Terminating China-based employees is difficult. Article 40(2) of China’s Labor Contract Law permits an employer to unilaterally terminate an employee, with severance, if the employee is incompetent and remains incompetent after training or assignment to a different position. In practice though, Chinese courts tend to be quite strict in applying this law and employers that fail to “check all the boxes” before a termination usually face adverse consequences.
Employee Termination Hypothetical 1: Employer and employee enter into a written employment contract in year 1. Employer provides employee with a written statement explaining its expectations and performance requirements for employee’s position. Employee signs that statement, but employee’s performance perpetually fails to meet employer’s expectations. Employer unilaterally terminates employee for “poor performance” and pays employee statutory severance: in this case, three months salary, plus one additional month’s salary in lieu of advance notice. Employee sues for unlawful termination.
How will a Chinese court likely rule? This termination will usually be deemed unlawful because the employer failed to generate good contemporaneous evidence of its employee’s failures to meet the job requirements.
Employee Termination Hypothetical 2. Same facts as above, except employer did yearly performance reviews and documented the results. These performance reviews indicated employee was poorly performing and employee acknowledged the performance reviews via signature. Then during the next 6-month period, employee did nothing to improve job performance and it became clear employee was not going to get any better. The termination notice in year three was the same: unilateral termination of employee with the same amount of severance for “poor performance.” Employee sees for wrongful termination.
In this scenario, the employer did a better job documenting employee’s incompetence but it will still likely lose. Employer will likely lose because it did not follow the law in making the termination decision as it did not provide employee training that might have led to performance improvements, nor did employer ever assign employee to a different position. For these reasons, employer will likely lose the wrongful termination lawsuit for failing to meet its burden of proof regarding the need to provide a failing employee with training or a different position.
Employee Termination Hypothetical 3. Same facts as above, except during the 6-month period before termination, employer diligently worked with employee to come up with a corrective plan for employee’s improvement. Employer worked with the failing employee on correcting work errors, closely monitored employee’s work progress, and provided employee with ample training. Employer also contemporaneously documented all of this in writing.
Will this employer prevail against employee’s wrongful termination lawsuit? Probably yes. But there are a few more things employer should have done to increase its chances. Generally speaking, if there is a workers union, the union needs must be consulted before a unilateral termination decision can be made final and failing to go through this step may subject an employer to liabilities for unlawful termination. Even assuming there is no workers union, there may still be additional requirements imposed by the local authorities, and those local rules must be followed as well.
Your outcome from your China employee termination decisions will, of course, depend on the facts, including where your company and your terminated employee are based. Note that even in the last hypothetical above, the multiple hoops with which employers must jump through to satisfy their burden of proof. This is why it nearly always makes sense for employers to do their utmost to secure a mutual termination agreement from any leaving employee.
Bottom Line: Mutual termination agreements are the best way to reduce your risk of being sued by a departing employee. If you cannot get your employee to agree to a mutual termination agreement, the next best thing is to be sure to do everything right in terminating your employee.
