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; and automatic termination.
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, without objection. Only then may the employer implement the redundancy.
An employer may unilaterally terminate an employment contract immediately when the employee commits any form of misconduct as defined by law. Furthermore, in certain circumstances, 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.
Is Severance Pay Required?
For mutual terminations proposed by the employer, unilateral terminations by the employer via notice under the three statutory circumstances, redundancy terminations for economic reasons, unilateral terminations by the employee for the employer’s fault or constructive 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, defined as the average monthly wage of the employee over the last 12 months prior to his/her termination date. The Average Monthly Salary for severance calculations is capped at three times (3x) the local average monthly salary and when this cap is reached, the compensable years for severance calculation shall not exceed 12 years.
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.
Remedies for Employee Seeking to Challenge Wrongful Termination
Employees may initiate labour arbitrations in response to any unilateral termination by their employers Both parties may appeal a labour arbitration’s decision to the court. 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 dispute resolution period. 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.
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.