China laws are notorious for the protection offered to the employees and provide highly limited grounds for dismissal of an employee without the consent of the employee.  However, this is not necessarily true when the Severance Fee is concerned, in particular for managerial employees with high salaries.

Under the Employment Contract Law effective on 1 January 2008, an employee will be entitled to severance pay if, among others, the employment contract expires; the employment is terminated due to that the employer is bankrupted, or has been approved by the labor authority for redundancy due to the difficulty in the operation of the employer.  Furthermore, an employee is entitled to the damages of a double severance pay if he has been wrongfully dismissed.  For the purpose of this article, we shall not discuss the various causes for termination in detail.

According to Article 47 of the Employment Contract Law, the Severance Fee shall be paid to an employee on the basis of the number of years the employee has worked for the employer by the rate of one month’s wages for each full year he worked.  Any period of not less than six months but less than one year shall be counted as one year.  The Severance Fee payable to an employee for any period of less than six months shall be half of his monthly wages.  The monthly wages of an employee shall be capped at 3 times the average monthly wages for the previous year of the local employees, which has materially reduced the amount of the compensation in practice for the managerial employee. 

The case study below is prepared to provide a straightforward illustration of the calculation above.  It is noted that the released average monthly wages of year 2014 in Guangzhou were RMB 6,187 according to Guangdong Human Resources and Social Security Bureau.

 

Alex

Bill

Employed on

1 January 2012

Current Salary

RMB 70,000/Month

Contract Term

5 years

Terminated on

1 November 2015

29 June 2015

Reason for Termination

Redundancy

Wrongful termination

Compensation

Severance Fee: RMB74,244

= RMB(6,187×3)×4

Damages: RMB 129,927

= RMB(6,187×3)×3.5×2

 

 

Allen

Bryan

Employed on

1 January 2012

Current Salary

RMB 5,000/Month

Contract Term

5 years

Terminated on

1 November 2015

29 June 2015

Reason for Termination

Redundancy

Wrongful termination

Compensation

Severance Fee: RMB20,000

= RMB 5,000×4

Damages: RMB 35,000 =

RMB5,000×3.5×2

As shown above, compared with the high salaries, the compensation offered to a senior employee under China laws is relatively low.  The senior employees in a company should therefore consider the compensation issue before entering into an employment contract.  In fact the courts in China tend to respect the free will of the employment contract between the employee and the employer in terms of compensation.  It is highly advisable for the potential employees with high salaries to negotiate the compensation and/or liquidated damages higher than the statutory compensation discussed above.