The China Labor Contract Law came into effect on January 1, 2008.  It requires employment contracts to be in writing.  It further requires that an employer must sign a written employment contract with its employee within one month after the employee commences employment or the employer will have to pay the employee double salary until the employment contract is signed.  If a written employment contract is not signed after one year, the parties will be deemed to have entered into a permanent employment relationship (as opposed to a fixed-term employment).  Termination without a legally permitted cause is not allowed unless otherwise agreed by the employee at the time of termination.  The following is a summary of the legal grounds on which an employer may terminate an employee and the relevant compensation requirement (if applicable) under the Labor Contract Law.  

  1. Termination by Mutual Consent

Under any circumstances, the employer may terminate the employment contract with consent of the employee.  The employer may negotiate with the employee the termination date, severance payment and all other details they deem necessary.

  1. Termination for Cause

Under any of the following circumstances, an employer may unilaterallyterminate the employment agreement with an employee by serving a notice to the employee with immediate effect:

  • Employee fails to satisfy the specified recruitment requirements during the probationary period;
  • Employee has materially violated the labor discipline or the internal rules of the employer (which rules are public to all employees);
  • Employee has committed an action of serious dereliction of duty, and thereby caused substantial harm to the interests of the employer;
  • Employee has additionally established an employment relationship with another employer which materially affects the completion of his tasks with the first-mentioned employer, or he refuses to rectify the matter after the same is brought to his attention by the employer;
  • Employment contract is invalid due to the employee’s faults; or
  • Employee is subject to criminal liabilities.
  • In addition, the Labor Contract Law requires that when an employer decides to terminate an employee, the employer must notify the labor union (if any) of the grounds for such termination in advance.
  1. Termination without Cause

Under any of the following circumstances, the employer may unilaterally terminate the employment by serving a 30-day prior written notice to the employee, or paying to the employee the salary that he/she may obtain during the notice period in lieu of such notice:

  • Employee suffers from illness or non-work-related injury and is unable to engage in the original work or any other work assigned by the employer to him/her upon the conclusion of his/her statutory medical treatment leave;
  • Employee is incompetent for his/her position and remains incompetent after taking training or being assigned to another position; or
  • There has occurred a major change to the objective circumstances under which the employment contract was concluded, which has caused the performance of the employment contract impossible and the parties have failed to reach an agreement on the amendment to employment contract.
  1. Severance Payment

Except for termination for cause, the employer must provide a statutory severance payment of one month’s wage for each full year of service rendered by the employee.  Less than a full year but greater than six months shall be counted as one full year (half month’s wage for less than six months).  If an employee’s average monthly salary exceeds three times the average wage of all employees in the city where the employer is located, as published by the municipal government, the severance pay will be capped at three times the average municipal salary and the total amount of severance payment in this situation is capped at 12-months’ salary.

  1. Unlawful Termination

In the case of unlawful termination of the employment contract by the employer, the employee has two rights:  (a) right to reinstatement; and (b) right to damages.  If the employee does not require reinstatement or it is impossible for the parties to continue to perform the employment contract (sometimes decided by the court), the employer is required pay damages to the employee.  The amount of the damages shall be equivalent to twice the severance which would be payable by the employer if the employee had been lawfully terminated.