Discontinuing employmenti Dismissal
Chinese law is much more protective of employees than the laws of many Western countries. Under Chinese law, only employees are given the right to terminate an employment contract without cause with 30 days' prior written notice (which will be reduced to three days' notice during the probation period), while employers cannot terminate an employment contract without cause. Employers can only terminate an employment contract based on certain specific grounds provided in the relevant Chinese labour laws and regulations.
Generally, an employer may legally terminate an employment contract on the following grounds.Termination by mutual agreement
An employment contract can be terminated at any time by mutual agreement between the employer and the employee. In such case, if the termination by mutual agreement is initiated by the employer, the employer will be required to pay statutory severance to the employee (see below for details on the calculation of statutory severance).Unilateral termination by employer without notice and compensation
An employer is allowed to terminate an employment contract without giving the employee prior written notice and without paying statutory severance if:
- the employee on probation fails to meet the employment requirements;
- the employee has seriously violated the employer's policies;
- the employee is guilty of serious dereliction of duties, corruption and causes the employer to suffer significant losses;
- the employee is at the same time working for another employer, which has seriously affected his or her performance of current work tasks assigned by the employer, and refused to rectify the situation after being requested by the employer;
- the employee used fraudulent or coercive tactics to obtain the employment contract or to amend the contract; or
- the employee is subject to criminal prosecution.
An employer is allowed to terminate an employment contract under any of the following circumstances, provided that it gives the employee 30 days' prior written notice or pays one month's salary in lieu of notice where:
- after undergoing medical treatment for a period, the employee, owing to illness or non-work-related injury, is unable to perform his or her original duties or other work as arranged by the employer;
- the employee is not competent to perform the work required and remains incompetent even after training or reassignment to another post; or
- an employment contract can no longer be performed owing to changes in the objective circumstances that were relied upon as the basis for the contract, and no agreement can be reached between the parties to amend the contract. Statutory severance is required to be paid in this case.
Notwithstanding the foregoing, employers will not be permitted to terminate an employment contract based on these grounds if:
- the employee has been exposed to occupational disease hazards and has not undergone a pre-departure occupational health check, is under medical observation, or there is reason to believe he or she has contracted an occupational illness;
- the employee has contracted an occupational illness or suffered a work-related injury while working for the employer and is confirmed to have wholly or partially lost his or her ability to work;
- the employee is suffering from illness or a non-work-related injury and is still in the stipulated medical treatment period;
- a female employee is pregnant, on maternity leave or breastfeeding; or
- the employee has worked for the employer for at least 15 years consecutively, and is less than five years away from legal retirement age (protected employees).
An employment contract will automatically terminate by operation of law under the following circumstance:
- the employment contract expires and is not renewed by the employer and the employee;
- the employee retires;
- the employee passes away, or is declared deceased or missing by a court of competent jurisdiction;
- the employer decides to dissolve; or
- the employer is declared bankrupt, its business licence is rescinded or it is ordered to close down in accordance with the law.
In the event of termination under point (a) (unless the employer proposes to renew the contract on the same terms or terms more favourable to the employee but the employee does not agree to the renewal), point (d) or (e) above, the employer is required to pay statutory severance to the employee.Calculation of statutory severance
As mentioned, an employer will be required to pay statutory severance to an employee under certain circumstances. The statutory severance equals an employee's average monthly wage (AMW) during the 12 months immediately before the termination date multiplied by the number of years' service with the employer. The AMW is capped at three times local average wages in the previous year (a fixed number published by the local government on a yearly basis). For example, the local average wage in Beijing in 2014 was 6,463 yuan per month and in Shanghai in 2014 was 5,451 yuan per month. The cap is not applicable for severance for service years before 1 January 2008. For any period of service of less than six months, it is rounded up to half a year; and for any period of six months or more, it should be rounded up to a whole year. For example, for the purpose of calculation of statutory severance, a service period of four years and five months will be deemed as four-and-a-half years, and a service period of four years and six months will be deemed as five years.
The statutory severance is merely a minimum amount required by law. In practice, in the event of termination by mutual agreement or massive lay-off, employers usually offer a higher severance to obtain consent and cooperation by employees.Notification requirements
Although there is a general requirement under Chinese law that advance notice must be given to the trade union in the event of unilateral termination of employment by employers, such a requirement has not been seriously implemented in practice as most private companies in China do not have a labour union.
After the employment termination, employers are required to issue termination notices to the terminated employees and inform them of their right to unemployment insurance benefits. Employers are also required to inform the social insurance agency of any terminations within certain days of their occurrence.ii Redundancies
Mass lay-offs are generally not permissible, unless the individual terminations fall under one of the grounds set forth in subsection i, above, or in the event of economic lay-offs (as defined below) where employers follow the statutory procedures.
An economic lay-off is defined by the relevant Chinese labour laws and regulations as a lay-off of either 20 or more employees or 10 per cent of the workforce for the following reasons:
- the employer is undergoing organisational restructuring pursuant to Chinese bankruptcy law;
- the employer is falling into serious production and business difficulties;
- the employer is undergoing a change of production, significant technological reform or change of mode of operation, and after amendment of employment contracts, there is still a need for lay-off; or
- the circumstances upon which the conclusion of the employment contracts are based have significantly changed and, as a result, the employment contracts can no longer be performed.
If an employer wishes to conduct an economic lay-off, it must give at least 30 days' notice and explain the circumstances to the labour union or all the employees, consider the opinions of the labour union or employees, and report the lay-off plan to the local labour authority. Notwithstanding the foregoing, protected employees cannot be laid off until the circumstances based on which they are protected (e.g., pregnancy or a stipulated medical treatment period) no longer exist, unless they agree otherwise.
Laid-off employees are entitled to priority in hiring if the employer re-engages staff within six months of the lay-off. In addition, certain categories of employees are to be given preference for retention by the employer in an economic lay-off, which include those who have relatively longer employment contracts with the employer; those who have concluded open-ended employment contracts with the employer; and those who are the only working member of a household and are supporting an elderly person or minor.
Laid-off employees are also entitled to statutory severance (see subsection i, above). Although the law does not require any enhanced severance payment in the event of an economic lay-off, the employer, in practice, may need to provide a greater level of severance benefits to obtain consent and cooperation by the employees and the labour authorities.