Navigating employee termination in China is a delicate and often challenging process. You may be faced with the need to sever ties with an employee while operating in China. Whether it is due to underperformance, misconduct, or company restructuring, terminating an employment relationship requires prudent management. It also demands strict adherence to the relevant local labour laws. Careful handling is all the more important in China, where employee termination has become difficult from a legal standpoint.
Employers in China, particularly foreign employers, face a multitude of complex and intricately worded local employment laws. As a result, compliance in this area is often prone to slip ups. Misinterpretation of relevant regulations or oversights can have far-reaching and costly repercussions, leading to reputational damage. To avoid potential legal pitfalls and disputes arising from wrongful termination, you should have a solid understanding of the workings of China’s stringent labour laws.
This guide will walk you through the permitted grounds for employee termination, including both termination for and without cause, as well as some common pitfalls to avoid regarding renewals of fixed-term contracts.
Table of Contents
Overview: Legal grounds for employee termination
In China, strict labour laws are in place to protect the rights of employees. There are only limited circumstances under which an employee can be legally terminated. Employers are required to demonstrate that any unilateral termination of an employee is justified based on statutory grounds.
China’s Labour Contract Law, which came into force in 2008, marked a significant milestone in labour relations. It was the first piece of nationwide legislation governing the formation, execution, and termination of employment contracts. Prioritising the protection of workers, the Labour Contract Law permits very restricted grounds for unilateral employee termination:
Termination for cause
Article 39 of the Labour Contract Law provides for the grounds under which employment can be terminated for cause. Termination for cause refers to the dismissal of an employee because of wrongdoing on the part of the employee. For example, an employee may be let go due to serious misconduct or a major violation of the terms of the employment contract.
Termination without cause
While, generally speaking, an employer can only dismiss an employee for cause, Article 40 provides for the specific circumstances under which termination without cause is allowed. This refers to a no-fault dismissal, where an employer unilaterally terminates an employee through no fault of his/her own.
Article 41 provides for the dismissal of staff through mass layoffs, which occurs when an employer is required to downsize their workforce. Specifically, where an employer intends to reduce the number of employees by 20 or more, or if the reduction constitutes 10 per cent or more of the total workforce, the provisions of Article 41 shall apply.
Termination upon the end of a fixed term contract
Article 44 stipulates that the termination of an employee is permissible when a fixed term contract expires. However, as we will discuss in the “Common pitfalls regarding renewals of fixed-term contracts” section further below, there are certain caveats that must be considered to steer clear of potential legal complications.
Termination upon bankruptcy, dissolution, or revocation of business licence
Under Article 44, an employment contract shall be terminated where:
- The employer is declared bankrupt in accordance with the law;
- The employer’s business licence is revoked;
- The employer is ordered to close down or dissolve their business;
- The employer decides to dissolve their business at an earlier date.
Termination for cause
According to Article 39 of the Labour Contract Law, an employer has the right to terminate an employee without prior notice under the following circumstances:
- The employee does not fulfil the requirements specified for the probationary period.
- The employee commits serious violations of the employer’s rules and policies.
- The employee engages in corrupt and neglectful behaviour that causes significant harm to the employer’s interests.
- The employee has obtained employment through fraudulent means, such as fraud, deception, or coercion.
- The employee is employed by another company at the same time, which significantly impairs his/her ability to fulfil his/her duties properly, and the employee refuses to remedy the situation at the employer’s request.
- The employee is convicted of a crime.
In the above circumstances, the employee concerned can be subject to immediate termination without receiving any severance payment.
A note of caution should be sounded, however. Where an employer terminates an employee due to gross misconduct, the employer carries a heavy burden of proof. This means that the responsibility primarily falls on the employer to prove the claim. The employer must prove that the employee’s actions were indeed severe enough to warrant such termination. The employer is, therefore, exposed to a higher risk of losing the case. For instance, in addition to establishing the employee’s misconduct, the employer must show that the internal set of rules or policies clearly states that such misconduct provides justifiable grounds for termination.
Termination without cause
In the specific situations outlined below, as provided for by Article 40 of the Labour Contract Law, an employer can terminate an employee without cause, i.e., not due to wrongdoing on the latter’s part. In this case, the employer must give 30 days’ prior notice or an additional month’s salary. The employee is also entitled to severance payment.
- The employee is unable to work due to an illness or an injury that was not sustained during the performance of work-related duties.
- The employee is incompetent for the role and remains incompetent even after receiving training or being assigned to another role.
- The objective circumstances have changed substantially, rendering the performance of the employment contract impossible.
Any downsizing of the workforce that involves the dismissal of 20 employees or more, or ten per cent or more of the total workforce requires the employer to provide 30 days’ prior notice to the trade union or all employees. Alongside the notification, the employer must also provide a thorough explanation and solicit their opinion on the matter. Upon careful consideration of the views of both the union and the employees, employers must file a comprehensive layoff plan with the local labour administrative body.
Article 41 of the Labour Contract Law stipulates that mass layoffs are only permitted if the employer:
- Has initiated bankruptcy proceedings;
- Is experiencing significant production or operational difficulties;
- Changes the mode of production or doing business, or implements a major technological upgrade, and despite amendments made to the employment contracts, the need for a workforce reduction remains; or
- The objective conditions have changed considerably, rendering the performance of the employment contracts impossible.
When determining who to retain, employers should give priority to employees who:
- Have entered into a fixed-term employment contract for an extended period of time with the employer;
- Have entered into an open-ended employment contract with the employer;
- Are the sole breadwinners in their families and need to support an elderly or young family member.
Common pitfalls regarding renewals of fixed-term contracts
Assuming there is no obligation for severance payment upon the expiration of a fixed-term contract
At first sight, it may seem that terminating an employee at the end of a fixed-term contract is relatively self-explanatory. The devil is, however, in the detail when it comes to severance pay. There is a common misconception among many employers that, if severance pay is not addressed explicitly in the employment contract, they are not obligated to pay. Whether severance is payable is determined by the regulations of the particular locality and the circumstances surrounding the termination.
Below are a few general guidelines to bear in mind:
- Where the employer declines the employee’s request to renew the contract, the employer is mandated by law to pay severance.
- Where the employer seeks to renew the contract with terms less favourable than the employee’s previous contract, and the employee rejects the new terms, the employer is required to pay severance.
Neglecting to provide a new contract
Where the employer fails to issue a new contract upon the expiration of the existing contract, and the employee continues to work for the company thereafter, the labour relationship will be deemed to be ongoing. Further, the employer shall be responsible for any consequences resulting from the absence of a valid employment contract.
Renewing for another term without any intention of keeping the employee on board for the long term
Entering into a subsequent term when the initial contract expires usually means that the employer has made a commitment to retain the employee for the long haul. According to China’s employment laws, an employee is eligible for an open-ended contract after two consecutive terms. In practice, however, an employee is deemed to have an open-ended contract in most of China upon renewal for a second term. This effectively means that the employer will be obligated to retain the employee until the mandatory retirement age – unless any of the grounds for termination applies. Therefore, it is very important to approach the initial contract renewal with utmost caution. An employment contract should not be extended beyond the first term unless the intention is to retain the employee for the long term.
In cases where the reason for termination is not covered by grounds mentioned above, an agreement must be reached by both the employer and employee. Generally, an employment contract can be terminated by mutual agreement at any time. Where the employer initiates the termination process, the employee is eligible to receive severance payment. It is not uncommon for employers to offer extra financial compensation to employees to secure their consent for termination. There is no prescribed limit on the amount of money that can be provided in such cases.
As mentioned in the “Termination for cause” section above, employers face a heavy burden of proof to prove their claim. In the case of termination on grounds of poor performance, employers can also be at risk of being sued for unlawful termination. In order to establish the employee’s incompetence, it is necessary to provide a substantial and credible body of evidence. Even if the employee’s below-par performance is well documented, there must be evidence to demonstrate that remedial training was offered to the employee, or that the employee was assigned to a different role. Hence, it is in the best interest of the employer to conclude a mutual termination agreement with the employee. By doing so, the likelihood of a legal dispute arising from wrongful termination can be greatly minimised.
Circumstances where an employee cannot be dismissed
According to Article 42 of the Labour Contract Law, there are certain types of employees that cannot be dismissed. These are employees who:
- Engage in work-related operations that pose occupational disease hazards and have not undergone the necessary health checks before leaving their position;
- Suspected of suffering from occupational diseases and are currently undergoing medical diagnosis or under medical observation for such conditions;
- Have either completely or partially lost their ability to work after contracting an occupational disease or sustaining a work-related injury;
- Are currently on the statutory prescribed leave to receive medical treatment due to illness or a non-work-related injury;
- Are pregnant, on maternity leave, or in the nursing period (from childbirth until the child’s first birthday);
- Have been working for the employer for 15 consecutive years and are only five years away from reaching the statutory retirement age;
- Are otherwise legally protected from dismissal.
What CW can do for you
At CW, we understand the complexities and challenges you may face as a foreign company when it comes to employee termination in China. With over 30 years’ experience and a well-established presence in Shenzhen, Guangzhou, and Shanghai, our team of seasoned professionals can help you navigate the host of local employment laws and regulations.
Well-versed in the local compliance landscape, we provide comprehensive and holistic support throughout the entire termination process. In addition, we ensure that your company complies with all legal requirements, while handling employee terminations in a legally sound and sensitive manner. We can help you mitigate the risk of non-compliance and costly legal conflicts arising from wrongful termination. Our utmost priority is to safeguard your company’s interests and reputation.
Contact us to find out how we can help.