China: Beijing HR Bureau Warns: Employers Cannot Use “Trap Clauses” in Termination Agreements
Under Article 50 of Employment Contract Law of People’s Republic of China (the “Employment Contract Law”), an employer shall pay severance in a lump sum upon terminating the employment relationship. In this case, Mr. Chen and a trading company (the “Company”) signed a Mutual Termination Agreement on 10 December 2019, agreeing to terminate their employment relationship. The Company agreed to pay him RMB 38,000 in severance, with the payment contingent upon the unfreezing of the company’s bank account. After four years of waiting without payment, Mr. Chen applied for arbitration, while the Company claimed the payment condition was unmet. The key issue was the validity of the supplementary clause. The Beijing Labour Arbitration Commission held the clause improperly shifted the Company’s operational risks to Mr. Chen, impairing his rights. It was deemed a grossly unfair “trap clause” and invalid under Article 26 of the Employment Contract Law, and the Company was ordered to pay the severance.
Mr. Chen joined the Company on 30 May 2016. On 10 December 2019, he and the Company signed a Mutual Termination Agreement, agreeing to end the employment relationship on the same day. The Company undertook to pay Mr. Chen severance of RMB 38,000. A supplementary clause provided that, due to the freezing of the Company’s bank account, the payment could not be made immediately and would instead be paid within five days after the account was unfrozen.
Mr. Chen waited four years, but the Company’s bank account remained frozen and no payment was made. He subsequently filed a claim with the labour arbitration commission, requesting the Company to fulfil its severance obligation. The Company argued that the agreed payment condition had not been satisfied because its bank account had not been unfrozen, and therefore it was not yet obligated to pay.
The key issue was whether the Company could lawfully defer its statutory severance obligation by conditioning payment on the unfreezing of its bank account.
The Beijing Labour Arbitration Commission held that Article 50 of the Employment Contract Law requires an employer to issue a certificate of termination and to pay severance in a lump sum upon completion of the work handover. This provision is mandatory, and an employer may not exclude or evade its statutory obligations through private agreement.
In this case, linking severance payment to the unfreezing of the Company’s bank account effectively shifted the employer’s operational risks to the employee and left the employee’s entitlement in prolonged uncertainty. Although framed as a payment arrangement, the clause substantially impaired the employee’s lawful rights and interests. The Commission found it to be a grossly unfair clause and declared it invalid pursuant to Article 26 of the Employment Contract Law.
Key Action Points
The core issue in this case concerns the validity of a payment clause subject to uncertain conditions in a mutual termination agreement, reflecting the boundary between contractual freedom and mandatory employment law provisions. The ruling clarifies that such clauses are invalid and underscores the principle of preferential protection of employees’ rights.
Article 50 of the Employment Contract Law requires employers to pay severance in a lump sum upon termination. Its purpose is to safeguard employees’ basic living needs and prevent impairment of their rights due to operational risks or delay. Conditioning payment on the unfreezing of the company’s bank account effectively shifts the employer’s internal financial risks to the employee and violates mandatory legal provisions.
In employment law, contractual freedom is limited. Given the imbalance in bargaining power, mandatory rules protect employees from unfair terms. Even mutually agreed clauses may be invalid if they infringe statutory rights.
