action when investigating employees who raise red flags to provide a reliable basis for determining whether an employee has committed misconduct. Approaches include preserving contracts, transaction records, financial records, and approval documentation to ensure traceability. Additionally, regular disclosures should be maintained in each employee’s personnel file for potential conflicts of interest or related-party transactions, with special emphasis on transparency in vendor procurement and client business development. A second review should be conducted for any management decision-making involving transactions.

When suspicious activity by an employee is detected, managers should conduct an internal investigation, establish a full record, and preserve digital copies of key evidence—including transaction records, internal communications, and whistleblower complaints—to ensure that corporate policies are followed. Evaluate whether a violation of company policy has occurred, and organize and classify all evidence to establish a clear and complete chain of facts so that decision-makers have a sufficient basis for their conclusions. If an employee is found to have committed a severe violation, it may be appropriate to refer the matter to regulatory agencies or law enforcement. When preparing for employment arbitration regarding an employee who has committed a rights violation, maintain a complete factual record and document the economic damages suffered by the business, and file a counterclaim in the arbitration process to seek relief in the dispute. As appropriate, business managers in China may consider pursuing a criminal complaint if the offense constitutes a crime, even after completing a civil arbitration.

23. Can employees who quit change their mind?

Consider this hypothetical: an employee who submitted a resignation and then, one week later, wanted to withdraw it. The company should first consider what the employee is attempting to do, namely cancel the resignation, and note that human resources managers throughout China often encounter similar situations. To properly resolve these issues, management must understand the full set of legal rights held by both parties to the employment contract.

Chinese commentators refer to this as the employee’s statutory right to terminate their employment contract with 30 days’ notice. §37 of the Employment Contracts Act states that an employee may terminate the employment contract by giving written notice to the employer 30 days in advance, commonly referred to as the 30-day resignation right in Chinese HR circles. An employee exercising this right may leave the company at the end of the 30-day notice period, and the company has no authority to prevent their departure. In practice, while the employee is ethically obligated to complete a full handover and transition of responsibilities, there is no enforceable right to a comprehensive handover process.

What rights does the employer have? The employer has the right to confirm that it agrees with the employee’s withdrawal of their resignation, and the withdrawal is not effective until confirmed by the employer. Chinese legal precedent has identified several situations in which these rights and timelines are resolved. In one scenario, an employee provides 30 days’ notice to terminate their Employment Contract and the employer confirms in writing within those 30 days that the notice period is sufficient, resulting in the Employment Contract terminating at the end of the 30 days.

In another situation, an employee resigns and leaves without the employer’s consent. In a different case, an employee submits a resignation letter with 30 days’ notice as required and the employer provides written confirmation within those 30 days, leading to termination effective on the day of confirmation. If an employee terminates the Employment Contract immediately without serving the 30-day notice, this action is considered illegal, and since the Employment Contract has not yet terminated, the termination may be characterized as disciplinary in nature, rendering the employee ineligible for severance pay. Finally, when the employer confirms the resignation immediately after receiving it, the Employment Contract terminates immediately.

Chinese labor law provides that an employee may choose to abandon their resignation up until the end of the 30-day notice period and requires the immediate reinstatement of the employee if they have already completed the resignation process. Employers in China are not always aware of this rule and may expect the employee to leave at the end of the notice period, without realizing that the employee has the right to withdraw the resignation during that time.

The proper way for an employer to prevent an employee from unexpectedly retracting a resignation is to explicitly agree with the employee on specific dates for the 30-day notice period. For example, if an employee has already handwritten a resignation letter effective 30 days later, but the employer fails to confirm the dates and the employee continues working and effectively withdraws the resignation, Chinese labor lawyers believe that the employer still has an obligation to honor the employment contract and cannot force the employee to leave.

The law in China today imposes various duties on employers to ensure that individuals’ fundamental rights are respected. These duties are driven by policy interests aimed at upholding workplace human rights and supporting economic growth through talent mobility.

To ensure compliance, management in China should ensure that their staff fully understand and utilize these Chinese legal provisions. The examples provided offer insight into how to mitigate some of the most common resignation-related business risks.