Employment is one of the main challenges when it comes to setting up business in China. Hiring the right personnel can often be the difference between success and failure as employee terminations in China can be a minefield.
In general, a foreign entity must establish some sort of formal business presence in China in order to engage employees. A Wholly Foreign-Owned Enterprise (WFOE) can directly engage Chinese employees. A Representative Office (RO), which has no formal legal identity in China, cannot – it must hire employees through a recognised employment or ‘labour dispatch’ agency.
Employment law in China is based on a statutory, civil law system. There is no concept of ‘at will’ employment in China, such that termination of employment is only possible on specific statutory grounds that generally require ‘just cause’. All employees are protected from unlawful dismissal, regardless of their seniority, and severance payment is generally a requirement
It is critical to follow the procedures for employee termination. Failure to abide by the relevant regulations can lead to expensive settlements and legal costs. This article will briefly outline some of the main points to consider when it comes to employee termination.
A statutory minimum notice period of 30 days applies whether it is the employer or the employee giving notice. An employer may pay in lieu of this notice period.
Statutory grounds that would allow an employer to dismiss an employee without notice or severance are limited to cases in which the employee is found to be:
- Unsuitable for the role during the probation period
- In breach of company regulations
- Seriously derelict in the performance of duties or actions that cause major damage to the employer
- Engaged in an employment relationship with another employer that adversely impacts their work for the existing employer
- Subject to criminal proceedings.
Statutory grounds under which an employer may terminate the employment contract of an employee with 30 days’ notice or, usually, one month’s salary in lieu of notice include:
- An employee is unable to carry out their assigned duties for medical reasons
- An employee is incapable of properly carrying out their duties and would remain so even with training or job adjustment
- A material change in circumstances that means that performance of the contract is impossible.
Generally, severance must be paid when terminating the employment contract as soon as an employee has passed their probation period. The severance amount will normally be calculated as one month’s salary for each year of employment. Severance will be required in the following situations:
- The employee resigns due to breaches of labour regulations
- The employment contract expires
- By mutual agreement between employer and employee
- The employer becomes bankrupt
- The employer is closed down or has its business licence revoked.
An employer does have the right to terminate an employee upon expiration of a fixed-term contract but must pay financial compensation. Since 2008, a ‘two fixed-terms rule’ has applied, under which an employer must automatically provide an employee with an open term contract where they have signed a fixed-term contract twice in succession. Severance can be only be avoided in cases where an employee refuses to renew a contract on the same or better terms as enjoyed previously.
Enforcement of the national employment law can vary, sometimes significantly, from region to region. It is therefore of vital importance to seek advice from qualified employment lawyers in China. Mishandling an employee termination can result in both financial and reputational costs and disgruntled former employees have been known to create major problems for their erstwhile employers. Sovereign has longstanding relationships with a number of employment law specialists in China and will be happy to assist in putting you in contact with a suitable expert if you have any needs in this area