As previously reported here, employers in China must consider several costs when making employment termination decisions. In addition to severance pay as previously noted, employers should consider: accrued but unused statutory vacation days as well as compensation for non-compete obligations.
Accrued But Unused Statutory Vacation Days
In China, employers are required to pay daily salary for these days unless the employer permits the employee to use the vacation before the termination. In addition, Chinese law requires employers to provide statutory vacation available to the employee. Statutory vacation days can only be carried over if the employee agreed. However, if a terminated employee has any carried over statutory vacation day from previous year and the employee did not consent to the carryover, the employer must pay three times daily salary for each of such days. This can result in a significant cost to employers.
However, this cost can be completely avoided if the employer properly manages its employees’ vacation and strictly follows the rules.
Compensation For Non-Compete Obligations
Many employers choose to protect their assets by having employees execute non-compete agreements whereby they agree to refrain from certain employment activities in a restricted area for a certain period of time. Employers who choose to have their employees sign such agreements can incur significant risks if not careful. If employers want to enforce a non-compete obligation in China, an employer must provide monthly compensation to the employee during the restricted time period. Although employers can choose to waive a non-compete obligation, employers must notify the employee in writing of the decision to waive any obligations. This is a common misunderstanding among employers and exposes employers to potential risks. Employees can file a claim for compensation during the period after termination until the employer notifies him/her in writing of the waiver if the employee proves that he/she complied with the non-compete obligation during such period.
To avoid such risk, employers should include a waiver / enforcement notice of non-compete as a standard termination document to be considered in every termination for employees who have signed non-compete clause.