End of the Line: Terminating an Employee in China (Part 1)

Heightened pressure in China’s labor market means that employers are commonly required to terminate employees to optimize business operations. Legally speaking, this is by no means easy, especially under the comparatively stringent regulations on terminating employment contracts since 2008.


Termination upon expiration

When seeking to terminate an employment contract, an employer should first check whether the contract term is soon to expire. A first fixed-term employment contract can be dropped upon expiration; however, compensation must be paid. If the contract term is not about to expire, then the employer must deal with a case of early termination.

Chinese labor laws—it is wise to note—mandate that an employee requesting an open-ended employment contract after a second fixed-term contract is entitled it.

Early termination

In China, there is no concept of “at will” employment as in some other countries. In cases of early termination, employers may only terminate as stipulated by relevant laws and regulations. Otherwise, it shall be deemed unlawful and may trigger a costly dispute and penalties.

Lawful termination

Termination through mutual agreement

This type of termination occurs when the employer and employee mutually agree to terminate the employment relationship. Generally, the employer provides severance payment to obtain his/her consent. The two may negotiate the date of termination, severance payment and any other necessary details. Under this circumstance, the agreed-upon severance, if not agreed upon in the original employment contract, will normally fall somewhere between the minimum legal severance and maximum compensation allowable by law.

Unilateral termination

If the employer is unable to reach a mutual agreement with the employee, then he/she will face a case of unilateral termination of the employment contract.

The employer must have grounds under at least one of the specified circumstances. If the employer intends to do so, it must notify the employee’s trade union (if applicable) in advance. The trade union may raise comments on the proposed termination, which the employer must consider and respond to, amending the termination plan as appropriate.

Depending on the grounds of termination, unilateral termination by the employer can be divided into two types—termination for cause and termination without cause.

Termination for cause

This refers to termination resulting from the fault or misconduct of the employee and takes immediate effect upon the employee’s receipt of a termination notice. It does not require the employer to provide severance payment to the employee and can be executed on any of the following grounds.

The employee:

  • fails to satisfy specified recruitment requirements during probationary period.
  • has substantially violated the labor discipline or internal rules of the employer (which are public knowledge to all employees).
  • has committed an action of serious dereliction of duty, and thereby caused substantial harm to the interests of the employer.
  • has additionally established an employment relationship with another employer which materially affects his/her responsibilities to the original employer, or he/she refuses to rectify the issue after it is brought to his/her attention by the employer.
  • through fault of his/her own invalidated the contract.
  • is subject to criminal liability.

Termination without cause

When an employee has committed none of the abovementioned faults or types of misconduct, the employer is still permitted to unilaterally terminate the employee under the following circumstances. However, the employer will be required to serve a 30-day prior written notice to the employee, or in lieu of this, pay the employee in the amount that he/she would have obtained as salary during the notice period. The outgoing employee is entitled to statutory severance payment.

The employee:

  • suffers an illness or non-work-related injury and is unable to engage in the original work or any alternative task assigned by the employer to him/her upon the conclusion of statutory medical leave.
  • is deemed incompetent for his/her position and remains so after receiving training or being assigned to another position.
  • and employer fails to amend the contract where a major change to the objective circumstances, under which the employment contract was originally concluded, making the performance of employment impossible.

Even if the employer satisfies one of the above circumstances, the following are legally defined as “blocking” termination.

The employee:

  • is suspected of having contracted an occupational disease and is waiting for diagnosis.
  • has completely or partially lost his/her labor capability due to an occupational disease or work injury.
  • remains within the legally defined medical treatment period for a non-work-related illness/injury.
  • is pregnant, on maternity leave or in the nursing period.
  • has continuously worked for the employer for more than 15 years and is less than 5 years from retirement.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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