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07. Termination of Employment Contracts

Grounds for Termination

PRC labour law generally favours employees and therefore contains many statutory provisions on termination of employment contracts that protect employees’ rights and interests. The statutory grounds for termination are:

  • termination by mutual agreement;
  • termination by employee;
  • termination by employer;
  • automatic termination.

Termination by mutual agreement

Employers and employees may terminate their employment contracts at any time upon mutual agreement. Termination by mutual agreement is often used by employers to encourage employees to leave, while reducing the risk of being sued for illegal termination.

Termination by the employee

It is usual for employees to voluntarily terminate their employment. Employees may terminate their employment by giving their employers 30 days’ prior written notice (or three days’ notice if the employee is still within the probationary period). Where the employer is at fault according to the law, such as failing to provide labour protection or labour conditions pursuant to the provisions of the employment contract or failing to promptly pay labour remuneration in full, the employee is entitled to immediately terminate the employment by giving the employer notice. Where an employer uses means such as violence, threats or unauthorised detention to coerce an employee into working for the employer, gives orders in violation of rules or forces an employee to engage in risky work that endangers the employee’s personal safety, the employee may immediately terminate the employment without informing the employer in advance.

Termination by the employer

PRC labour law only permits an employer to immediately and unilaterally terminate an employment contract when the employee commits a misconduct listed in Article 39 of the PRC Labour Contract Law. An employer may also terminate an employee with either 30 days’ prior written notice or a month’s salary in lieu of notice, under the circumstances described in Article 40 of the PRC Labour Contract Law. An employer may also terminate an employee if it satisfies the conditions for reduction in force and completes the required procedures contained in applicable employment laws.

Automatic termination

In any of the following circumstances, the employment contract should terminate automatically, unless otherwise provided by law:

  • the term of the employment contract expires;
  • the employee reaches the statutory retirement age or starts to enjoy retirement benefits;
  • the employee passes away, or is declared dead or lost by the people’s court;
  • the employer is declared bankrupt under the law;
  • the employer’s business license is revoked or the employer is ordered to close down or de-register, or decides to liquidate in advance; or
  • other circumstances in which the employment contract should terminate according to the laws or administrative regulations.

Labour arbitrators and courts in China interpret these statutory termination provisions as exhaustive. In other words, employers cannot add any additional conditions for termination in its employment contract and terminate its employees based on such additional conditions. However, the employer may reasonably define serious misconduct in its employee handbook (also known as a staff handbook). Employees who commit any such serious misconduct will be deemed as materially violating the internal rules of the employer, which constitutes one of the statutory termination grounds.

Collective Dismissals

Collective dismissals usually take place in the context of reduction in force, which include the following circumstances:

  • the employer is restructuring pursuant to the Enterprise Bankruptcy Law;
  • the employer is experiencing serious difficulties in production and/or business operations;
  • the employer switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce; or
  • other objective economic situations on which the employment contract is based, have changed considerably and renders the employer unable to perform the employment contract.

Under the PRC Labour Contract Law, if an employer intends to reduce its workforce by 20 persons or more or by a number that is fewer than 20 but accounts for 10% or more of its total number of employees for the reason mentioned above, the employer must explain the situation to its trade union or all of its staff 30 days in advance. The employer must also seek the opinion of the trade union or its employees and submit a redundancy report to the labour administrative authorities, which will accept the report for 15 days, and issue a reporting receipt. Only then may the employer implement the redundancy.

Also, when reducing its workforce, an employer is required to give priority to retaining the following employees:

  • those who have fixed-term employment contracts with a relatively long term;
  • those who have open-ended employment contracts; or
  • those who are the sole income earner for their families and must support elderly or minors.

Furthermore, the following employees are protected from reduction in force:

  • those who are engaged in work involving occupational disease or hazards, without having undergone a pre-departure occupational health examination, or who are suspected of having contracted an occupational disease and are being diagnosed or under medical observation;
  • those who have been confirmed as having lost or partially lost their capacity to work due to an occupational disease or a work-related injury sustained with the employer;
  • those who have contracted an illness or sustained a non-work-related injury, and the statutory medical treatment period has not expired;
  • female employees in their pregnancy, maternity leave or breastfeeding period; and
  • those who have been working continuously for the employer for not less than 15 years and are less than 5 years away from the statutory retirement age.

Even if a redundancy proposal has been reported to the labour department and the employer proceeds to terminate its employees, such terminations may still be reversed by a labour arbitration commission or a court. One common reason for such reversal is that the employer improperly terminates an employee who should have been specially protected or fails to give priority to retaining the three kinds of employees discussed above. In order to avoid such mistakes, the employer needs to carefully check and investigate its employees’ situations before implementing the redundancy plan, which may be not easy without support of legal counsel. It may be especially difficult to learn which employees are sole income earners and have the elderly or minors to support.

Individual Dismissals

As mentioned above, an employer may unilaterally terminate an employment contract immediately when the employee commits any of the following types of employee misconduct contained in Article 39 of the Labour Contract Law:

  • the employee fails to satisfy the recruitment conditions during the probationary period;
  • the employee seriously violates the labour disciplines or the employer’s rules and regulations;
  • the employee causes serious damage to the interests of the employer due to his or her serious dereliction, or his or her engagement in malpractice for personal gain;
  • the employee has established employment relationship with another employer, which materially affects the completion of his or her tasks with the original employer, or the employee refuses to rectify per the employer’s request;
  • the employment contract is invalid because the employee used means such as deception or coercion, or took advantage of the employer’s difficulties to cause the employer to conclude the contract or to make an amendment thereto, which is contrary to the employer’s true intent;
  • the employee is held criminally liable under the law.

Furthermore, the employer may also terminate an employment contract by giving the employee 30 days’ prior written notice or one month’s salary in lieu of notice under any of the following circumstances described in Article 40 of the Labour Contract Law:

  • the employee, after exhausting the legally prescribed period of medical treatment for an illness or non-work-related injury, remains unable to perform his or her original job duties, and is also unfit for another job assigned by the employer;
  • the employee is incompetent in fulfilling his or her duties, and remains so after undergoing training or an adjustment of his or her position;
  • the employment contract cannot be performed due to major changes of the objective circumstances under which the contract was originally concluded, and the employer and the employee fail to reach agreement on modification of the contract after mutual consultation.

Is Severance Pay Required?

Under the Labour Contract Law, for mutual terminations proposed by the employer, unilateral terminations by the employer via notice under the Article 40 of the Labour Contract Law, redundancy terminations for economic reasons, unilateral terminations by the employee for the employer’s fault or automatic terminations due to the employer’s reasons, the employer is required to pay severance based on the employee’s years of service.

Severance is calculated at a rate of one month’s salary (the “Average Monthly Salary”) for each full year of service. Service periods greater than or equal to six months are rounded up to a full year, and periods fewer than six months are considered half-years (the employer would owe a half month’s salary). The Average Monthly Salary means the average monthly wage of the employee over the last 12 months prior to his or her termination date. If the employee’s Average Monthly Salary is more than three times the local average monthly salary, the Average Monthly Salary for severance calculations is capped at three times (3x) the local average monthly salary. When this cap is reached, the compensable years for severance calculation shall not exceed 12 years, pursuant to the Labour Contract Law.

Separation Agreements

Is a Separation Agreement required or considered best practice?

A separation agreement is required in the event of mutual termination. As mentioned above, termination by mutual agreement is often used by employers to reduce the risk of being sued for wrongful termination. Therefore, when the employer decides to terminate an employee, a separation agreement would be considered a best practice.

What are the standard provisions of a Separation Agreement?

The law does not specify the standard provisions in a separation agreement. However, in practice a separation agreement for mutual termination typically includes the last working day, severance amount and payment date, last month salary payment, payment of social insurance and housing reserve fund, the employee’s obligations to hand over work and return the employer’s properties, waiver and release, confidentiality, etc.

Does the age of the employee make a difference?

According to PRC Labour Contract Law, if the employee has been working with the employer for more than 15 years and it is less than 5 years for him or her to reach the statutory retirement age, the employer shall not lay him or her off for economic reasons or unilaterally terminate his or her employment contract, unless the employee’s behaviour falls within the types of misconduct detailed in Article 39 of the Labour Contract Law. However, in the event of mutual termination, the employer is also able to reach a separation agreement with the aged employees. Due to the legal protection afforded to aged employees, the employer may need to pay ex-gratia severance in addition to the mandatory severance provided in the Labour Contract Law, as an incentive for the employee to sign the separation agreement.

Are there additional provisions to consider?

If the employer and the employee have an agreement on the post-employment non-competition obligation, the separation agreement shall have a clause to specify whether or not the employer releases the employee from the post-employment non-competition obligation. In addition, the separation agreement may include provisions about non-solicitation, non-disparagement, non-interference, etc. when necessary, especially for senior employees.

Remedies for Employee Seeking to Challenge Wrongful Termination

Employees may initiate labour arbitrations in response to any unilateral termination by their employers. Either the employee or employer may appeal a labour arbitration’s decision to the court if dissatisfied with its decision, unless otherwise prescribed by law. During the labour arbitration or litigation, the employer must provide solid evidence to support the termination and assume the burden of proof. If the unilateral termination by the employer is finally judged as wrongful, the employee may request the employer to continue to perform the employment contract (i.e. reinstatement of employment) and provide back pay of salary and social insurance contributions for the period of dispute resolution. Where the employee does not request continued performance of the employment contract or the employment contract cannot be reinstated, the employer must pay the employee compensation equal to double the statutory severance. Due to the high risk of a unilateral termination leading to a labour dispute (arbitration and/or litigation), employers should view unilateral termination as a last resort.

Whistleblower Laws

The PRC Labour Law explicitly stipulates that if employers unreasonably obstruct the labour administrative authority, relevant authorities or their officials from exercising the right of supervision and inspection, and retaliate against the whistleblower, the labour administrative authority or relevant authorities may impose a fine on the employer.

From the perspective of corporate governance and company’s operation compliance, the Chinese legislation has not yet formulated an independent sector of laws to govern the rights and obligations of the whistleblower. Except for the above-mentioned provision, a similar concept on whistleblower protection can also be found in the PRC criminal laws and regulations, where criminal liability is to be pursued by the public prosecutor, and the identity of the whistleblower is kept undisclosed for avoidance of potential retaliation against the whistleblower and of impeding any ongoing investigation.

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