Key Takeaways:
- Types of termination scenarios under Chinese law
- Legal grounds for termination and severance pay
- Avoiding wrongful dismissal
Introduction
In China, the Labor Contract Law governs employee terminations. This guide provides essential steps for compliant and lawful terminations.
Types of Termination Scenarios in China
In China, employee terminations can occur under several different scenarios. Each scenario has specific legal requirements that must be followed to ensure compliance with Chinese labor laws. The most common types of termination scenarios are redundancy, misconduct, and incapacity.
1. Redundancy
Redundancy refers to the elimination of a role when it is no longer necessary, often due to business restructuring or economic downturns. Terminations due to redundancy must be handled carefully to ensure they comply with Chinese labor laws. Employers must provide evidence of the redundancy and consider alternative positions for the employee before termination. Redundancy requires detailed documentation to protect against wrongful dismissal claims.
2. Misconduct
Terminating an employee for misconduct, such as theft, fraud, or violation of company policies, is permissible under Chinese labor law. However, to lawfully terminate an employee for misconduct, employers must conduct a thorough investigation and provide clear evidence of the wrongdoing. It’s also essential to follow the proper disciplinary procedures, including giving the employee a chance to defend themselves. Without this, a termination could be considered wrongful.
3. Incapacity
Incapacity occurs when an employee is no longer able to perform their job duties due to health reasons or prolonged absence. Employers must follow specific steps when terminating for incapacity, including verifying the employee’s medical condition and exploring whether a reassignment is possible. Only after these steps have been exhausted can termination for incapacity be justified.
Each of these termination scenarios must be supported by documentation and proper legal processes to comply with Chinese labor law.
Grounds for Lawful Termination
Under Chinese law, employers cannot terminate employees at will. The Labor Contract Law specifies valid reasons for termination, including:
- Serious Misconduct: When an employee engages in activities that breach company policies or break the law.
- Incapacity: When an employee is no longer capable of fulfilling their job duties due to health or other personal reasons.
- Redundancy: When the employer can no longer sustain the employee’s role due to economic circumstances or organizational restructuring.
These are among the most common lawful reasons for termination. Employers must clearly communicate the reason for termination to the employee and maintain comprehensive documentation throughout the process to protect against legal claims. Termination outside of these valid reasons could result in claims of wrongful dismissal.
We’re here to help you on your journey to hire, manage and pay.
Wrongful Dismissal Avoidance
Wrongful dismissal claims in China can arise when an employer fails to follow legal procedures or terminates an employee without a valid reason. These claims can lead to significant legal consequences, including compensation payments to the employee or reinstatement. Employers must take the following steps to avoid wrongful dismissal claims:
1. Maintain Detailed Documentation
It is essential to document every step of the termination process, including reasons for dismissal, any performance reviews, warnings, or investigations that support the decision. This documentation serves as evidence in the event of a dispute.
2. Follow the Correct Legal Procedures
Termination in China requires strict adherence to the legal procedures outlined in the Labor Contract Law. This includes conducting investigations, issuing formal warnings, and providing the employee with an opportunity to respond to allegations, especially in cases of misconduct.
3. Comply with Notice Periods
Providing the appropriate notice period or offering pay in lieu is essential to ensuring a lawful termination. Failing to provide sufficient notice or compensation can expose employers to legal challenges.
By following these guidelines, employers can significantly reduce the risk of wrongful dismissal claims.
Notice Periods and Pay in Lieu
The Labor Contract Law in China requires employers to provide notice before terminating an employee. The standard notice period is typically 30 days, but this may vary depending on the specifics of the employment contract. In some cases, such as immediate terminations for gross misconduct, the notice period can be waived, but employers must still ensure they comply with all other legal requirements.
Pay in Lieu of Notice:
If an employer wishes to terminate an employee without requiring them to work during the notice period, they may offer pay in lieu of notice. This payment compensates the employee for the notice period they would have otherwise received. The amount should be equal to the employee’s salary for the entire notice period.
Providing proper notice or pay in lieu ensures compliance with labor laws and helps avoid disputes over wrongful termination.
Severance Pay and Long Service Payment
In China, severance pay is mandatory for most terminations, including those due to redundancy, incapacity, or the expiration of a labor contract that the employer chooses not to renew. The amount of severance pay is based on the employee’s years of service and their average salary over the 12 months preceding termination.
Severance Pay Calculation:
- 1 month’s salary for each full year of service.
- Pro-rated payment for employees with less than one full year of service.
Long service payments may also apply to employees who have worked for a company for an extended period. These payments are designed to compensate long-serving employees for their years of dedication to the company.
Accurate calculation of severance pay is critical to ensuring compliance with the Labor Contract Law and avoiding legal disputes.
Steps in the Termination Process
To ensure compliance with Chinese labor laws, employers must follow a structured process when terminating an employee. The steps below outline the proper termination process in China:
1. Document the Reason for Termination
Employers must clearly document the reason for termination, whether it’s due to redundancy, misconduct, or incapacity. This documentation is crucial for protecting the company in the event of a dispute.
2. Provide Formal Notice
The employer must issue formal written notice of termination, adhering to the required notice period. If immediate termination is required, pay in lieu of notice must be provided.
3. Calculate Severance and Final Compensation
Employers must calculate any outstanding wages, unused leave, and severance pay according to Chinese labor laws. These payments should be made promptly to avoid legal challenges.
4. Ensure Legal Compliance
Throughout the termination process, employers must ensure compliance with the Labor Contract Law. This includes adhering to the notice period, providing severance pay, and documenting the entire process.
How AYP Can Help
Navigating the employee termination process in China can be complex due to the various legal requirements involved. AYP’s Professional Employer Organisation (PEO) and Employer of Record (EOR) services are designed to help businesses manage employee terminations in full compliance with the Labor Contract Law. Our services include:
- Managing Terminations: From issuing formal notice to calculating severance, AYP ensures that the termination process is handled in accordance with Chinese labor laws.
- Minimizing Legal Risks: We ensure that terminations follow proper legal procedures, helping businesses avoid wrongful dismissal claims and other legal disputes.
- Handling Employment Contracts: AYP assists with ensuring that employment contracts are compliant with Chinese labor laws and clearly outline termination procedures.
With AYP’s expert support, employers can manage employee terminations in China confidently and legally. Contact us today to learn how we can assist with your HR and compliance needs.
