On 30 November 2016, China’s Supreme People’s Court released the “Minutes of the 8th National Court Trial Work Conference on Civil and Commercial Matters – Part of Civil Matters” (“Minutes”).

According to the Minutes, an employer may not fire an employee just because the employee was graded last in a performance evaluation or failed to win a “competition for positions”. Such unilateral employer dismissals will not be supported by courts and the dismissed employees may claim from the employer reinstatement or compensation for unlawful dismissal, i.e. may claim double the statutory severance.

The Minutes are a good reason to take a closer look at the limited options for dismissal of employees due to incompetence in China. What are the legal possibilities in the very common case that the performance of an employee is not up to the company’s expectations?

Statutory termination reason must be fulfilled

In China, any unilateral dismissal by the employer always requires at least one of the limited number of statutory reasons to be fulfilled. Dismissal at will, as common in some other jurisdictions, is not allowed.

The employee’s incompetence can constitute a statutory termination reason if certain mandatory conditions have been met. An employer may, with a 30-day written prior notice or by paying a one month’s salary in lieu of notice, dismiss an employee who

  • is incompetent and – cumulatively -
  • has remained incompetent after training or having adjusted his/her position.

Furthermore, if it is proven that an employee does not meet the recruitment conditions during the probation period, the employee can be dismissed with immediate effect.

A lawful dismissal due to incompetence, except the above-mentioned immediate dismissal during the probation period, leads to statutory severance payable by the employer to the employee at the time of termination. The exact severance calculation depends on the individual case and also on the local regulations at the workplace. Generally, one monthly salary needs to be paid as severance for each year of service, but with caps applying to the maximum calculation basis and to the number of service years to be considered.

In contrast, an unlawful dismissal due to incompetence can result in employee’s claim for reinstatement or a claim for double the statutory severance.

“Incompetence”

Based on older official explanations, an employee is incompetent under one of the following circumstances:

  • The employee fails to accomplish the tasks stated in his/her labour contract; or
  • The employee is unable to reach the productivity level of other colleagues doing the same type of job or holding the same position.

But the employer may not arbitrarily enhance the work standards so that the employee cannot meet them.

In practice, the above vague and at the same time cumbersome regulations make it very difficult to terminate the employment of an employee not meeting performance expectations. For example:

  • Often labour contracts fail to specify the employee tasks at all, or are not defined in a sufficient level of detail: then it cannot be proven that specified tasks were unaccomplished;
  • It is not possible to use the productivity level comparison where no comparable position exists, e.g. in case of a general (or other high level) manager, or in smaller companies with limited staff.

Even if it is possible to prove that an employee is incompetent outside the probation period, his/her employer must at first provide the employee with training or adjustment of his/her position for improvement. The employer can only dismiss the employee for incompetence if the employee remains incompetent after such training or adjustment has taken place.

Practical suggestions prior to the dismissal

The employer assumes the burden of proof in an employer dismissal. Based on relevant court cases the following actions may increase the chances of a legally valid dismissal:

  • The specific standards / evaluation procedures for and content of a certain job position of an employee should be precisely articulated in a validly signed labour contract with the employee and/or in relevant company rules or hand books; they must be validly adopted by complying with the statutory procedures;
  • The employee’s obligation to participate in performance evaluation and improvement training and to accept necessary and appropriate job adjustments decided by the employer, should be included in the relevant labour contract and/or company rules;
  • Outside the probation period, timely and detailed evaluation of job performance (including results) should be adequately documented and ideally signed by the employee;
  • Improvement training and/or adjustment of job positions (including results) should be appropriate and reasonable, and again should also be adequately documented;
  • If the employee does not sufficiently improve after such training or adjustment, other measures softer than dismissal (such as written warnings, amending the labour contract, mutual termination etc.) can be considered.

Dismissal process

  • The written unilateral dismissal notice should be carefully drafted to comply with all statutory requirements, including showing the dismissal reason; and
  • The trade union within the company (or otherwise the local trade union committee) shall be informed in writing about the dismissal ideally before termination, but latest before the employee has filed a lawsuit against the perceived unlawful termination. The inquiries and opinions of the trade union need to be answered in writing.