How do you Terminate an Overseas Employee in China?

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.

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:

1. 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.
2. The issuance of the final payslip, and how to send it to the employee.
3. 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.