Study on Employment Termination by Employer in China

by Giovanni Pisacane (Lawyer) - Greatway Advisory (Shanghai) Co., Ltd.

Categories: Employment Law
Typology: Articles


1. The systematic deficiencies of employment termination by the employer in China related to the reasons for termination, termination notice and responsibilities for wrongful termination.

2. The reasons underlying the employment termination by employer system deficiencies in China.

3. Suggestions on reforming and improving the current employment termination structure.  



The implementation of the Employment Contract Law of China, effective since January 1, 2008, and its implementing regulation has been pushing the protection of employees’ rights to a new unprecedented higher level. Employers are strictly restricted from dismissing employees without just causes to guarantee employees’ basic work rights. However, some employers are complaining that their power of decision on employment has been greatly impaired, which seriously affects their efficiency and interests, whereas, many employees are still voicing that they have been unfairly treated by their employers during the continuance of the employment relationship and that they cannot obtain a sufficient and reasonable compensation when they are illegally dismissed. Employment termination by the employer in these articles refers to the situation where the employer terminates the employment relationship with the employee before the expiration date of a fixed-term employment contract, or terminates a non-fixed term employment contract or terminates an employment contract for the duration of a certain task prior to its completion.

In consideration of the particularity of economic redundancy, these articles will only focus on the situations prescribed in Article 39 and Article 40 of the Employment Contract Law of China so as to give suggestions on how to optimize the employment termination structure by analyzing the system deficiencies on employment termination by the employer in China and the reasons behind them.

1. The systematic deficiencies of employment termination by the employer in China related to the reasons for termination, termination notice and responsibilities for wrongful termination.

The 2007 Labor Contract Law made significant strides from the 1994 Labor Law. It mandates executing a contract for every employment relationship and makes the termination of an employment contract more difficult. The changes in the law could significantly enhance the protection of labor rights, if they are effectively implemented in practice. Generally, an employer cannot unilaterally terminate an employment contract at will or without cause, unless certain specific conditions have occurred (statutory grounds for dismissal). If the employer terminates an employment contract in violation of the law, the employee may request for reinstatement in his or her job position. If the employee does not so request or the contract is no longer capable of being performed, the employer shall pay twice the usual severance amount as damages to the employee (see Zeng Xianwu). Nevertheless, Employers can terminate the employment contract with their employees early for statutory reasons. For instance, Article 39 lists reasons by which employers can terminate employment contract with employees early without notice and without severance payment. This article is regarded as a sharp-edged sword for employers which helps them sharply cut away a “tumor” within their human resource structure, on the other hand, it penalizes employees who are unlawfully dismissed. However, there are still flaws in this sword in terms of reasons for termination during the probationary period, disciplinary dismissal, and employees’ criminal liability as just cause for early termination by employer.

Under Article 39, employers can unilaterally terminate a contract under the following conditions: if the employee cannot satisfy the conditions of employment during probation, if there is a material breach of the company’s rules or regulations, if the employee is seriously negligent , if the employee establishes a labor relationship with another employer, or is subject to criminal liabilities (see Marisa Anne Pagnattaro). If an employee is incompetent, the employer must provide further training to the employee or re-assign the employee prior to terminating the contract. Therefore, employers generally try to implement standard operating procedures to maintain a detailed set of rules and regulations reflected in the contract, to which employees agree to, and to maintain thorough disciplinary records efforts of improvement in order to establish "proof" for termination, dismissal, or involuntary separation if it needed later on (see Marisa Anne Pagnattaro). Termination for these reasons does not require severance payment whereas most types of termination require severance payment (see Alice Shelor Wang). Standards of “materiality” and “seriousness” related to a violation or damage should be defined and clarified under Article 39 and explained in the employee handbook or the company’s rules and regulations (see China Law Blog, Terminating your employee is not easy, Although notice to employees is not explicitly required, there is a general understanding that prior notice is necessary (see 1681 PLI/Corp 129). The Labor Contract Law does not expressly include a dismissal based on conduct. Thus, a minor breach of duty on the employee’s part would not be sufficient for a dismissal without notice and would most likely not permit the termination of the employee (see Wolfgang Daubler and Qian Wang).

In cases under Article 40, where employer can terminate employment contract early with 30 days prior written notice or in lieu of notice with payment of a month’s salary plus severance pay, the period of 30 days’ notice is questionable due to its lack of consideration for the employees’ seniority. An employer is prohibited from dismissing an employee during the employee’s medical treatment for illness or non-industrial injuries. Otherwise, the dismissal will be regarded as wrongful and the employee can ask for either reinstatement or compensation. Article 40 allows a dismissal due to illness, if it affects an employee’s ability to perform after the expiration of the medical treatment period. However, it would have to be shown that the employee was unable to perform his or her work. The law is unclear on how an employer should deal with frequently occurring illnesses. Article 40 also allows a dismissal for incompetence after efforts at further training have been made. Under Article 40, termination is also permitted if there is such a “material” or “major” change in the objective circumstances at the time the employment contract was signed and that leads to the contract not being able to be fulfilled and no agreement about a modified work effort can be reached. This appears to constitute a termination based on operational grounds without clarifying its requirements or limitations. Nevertheless, the requirement of a change in the “objective circumstances” makes clear that an employer’s decision to merely have the same tasks performed with fewer employees is not enough to satisfy this ground for dismissal (see Wolfgang Daubler and Qian Wang). Under Article 40, what constitutes a “material” or “major” change and “objective circumstances” should be better defined (see Terminating your employee is not easy - In addition, for purposes of Article 40, employers should develop and implement effective performance evaluation systems and ensure that such systems are made known to the employees and are not arbitrary (see 1681 PLI/Corp 129).  

In general, employers are required to make severance payments for terminations, which are equal to the employee's average monthly wage in the 12 months prior to termination for each year of employment. For high-income employees, if the monthly wage of the employee is greater than three times the average monthly wage of local employees in the previous year, the severance payment equals three times the average monthly wage of local employees times the number of years of employment (see Pagnattaro). However, twelve months of wages constitutes the upper limit and cap on compensation. With unlawful dismissals the employee can either choose reinstatement or compensation (see Wolfgang Daubler and Qian Wang). Although the formulas appear straightforward, there could be some arbitrary issues, including determining the number of years of employment and the calculation of the average local monthly wage (see Pagnattaro). In particular, severance must generally be paid whenever a fixed-term contract expires and is not renewed, making it an additional cost for any new hire (see Virginia E. Harper). In the event employee compensation is required, the law does not state which date should be the termination date. One judgment by a Shanghai court in the first instance is cited as illustrating the judge making the discretionary judgment on the termination date whereby he confirmed that the termination date should be the date claimed by the employee since the termination is wrongful, and the employee was confirmed her salary from the termination date until her claimed termination date. This judgment was appealed. The Shanghai 2nd Intermediate People’s Court made a final judgment on September 23, 2009 in favor of employer whereby the termination date of the employment relationship should be the date when the employer terminated the relationship, and the employment relationship ended from that date on, therefore the employee is not entitled to any salary from that day on.

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