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:
- Termination by mutual agreement;
- Termination by the employee;
- Termination by the employer;
- 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 labor administrative authorities. Only then may it implement the redundancy.
An employer may unilaterally terminate an employment contract immediately when the employee commits any form of misconduct as defined by law.
Is severance pay required?
Under the Labor Contract Law, for mutual terminations proposed by the employer, unilateral terminations by the employer, 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. 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).
Is a Separation Agreement required or considered best practice?
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.
Remedies for employee seeking to challenge wrongful termination
Employees may initiate labor arbitrations in response to any unilateral termination by their employers. If the unilateral termination by the employer is finally judged as illegal, the employee may request the employer to continue to perform the employment contract (i.e. reinstatement of employment) and provide back pay. Where the employee does not request continuous performance of the employment contract or the performance of the employment contract cannot be continued, the employer must pay the employee compensation equal to double the severance for normal termination. Due to the high risk of unilateral termination, employers should view unilateral termination as a last resort.
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. A similar concept on whistleblower protection can 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 remains undisclosed for avoidance of potential retaliation against the whistleblower and of impeding any ongoing investigation.