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How to Calculate Severance Pay in China: A Guide for Overseas Employers

Countries with strong labor protections for employees will often have a requirement for severance pay, which is a post-employment payment in addition to the final salary, bonuses and other statutory obligations.  Even when an employer lawfully terminates an employee, severance will be paid unless there is some employee misconduct leading to the dismissal.

China does mandate severance pay following lawful termination for restructuring, contract expiration or mutual agreement between the employer and employee.  An unlawful termination (without cause) would result in double the severance amount being imposed or punitive compensation.

As a company with employees in China, you may want to know how severance pay in China is calculated so that you can plan for any anticipated terminations, and this article will give you those details.

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Calculating Severance Pay in China

The basic rule for severance calculation in China is one month of salary for each year of employment.  It is based on the employee’s average salary amount for the 12 months preceding dismissal.  Work periods of six months or more in a year will result in a full month salary, while less than six months equals one-half month’s salary.

Labor Contract Law January 2018

A new law in 2018 limited the severance amount to a maximum of three times the average month’s salary for all workers in a given location, even if the employee’s salary exceeded that amount.  Also, the total severance payout cannot exceed 12 month’s salary, meaning the annual calculation stops at 12 years of employment.  The law only applies to years of employment following January 2018.

Client Case: Mutual Severance Agreement

We had a client with an employee in China who initially wanted to know the minimum statutory severance due but then decided to enter a mutual severance agreement with the employee.   We let them know this was permitted as long as the amount was more than the statutory minimum, so they agreed to pay the employee 2 month’s salary as severance (based on the employee average for 12 months).

This is a common solution in China for severance payments and may include an agreement by the employee that accepting the higher amount prevents any type of post-employment legal claim.  A higher amount may be paid to avoid a potential dispute or where the reasons for termination are not strictly justifiable under statute.  However, some claims cannot be waived by law, including violations of minimum wage, overtime and unpaid benefits.

Do you need more information about China?

China’s labor laws are complex for foreign companies, and you may have more questions such as:

Is severance payment included in the final payroll along with all tax withholding and social contributions? 

Do the severance rules and calculations apply to expat employees as well as residents?

Can retention of employee equipment, such as a laptop, be included in a mutual severance agreement?

We address these types of issue for our clients with employees overseas, to ensure full compliance with employment, tax and immigration laws.  We make international employment simple.

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