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Terminating Employees in China: Some Practical Considerations

By Gregory Sy

Due to increasing market pressures and other situation-specific factors, employers are often required to terminate employees in China. This article briefly outlines some of the issues that must be addressed by employers before and after employee termination, including matters to consider during the hiring of prospective employees, from the perspective of the employer.

1. Grounds for Termination:

a. Immediate Termination

An employer may terminate an employee without requirement for notice in the following situations:

  1. During the probation period, if the employee is determined to be unfit for the position;
  2. The employee materially breaches the rules and regulations provided by the employer;
  3. The employee is in serious dereliction of duty, graft or corruption causing substantial damage to the employer’s interests;
  4. The employee has established an employment relationship with another employer and that relationship affects the completion of his tasks and he refuses to appropriately remedy the situation after notification from the employer;
  5. The employee was fraudulent in concluding the labour contract; or,
  6. The employee is subject to criminal investigation.

Practical Considerations:

  1. As termination during the probationary period is virtually at the will of the employer (an employee is required to give a minimum of 3 days notice to the employer), a prudent employer will, in the employment agreement, select the longest probationary period under the law (labour contracts of less than 3 months: no probation period; 3 months to 1 year: 1 month; 1 year to 3 years: 2 months; and, 3 years or more or open-ended: 6 months);
  2. Employers should clearly (in writing) define the rules and regulations of the workplace and what, both specifically and generally, constitutes a serious or material breach resulting in employer’s option to terminate (this can be accomplished through the distribution of employment handbooks or other more extensive policy guides); and,
  3. Employers should carefully document any breach of the rules and regulations and serve written notice thereof.

b. 30-Day Notice

An employer must give 30 days’ prior written notice or payment in lieu thereof, if it terminates the labour contract under the following situations:

  1. The employee is unable to perform his original duties or re-assigned duties, after returning from medical leave or non-work-related injury;
  2. The employee is incompetent and remains incompetent after training or adjustment of position; or,
  3. There has been a major change in ‘objective’ circumstances which were relied upon in the signing of the labour contract, and the employee and employer are unable to agree upon the modified terms of the labour contract.

Practical Considerations:
  1. Document any and all performance, particularly when the employee fails to perform or underperforms; and,
  2. Provide training to employees so as to ensure they are updated with the skills required of their position.

2. Severance Compensation:

Severance compensation is due in a number of situations, which are summarized below:

  1. The employer terminates the employee under situations requiring 30 days’ prior written notice (as previously mentioned);
  2. The employee is terminated due to restructuring or difficulties in business operations;
  3. Termination of the labour contract is proposed by employer and there is mutual agreement with regards to the termination thereof;
  4. Expiration of a fixed-term labour contract (except where the employee refuses to renew the contract on terms equal to or better than that previously concluded);
  5. Termination of the labour contract is due to the revocation of the employer’s business license; or, bankruptcy.

Employers must pay severance, in the amount of one month’s salary for each year of service, with half a month’s salary for each partial year.

If the employee earns more than 3 times the average monthly wage of the locality, then the compensation will be capped at 3 times the average monthly wage and up to a maximum of 12 months.

Practical Considerations:

  1. Accurately calculate the severance compensation due and determine the ‘bottom line’ or the highest amount of severance compensation to be offered;
  2. Prepare and sign an agreement in which the employee waives or releases his rights to further compensation upon agreement of the settlement amount offered;
  3. Clearly define in the employment contract what documents and other properties of the employer are to be returned upon termination (notwithstanding any disagreements to the grounds of termination or severance compensation due); and,
  4. Related to Point 1: be firm with regards to the calculated ‘bottom line’ (if the ex-employee refuses to agree to the amount of severance compensation offered, be prepared to refuse further discussion and negotiation).

3. Limitations Period:

The limitation period is 1 year after the employee knew or should have known that their rights have been violated. However, where the dispute has occured under an existing labour contract, the limitation period does not start until the labour contract has expired or has been terminated.

Practical Considerations:

  1. Maintain on file all records, documentation and other forms of evidence for a suggested minimum period of 5 years, so as to ensure the presence of proper records in the event of a dispute.
Evidently, there are a number of practical steps which can be taken in order to ensure that business interruptions are minimized on termination of employees. However, as with many things in China, things are often more complex than they seem, though the best advice is simply (not unlike how we would act in our home jurisdictions) use common sense and carefully document all agreements/contracts, emails, written/oral communications, work product, and any other potentially relevant information before, during and after the employment relationship.

About the author:

Gregory Sy is an Of Counsel at Grandall Legal Group, a law firm in China. Mr. Sy is a corporate/commercial lawyer with a specialization in working with foreign companies in their investments into and concerning China. Gregory is involved in all aspects of their investment, from tax planning, corporate structuring, IP protection, due diligence, partner selection/negotiation, site purchase/lease, employment, and dispute resolution (excluding litigtion). Representative clients include the Consulate of the United States of America in Shenyang, the Embassy of Brazil, Bancomext, various publicly-listed companies (NYSE, LSE (AIM), DAX, BSE), along with numerous other SME's operating in a wide range of industries. You may contact Gregory at [email protected].


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