A major compliance concern for multinational companies is how to handle termination of overseas employees. Failure to follow local guidelines can have consequences for the company, such as fines, employee payments and even reinstatement.
This holds true in China which has a myriad
of rules depending on the circumstances surrounding the termination. Every employee in China must have an
employment contract, either open ended or fixed term, so that does give the
employee certain rights when that contract is being terminated.
If you are new to hiring in China, how will you know the proper termination process, notice periods and employee severance payments? This guide will give you an outline of the basic rules, but at some point you may need expert advice to avoid any issues with authorities.
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Termination Process in China
The actual termination process in China involves
the labor union to make sure that there are justifiable reasons, required
notice is given and severance paid. Even
where a notice period is required for a valid termination, the employer does
not have to directly give the employee a reason for the termination.
However, the employer does have to let the
labor union know the reasons to determine the right procedure and if the
termination is lawful. Employees in
China, either locals or expats, cannot be dismissed unilaterally without some type
of review. This is vastly different from
an ‘at will’ employment policy such as in the US, where an employee can be
terminated at any time and for any reason.
Termination Notice in China
The type of notice required will depend on whether the employment contract is fixed or open ended, and if there is a justified cause for termination.
With Cause
Termination with cause does not require any
notice to the employee, but it does need to fall within the category of
justifiable reasons.
Without Cause
In the case of a termination without cause,
30 days notice is required.
Fixed Term Employment Contract
For employees on their first, fixed term
contract, no notice is required, and the contract can be allowed to
expire. However, severance will need to
be paid.
Two Main Approaches to Termination in China
There are two ways that a termination can
occur, either through mutual agreement between the employee and employer, or unilateral
termination by either party.
Termination through mutual agreement
This is obviously the best for everyone,
where employer and employee can agree to amicably end the employment
relationship.
Unilateral termination
The employee can choose to end the
employment contract by resigning, but needs to give 30 days notice. If the employer terminates unilaterally, there
are further criteria and rules to follow for termination without notice or
severance payment.
This type of termination does require some
cause based on employee performance or misconduct, including:
- Lack of qualifications during
probation
- Rule violations
- Dereliction of duty
- Invalidated the employment
contract
- Criminal liability
Employees Who are Protected from Unilateral Termination
Because of the potential impact on an
employee when terminated unilaterally, there are situations that are protected
from unilateral termination. Examples
include:
- Loss of capacity to work due to
occupational disease
- The employee is ill or injured
and still under a medical care period
- Pregnant and nursing employees
- Employees who have worked 15
years or more, and are less than 5 years from retirement
Statutory Notice in China
If there are less severe reasons for the
termination, then a 30 day notice period is required to the employee, along
with severance under the following situations:
- The employee can no longer
perform their work following an illness or injury
- Employee incompetence following
training or re-assignment
- A change in circumstances since
the contract was signed that prevents agreement to a modification
Severance/Redundancy in China
When severance is required there is a
formula used to determine the amount, based on one month of salary for every
year of employment. In the first year of
service, six months or less will equal one-half month’s salary severance, and
more than six months equals a full month salary. Severance will also be paid in the case of
redundancy or mass layoffs.
Severance is also calculated based on
location and the average monthly wage of employees in the region, capping
severance payment at three times that amount.
Severance can be negotiated as well, if there is a mutually agreed
termination.
Terminating an Employee in China During a Probation Period
Probation periods may be included in the
employment contract, which brings up the question of termination during
probation. Probation periods range from
one to six months depending on the length of the contract term.
Even though the employee is on probation,
they are still within the terms of their employment contract, so the same
termination rules and notice period will apply for the employer. If the employee ends the employment during
probation, only 3 days notice is required.
Client Case Example of Termination Issues
One of our clients with employees in China
had terminated two employees, and were facing several post-employment issues:
- China requires an ‘exit certificate’ for terminated expat employees, and this can take several weeks to process post-termination. The employee cannot leave the country until they have this certificate.
- The issuance of the final payslip, and how to send it to the employee.
- Changes in income tax rates affecting final tax withholding.
These are just a few of the termination
challenges in China, and the employee’s departure should be planned
accordingly.
Do you need more information about China?
After reviewing these termination rules,
you might want more information, such as:
Can
the labor authorities prevent a termination without cause?
What
if the employment contract has a longer termination notice period than the
statutory 30 days?
What
are the employee’s rights to contest a unilateral termination?
Addressing questions like this is how we support our clients’ foreign employment, including tax compliance, running payroll and meeting immigration requirements. We make international employment simple.
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Looking to hire an employee in China? Get in touch.
The information in this article is subject to changes in local legislation.