Sometimes, despite your best hiring efforts and management skills, things just don’t work out with an employee in China. But before you even think about saying “you’re fired” – stop right there!
Terminating employees in China is complex, highly regulated and often expensive. Get it wrong, and you could face costly disputes and hefty compensation claims.
Note: Before we dive into the specifics, it’s important to mention that the rules for terminating non-fixed term contracts differ somewhat from those for fixed-term contracts. For our purposes, we’ll assume you’re hiring your China team on fixed-term contracts, which is advisable in almost every case!
Types of Termination
The first thing to understand is that there are broadly seven ways to terminate an employee in China. Each has its own specific procedures, documentation requirements, and compensation rules.
Type | Notice Needed | Severance Required | Grounds for Termination |
---|---|---|---|
During Probation | 3 days | No | Poor performance, serious rule violations, fraud, criminal behavior, competing jobs |
Mutual Agreement | None | Usually yes | Agreed upon by both parties |
Immediate (For misconduct) | None | No | Major misconduct, criminal behavior, contract fraud |
30-Day Notice | 30 days | Yes | Poor performance after training, business changes, health issues |
Contract Expiration | 30 days before expiration date | Usually yes | Expiration of fixed-term contract |
Mass Layoff | 30 days | Yes | Reduction of workforce by either: – 20 or more employees – 10% or more of the total workforce |
Automatic (Company closure) | None | Yes | Company closure, bankruptcy, loss of business license |
1. During Probation (The Trial Period Exit)
What is it?
This is your easiest window for terminating employees in China. However, it still needs proper handling. This only applies during the legal probation period, which varies based on contract length.
When Can You Use It?
You’ve got six main reasons for termination during probation:
- Employee doesn’t meet job requirements
- Serious violation of company rules
- Fraud in employment application
- Poor performance (even after training)
- Taking competing jobs
- Criminal behaviour
Both sides have rights here. Your employee must receive their remaining salary and can challenge unfair termination. They can also quit with just three days’ notice during probation – read more about it here.
2. Mutual Agreement (The Safe Bet)
What is it?
Termination by mutual agreement occurs when both parties agree to end the employment relationship. This option is often the best for both parties as it helps avoid disputes.
Key Requirements:
- Must have a written agreement in Chinese.
- Should include compensation details if applicable.
3. Immediate Termination (For Misconduct)
What is it?
Immediate termination, also known as “summary dismissal,” allows employers to end employment without notice when serious misconduct occurs. This method carries significant implications and should be approached with caution.
When Can You Use It?
Immediate termination is applicable under specific circumstances, including:
- Major misconduct, such as theft or violence
- Criminal behaviour that affects workplace integrity
- Breach of contract, including fraud in the employment application
Key Considerations:
- Employee Handbook: You should have an employee handbook that clearly defines what constitutes major misconduct.
- Documentation: It’s crucial to document the misconduct thoroughly. This includes gathering evidence, witness statements, and any prior warnings given to the employee.
- Legal Justification: Ensure that the reason for termination is valid and aligns with labour laws. The employee has the right to challenge this decision, making solid justification essential.
- Immediate Effect: Employees terminated under this clause do not receive severance pay.
4. 30-Day Notice Termination
What is it?
This type of termination requires employers to provide a 30-day notice period, allowing employees time to prepare for their departure. This is a common route for performance-related issues or changes in company direction.
When Can You Use It?
You may opt for a 30-day notice termination for reasons such as:
- Unsatisfactory performance, even after training
- Health issues affecting job performance
- Organizational restructuring or downsizing
Key Requirements:
- Documentation: Prepare a written notice that outlines the reasons for termination. Keep a record of performance evaluations and any prior discussions that substantiate your decision.
- Severance Pay: Employees in this category must receive severance, which should be calculated according to local laws and company policies.
5. Contract Expiration
What is it?
When a fixed-term employment contract comes to an end, the employee can be automatically terminated.
Key Points to Remember:
- Notice Required: You must give the employee 30 days’ notice that you are not going to renew the contract.
- Severance Payment: If you decide not to renew the contract, you must still pay severance to the employee.
- Renewal Offers: If you offer the employee a new contract with equal or better terms and they refuse it, you’re not obligated to pay them any compensation.
6. Mass Layoff
What is it?
Mass layoffs happen when an employer needs to significantly cut their workforce — either by 20 or more employees or by 10% of the total workforce.
When Can You Lay Off Employees?
Mass layoffs in China are defined as terminating 20 or more employees simultaneously or reducing the total workforce by 10% or more. You can only do this under certain circumstances, such as:
- Restructuring due to financial issues.
- Serious operational difficulties affecting your business.
- Changes in how you operate that require workforce adjustments.
- Significant economic changes that impact job performance.
Steps to Follow
- Give Notice: Provide at least 30 days’ notice to affected employees and their labour union, including a clear layoff plan.
- Consultation: Listen to feedback from employees and the labour union about the layoff plan.
- File with Authorities: Submit your layoff plan to local labour authorities. They check for compliance but don’t approve layoffs.
Who Gets to Stay?
During layoffs, it’s best to avoid terminating employees with:
- Long-term fixed-term contracts
- Open-ended contracts
- Dependents who rely on their income
Severance Pay
You must provide severance pay, usually calculated at one month’s salary for each year of service.
7. Automatic Termination (Company Closure)
What is it?
Automatic termination occurs when a company closes its operations due to bankruptcy, loss of necessary licenses, or other significant business failures.
Key Considerations:
- No Notice Required: Employees are terminated immediately without notice.
- Severance Required: Organizations must still fulfil their severance obligations, which can be considerable.
- Legal Compliance: Ensure you are following all legal requirements related to notification of the labour bureau and proper compensation.
How to Calculate Severance Pay
Now that we’ve covered the major types of termination, let’s talk about severance pay. Fortunately, calculating it in China is quite straightforward.
Step 1: Use the Correct Formula
To calculate severance pay, use this formula:
Severance Pay = Average Monthly Salary x Years Worked
Step 2: Determine the Average Monthly Salary
- Last Year’s Earnings: Look at the employee’s earnings over the past year. This will be your starting point.
- If They’ve Worked Less Than a Year: For employees who have been with the company for less than a year, use their actual earnings for the period they worked.
- For High Earners: If the employee’s average monthly salary exceeds three times the local average salary, you need to adjust your calculation. Instead of using their actual salary, use the local average salary for your severance calculation.
Step 3: Calculate Years Worked
- Less Than 6 Months: If the employee worked less than six months, count this as half a year. This means you’ll calculate severance as half a month’s salary.
- 6 Months to 1 Year: If they’ve worked between six months and one year, count as 1 full year. This equates to 1 month’s salary.
Important Considerations
Salary Cap: If the employee earns more than three times the local average, remember that the maximum severance pay you can offer is capped at 12 months of the local average salary.
Final Thoughts
Firing somebody is never easy, and firing someone while working across eight time zones is even harder. That’s why we recommend hiring your China team through The China Desk.
If the day comes when you need to terminate an employee, we can help you out!
Contact us for a complete overview and let us handle the complexity of China employee management whilst you focus on your business goals.