Termination and Ending of Employment Contracts in China
China´s transition from a planed economy to a market economy has forced the country to revue his labor law. On January 1. 2008 a new labor contract law came into effect in China.
The legislative intention of this new Labor Contract Law, which came out after a series of incidents of severe abuse of workers in China, is to better protect the interests of blue collar workers, but is technically applicable to all types of employees in China, whether Chinese citizens or foreigners.
Foreign invested enterprises in China wishing to terminate an employment contract in china, must be particularly vigilant in order to avoid costly labor dispute and penalties.
Contract Termination in China
Termination of employment contracts in China is divided into two categories: Immediate Termination and Termination with 30-Day Notice.
An employer may terminate an employee without requirement for notice in the following situations:
- The employee is found to be in violation with the rules and regulations provided by the employer
- The employee is convicted of a crime
- The employee commits serious dereliction of duty or practices graft, causing substantial damage to the employer’s interests
- The employee has established an employment relationship with another employer and that relationship affects the completion of his tasks and he refuses to appropriately remedy the situation after notification from the employer
- The employee was fraudulent in concluding the labour contract
- The employee is proved during the probation period not to satisfy the conditions of employment
New regulations regarding probation periods in China allow more freedom in evaluating and terminating new staff before they begin permanent employment. The wages of a worker on probation may not be less than the lowest wage level for the same job with the Employer or less than 80 percent of the employee´s wage after probation and may not be less than the minimum wage rate in the place where the employer is located. Probation periods range from one month (for fix ed-term contracts between three months and one year in duration) to six months (for fixed-term contracts over three years in duration). Probation periods are not allowed for part-time work or contracts based upon completion of a task.
An employer must give 30 days’ prior written notice or payment in lieu thereof, if it terminates the labour contract under the following situations:
- After a set period of medical care for an illness or an non-work related injury, the employee is unable to perform his original duties or re-assigned duties
- The employee is incompetent and remains incompetent after training or adjustment of position
- A major change in the objective circumstances relied upon at the time of conclusion of the employment contract renders it unperformable and, after consultations, the Employer and worker are unable to reach agreement on amending the employment contract
In any of the following circumstances, termination is clearly prohibited by Chinese labor law:
- The Employee has a work-related illness or injury: all employees must receive a pre-departure health check-up before being terminated. This is meant to keep employers from terminating employees before a suspected occupational disease or injury is diagnosed.
- The Employee is a female in her pregnancy, confinement or nursing period
- The Employee has been working for the Employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age
The other circumstances under which termination is allowed and prohibited in China are stated in local laws, varying by region. If the employee is not in the same province as the employer, the laws of the province where the employer is registered generally apply.
When an Employer is to terminate an employment contract for any reason, it shall give the labor union advance notice. If the labor union believes such termination to be unjustified, it has the right to put forward its opinions. If the Employer violates laws, administrative statutes or the employment contract, the labor union has the right to demand that the Employer rectify the matter. The Employer shall study the labor union’s opinions and notify the labor union in writing as to the outcome of its handling of the matter.
When terminating an employee, the company is also required to report the termination to local social insurance authorities and keep the employment contract on file for at least 2 years after termination.
Workforce reduction for Econonic Reason
Workforce reduction or mass layoffs for Economic Reasons are governed by a special set of regulations in China. If terminating at least 20 people or 10 % of the workforce, the Employer shall:
- Explain the circumstances to its labor union or to all its employees 30 days in advance
- Report the workforce reduction plan to the local labor authorities
- Give priorities to remain at the company to employees with a relatively long-term fixed contract, those who are the only ones in their families to be employed and those whose families have an elderly person or a minor for whom they need to provide
Legitimate justification for this type of layoff under Chinese law include restructuring after bankruptcy, serious difficulties in production or business operations, or changes to production, technology or business methods that require reduction.
China´s new labor Contract law requires severance compensation under a number of situations, which are summarize below:
1. The employer terminates the employee under situations requiring 30 days’ prior written notice (as previously mentioned);
2. The employee is terminated due to restructuring or difficulties in business operations;
3. Termination of the labour contract is proposed by employer and there is mutual agreement with regards to the termination thereof;
4. Expiration of a fixed-term labour contract (except where the employee refuses to renew the contract on terms equal to or better than that previously concluded);
5. Termination of the labour contract is due to the revocation of the employer’s business license; or, bankruptcy
The Labor Contract Law also outlines the required minimum severance amounts. A worker shall be paid severance pay based on the number of years worked with the Employer at the rate of one month’s wage for each full year worked. Any period of less than one year shall be counted as one year. For periods less than 6 months, ½ month’s salary must be paid as severance. “One month’s salary” is generally defined by Chinese labor law as the average monthly wage over the 12 month period before the termination.
The maximum total severance pay required in China is three times the local average monthly wage times 12 years worked. Local average monthly wage in Beijing, for example, is around $400. Therefore, maximum required severance pay – whether for blue collar or white collar workers – would be calculated as follows: $400 x 3 x 12 = $14,400.
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