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Termination of Employment Contracts in China

1. Grounds for Termination

PRC labor law generally favors employees and therefore contains many statutory provisions on termination of employment contracts that protect employees’ rights and interests. The statutory grounds for termination are as follows.

  1. Termination by mutual agreement
  2. Termination by the employee
  3. Termination by the employer
  4. Automatic termination

Practitioners 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 use such additional conditions to terminate its employees. The only way in which the termination provisions of an employment contract may differ from statutory termination conditions is by optional reference to an employee handbook (also known as a staff handbook).

2. Collective Dismissals

Collective dismissals usually take place in the context of redundancy for economic reasons.

Under the Labor 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 labor administrative authorities. Only then may it implement the redundancy.

Furthermore, certain employees are protected from redundancy for economic reasons.

Even if a redundancy proposal has been reported to the labor department and the employer proceeds to terminate its employees, such terminations may still be reversed by a labor 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. It may be especially difficult to learn which employees are sole income earners and have elderly or minors to support.

3. Individual Dismissals

As mentioned above, an employer may unilaterally terminate an employment contract immediately when the employee commits certain acts of misconduct.

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 certain circumstances.

a. Is severance pay required?

Under the Labor Contract Law, for mutual terminations proposed by the employer, unilateral terminations by the employer according to Article 40 of the Labor 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).

4. Separation Agreements

a. 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 illegal termination. Therefore, a Separation Agreement is also considered as the best practice when the employer decides to terminate employees.

b. What are the standard provisions of a Separation Agreement?

The law does not specify the standard provisions in a Separation Agreement. But 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.

c. Does the age of the employee make a difference?

According to the PRC Labor 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 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 has misconducts contained in Article 39 of the Labor 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 of aged employees, the employer may need to pay ex-gratia severance in addition to the mandatory severance provided in the Labor Contract Law in exchange of the employee’s signing of the Separation Agreement.

d. Are there additional provisions to consider?

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

5. Remedies for employee seeking to challenge wrongful termination

Employees may initiate labor arbitrations in response to any unilateral termination by their employers. Either the employee or employer may appeal a labor arbitration’s decision to the court if dissatisfied with its decision. Due to the high risk of unilateral termination, employers should view unilateral termination as a last resort.

For more information on these articles or any other issues involving labour and employment matters in China, please contact Carol Zhu, Partner at Zhong Lun Law Firm (www.zhonglun.com) at carol.zhu@zhonglun.com
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