A document that certifies the cancellation or termination of an employment contract is known as a severance of employment certificate. Pursuant to Articles 50 and 89 of the PRC Labor Contract Law, if an employment contract between an employer and an employee is canceled or terminated, the employer must issue a document promptly certifying the cancellation or termination of the contract; if the employer fails to perform this obligation, it shall be liable for compensating the employee for any losses incurred therefrom. Apart from the aforementioned provisions, there are no further requirements stipulating how an employer is liable for compensation in any existing laws, administrative regulations or rules. This article analyzes through case study an employer’s compensation liability for withholding a severance certificate.

Case 1: 

When the employment contract between Company A and its employee surnamed Zhang terminated on 5 May 2014 in Beijing, the company refused to issue a severance of employment certificate to Zhang. Zhang was later employed by Company B on 7 May 2014, which offered Zhang a monthly salary of RMB22,000. For several times, Zhang asked Company A for his severance certificate but Company A stubbornly declined. That prevented Zhang from producing a severance certificate to Company B under his employment contract with the company. On 30 May 2014, Company B terminated the employment contract with Zhang citing the absence of his severance certificate. After that, Zhang was offered another job opportunity by Company C, which again refused to enter into a formal employment contract with Zhang because the latter could not provide his severance certificate. Zhang brought a suit against Company A, claiming a total of RMB113,034,48 yuan (RMB22,000 per month) in damages, which was calculated on the basis of his loss of income from 31 May 2014 to the date when Company A issued the severance certificate (5 November 2014). Taking in account the amount of the claim, the court handed down an award of RMB 40,000 in damages.[1]

In this case, the employee’s claim of damages from his ex-employer was based on the loss of expected income from his next employer. Although the evidence can well prove that the employee would not lose his new job but for the absence of his severance certificate, and the court agreed that the plaintiff did suffer losses, the plaintiff did not suffer any actual loss from performing services, because the plaintiff only had an expected interest in the job opportunities. In other words, the connection between the loss the employee suffered and the absence of his severance certificate is not complete or direct. The judge therefore used his discretion to award damages he thought fit and only partially supported the plaintiff’s claim.

Generally speaking, a worker often chooses to find another job after leaving his or her ex-employer. Under Article 17 of the Notice of Implementing the Labour Contract System effective on 31 October 1996, an employer, in recruiting employees, shall examine their certificates of employment separation, or other documents that prove there is no employment relationship between the employee and any other employer. Though employers are not obliged mandatorily to perform the duty of examining severance of employment certificates, and dual employment relationships are not prohibited at present by the Labor Contract Law, quite a few employers demand severance certificates from prospective employees. If the ex-employer does not give the severance certificate in time, the employee may lose a new job opportunity. Based on this causal link between an employer’s withholding of the severance certificate and an employee’s loss of a re-employment opportunity, the employee may claim compensation for losses calculated on the basis of his or her former wages or wages offered by the new employer.

Case 2:

In a labor dispute[2] in which Company A canceled its employment contract with Mr. Wang, an employee in Shanghai, Mr. Wang claimed damages from Company A on the ground that his ex-employer did not give him a severance certificate and complete the termination formalities, causing losses to him. Regarding the standards of losses arising from late completion of termination formalities, the court observed that Wang did not provide any evidence proving that he failed to be re-employed by other companies due to absence of employment termination material, and suffered any other losses beyond unemployment insurance benefits. The court ruled that “the losses of RMB 9,540 based on the standard of unemployment insurance benefits are not inappropriate.”

In this case, the employee failed to prove that he lost an employment opportunity because he had no severance of employment certificate. The court determined the loss by reference to the standard of unemployment insurance benefits. The reason that the court recognized the losses suffered by the employee by reference to the standard of unemployment insurance benefits is that there exists statutory “causal relationship” between unemployment insurance benefits and proof of employment termination. According to items 2 and 3 of Article 50 of the Social Insurance Law, “unemployed persons shall present the certificate of termination or rescission of employment relationship issued by their employer to complete unemployment registration timely with designated public employment service agency. Unemployed persons shall present the proof of unemployment registration and their identity document for collection of unemployment insurance monies from the social security agency. The unemployment insurance shall cover a period commencing from the date of completion of unemployment registration.”[3] Under the premise that the employee is entitled to unemployment insurance benefits in accordance with this Article,[4] the untimely issuance of proof of employment termination by the employer will inevitably result in the employee’s failure to enjoy unemployment insurance benefits, so the employee will obviously lose social insurance benefits.

These two cases demonstrate that employers may be liable for compensating for their failure to issue severance of employment certificates. The amount of compensation is often considered by reference to unemployment insurance benefits or the wages that the employees can reasonably expect from their next employers. The applications of these two standards are mutually exclusive and mutually complementary. Therefore, we suggest that employers issue severance of employment certificates promptly once they cancel or terminate employment contracts with their employees. This is not only to avoid the risk of potential compensation liability, but also represents fair treatment of their employees and decent termination of employment relationships.

Editor’s note: this article was simultaneously published on Chinalawinsight.com