It can be challenging to navigate the process of dismissing an employee in China due to a complex web of legal requirements and cultural considerations. Employers and business owners need to understand the nuances of firing in China to ensure compliance and maintain a harmonious workplace. In recent years, there has been a significant increase in employee terminations in China, largely influenced by economic and operational changes. For example, in July 2024, PwC had to lay off over 100 employees in Beijing, Shanghai, and other locations due to a decline in client numbers (Economic Times). Additionally, many other companies like Honda, Amazon, and Intel have also announced their plans for layoffs (SCMP).
Due to economic restructuring and operational changes, many companies had to downsize or restructure their workforce, leading to numerous layoffs. Economic layoffs, which often involve more than 20 employees or over 10% of the workforce, require a structured process that includes notifying labour unions and reporting to labour administrative authorities
The legal framework governing termination in China is primarily based on the Labour Contract Law. This law outlines the permissible grounds for termination, such as serious misconduct, incompetence, and significant operational changes. It also mandates the procedures for lawful termination, including the need for documented evidence, proper notice periods, and severance pay calculations. For example, statutory severance pay typically amounts to one month’s salary for each year of service, with specific caps and conditions based on the duration and nature of employment.
When carrying out terminations, it’s important to consider both legal compliance and cultural aspects. In China, preserving “face” and harmony is crucial as well. Termination must be approached with sensitivity to prevent embarrassment or friction. This involves private conversations, using respectful language, and providing support for the employee’s transition. Recognising these cultural subtleties can aid in effectively managing the termination process and upholding a positive work environment.
Source: CMS Law and China Law Experts.
Legal Framework for Termination in China
Labour Contract Law
The cornerstone of employment law in China is the Labour Contract Law, which came into effect on January 1, 2008. This landmark legislation was the first nationwide effort to regulate labour relations and provide a comprehensive legal framework for the establishment, execution, and termination of labour contracts. It applies to all entities, organisations, and individuals employing workers in China, including Chinese-foreign joint ventures, wholly foreign-owned enterprises, and foreign individuals working in the country. The primary goal of the Labour Contract Law is to protect the lawful rights and interests of employees while clearly outlining the responsibilities of employers.
Adhering strictly to these contracts is crucial, as wrongful termination can lead to significant legal and financial repercussions. Employers that fail to comply with the Labour Contract Law may face lawsuits, hefty fines, and damage to their reputation. For example, in October 2023, China Southern Airlines (CSA) was found guilty of wrongful dismissal, resulting in the employee being awarded $75,000 in damages for the suffering caused by the termination. This case highlights the importance of compliance with employment regulations and the potential financial and reputational risks for companies that neglect their legal obligations (HCAMag).
Since its implementation, the Labour Contract Law has significantly improved employee rights and interests in China and played a crucial role in promoting social stability. By formalising employment relationships with written contracts, the law ensures that employees are adequately protected and that employers adhere to clear standards and responsibilities. This legal framework has been essential in fostering a fair and stable labour market in China.
Source: Medium and Ministry of Human Resources and Social Security of the People’s Republic of China
Grounds for Termination
Under Chinese law, employment termination can be classified into three main categories: mutual agreement, employee-initiated termination, and employer-initiated termination. Each category has its benefits and risks, and understanding these can help employers navigate the complexities of the termination process effectively.
1. Mutual Agreement
Termination by mutual agreement involves both parties consenting to end the employment contract, often with a severance package included. This method generally results in a smoother and less contentious process, as it avoids unilateral actions and reduces the risk of legal disputes. For example, if an employee wishes to leave the company to pursue a different career path and the employer agrees, they can negotiate a mutually acceptable severance package.
This approach helps maintain professional relationships and can be beneficial for future references or networking. However, securing the employee’s agreement may require offering a more substantial severance package, which can be costly for the employer. Additionally, the negotiation process can be time-consuming, requiring careful management to reach a satisfactory conclusion for both parties.
2. Employee-Initiated Termination
Employee-initiated termination occurs when the employee resigns voluntarily, usually providing a notice period as stipulated in their contract. This type of termination is straightforward and involves lower costs for the employer, as severance pay is typically not required. For instance, an employee may choose to resign to relocate to another city or take up a new job offer.
The benefits of this type of termination include clear procedures and cost savings for the employer. However, sudden resignations can disrupt operations, especially if the employee holds a critical position. Additionally, losing valuable employees can impact the company’s productivity and institutional knowledge, necessitating a swift and effective recruitment process to fill the gap.
3. Employer-Initiated Termination
Employer-initiated termination is the most legally complex form of termination, involving the employer taking the initiative to end the employment contract. This type of termination can be based on various grounds, including serious misconduct, incompetence after training or reassignment, and redundancy due to significant operational changes.
- Serious Misconduct Terminating an employee for serious misconduct helps protect the company’s interests and maintain a safe and ethical workplace. For example, if an employee is found guilty of fraud or theft, the employer has a legitimate ground to terminate the contract immediately. This approach sets a precedent and deters other employees from engaging in similar behaviour. However, this method carries the risk of legal challenges if the employee contests the termination. Employers must provide thorough documentation to support their decision, which can be administratively burdensome and time-consuming.
- Incompetence After Training or Reassignment Terminating an employee due to incompetence after training or reassignment focuses on performance issues. Removing underperforming employees can lead to overall performance improvement and make way for more competent hires. For instance, if an employee consistently fails to meet performance targets despite additional training and reassignment, the employer may decide to terminate the contract. This can be more cost-effective than continuing to invest in ineffective training. However, determining incompetence can be subjective and may lead to disputes if not handled transparently. Additionally, frequent terminations for incompetence might harm the company’s reputation as an employer, potentially affecting future recruitment efforts.
- Redundancy Due to Significant Operational ChangesRedundancy due to significant operational changes involves terminating employees as part of a broader strategy to streamline operations and reduce costs. This approach allows companies to adapt to market changes and technological advancements more swiftly. For example, a company may need to lay off a portion of its workforce due to automation or a shift in business strategy. While this can improve operational efficiency and cost-effectiveness, layoffs can negatively affect the morale of remaining employees, leading to decreased productivity. The process also involves complex compliance requirements, such as notifying labour unions and reporting to labour administrative authorities, which can be time-consuming and require meticulous planning to ensure all legal obligations are met.
Source: China Briefing
Statutory Requirements and Notice Periods
Understanding the statutory requirements and notice periods is crucial for employers to ensure legal compliance during terminations. In accordance with Chinese labour law, notice periods for terminating employees vary based on the duration of their employment:
- Less than 1 year: Employers must provide at least 30 days’ notice or pay an additional month’s salary in lieu of notice.
- 1 to 3 years: A minimum of 30 days’ notice is required.
- More than 3 years: Notice periods may extend beyond 30 days, depending on company policies and collective agreements.
Notice periods may also vary based on the grounds for termination, such as serious misconduct or redundancy due to operational changes. Employers must adhere to these statutory requirements to avoid legal disputes and ensure fair treatment of employees.
Source: CMS
Severance Pay and Compensation
Severance pay is a critical aspect of employment termination, ensuring that employees receive adequate compensation when their contracts are terminated. Severance pay in China is generally calculated based on the employee’s length of service:
- One month’s salary for each year of service: This is the standard calculation method.
- Pro-rata calculation: For employees with less than one year of service, severance pay is calculated on a pro-rata basis.
Special considerations may apply for high-income employees, where severance pay may be capped at three times the local average monthly salary. Additionally, companies may offer enhanced severance packages as part of mutual termination agreements or to mitigate potential disputes.
Source: CMS Law
Termination of Foreign Employees in China
Terminating expatriate employees in China requires specific legal and procedural considerations that differ from those applicable to local employees.
- Work Permits and Visas: Employers must ensure that the termination process complies with the regulations governing work permits and visas. This includes notifying immigration authorities and cancelling the employee’s work permit and residence visa.
- Contractual Obligations: Employment contracts for foreign employees often contain specific termination clauses that must be adhered to. These may include longer notice periods or additional severance pay.
- Cultural Sensitivity: Employers should handle the termination of foreign employees with cultural sensitivity, considering the potential impact on their relocation and future employment prospects.
Source: China Briefing
Specific Considerations and Procedures
- Work Permits and Visas: Employers must ensure that the termination process complies with the regulations governing work permits and visas. This includes notifying immigration authorities and cancelling the employee’s work permit and residence visa.
- Contractual Obligations: Employment contracts for foreign employees often contain specific termination clauses that must be adhered to. These may include longer notice periods or additional severance pay.
- Cultural Sensitivity: Employers should handle the termination of foreign employees with cultural sensitivity, considering the potential impact on their relocation and future employment prospects.
Role of Labour Unions in Termination Processes
In China, labour unions play a significant role in protecting workers’ rights and ensuring fair treatment during the termination process. Their involvement is mandated by law, particularly in cases of mass layoffs or significant changes to employment terms. Understanding the role and protocols associated with labour unions can help employers navigate the complexities of employee termination while maintaining compliance with Chinese labour laws.
Labour unions are actively involved in various aspects of the termination process. Their primary function is to represent the interests of employees, ensuring that any termination decisions are fair, justified, and comply with legal requirements. The involvement of labour unions is particularly crucial in the following scenarios:
- Mass Layoffs: When a company plans to lay off a large number of employees (typically more than 20 employees or over 10% of the workforce), it must consult with the labour union. The union’s role is to review the layoff plan, negotiate terms, and ensure that the layoffs are carried out fairly and transparently.
- Collective Bargaining: Labour unions engage in collective bargaining on behalf of employees. This includes negotiating severance packages, notice periods, and other termination-related benefits. The goal is to reach an agreement that is acceptable to both the employer and the employees.
- Dispute Resolution: In cases where employees contest their termination, labour unions often act as intermediaries to resolve disputes. They may represent employees in negotiations with the employer or during legal proceedings, helping to ensure that employees’ rights are protected.
- Monitoring Compliance: Labour unions monitor employers’ adherence to labour laws and regulations. They ensure that termination procedures are followed correctly and that employees receive all entitled benefits, such as severance pay and compensation.
Procedures and Protocols for Consulting with Labour Unions
The consultation process with labour unions involves several key procedures and protocols that employers must follow to ensure compliance and maintain good relations with both employees and the union:
- Notification: Employers are required to notify the labour union in advance of any planned layoffs or significant changes to employment terms. This notification should include detailed information about the reasons for the layoffs, the number of affected employees, and the proposed timeline.
- Submission of Layoff Plan: Employers must submit a comprehensive layoff plan to the labour union. This plan should outline the criteria for selecting employees for termination, the severance packages offered, and measures to assist affected employees in finding new employment.
- Consultation Meetings: Employers must hold consultation meetings with the labour union to discuss the layoff plan. During these meetings, the union can raise concerns, suggest modifications, and negotiate terms on behalf of the employees. These discussions are aimed at reaching a consensus that balances the interests of both parties.
- Feedback and Amendments: After the consultation meetings, the labour union provides feedback on the layoff plan. Employers are expected to consider this feedback and make necessary amendments to address the union’s concerns. This iterative process helps ensure that the final plan is fair and compliant with legal requirements.
- Approval and Implementation: Once an agreement is reached, the labour union formally approves the layoff plan. Employers can then proceed with the implementation, ensuring that all agreed-upon terms and conditions are met. The labour union continues to monitor the process to ensure compliance and address any issues that may arise.
- Documentation and Record-Keeping: Throughout the consultation process, employers must maintain detailed records of all communications, meetings, and agreements with the labour union. This documentation is essential for demonstrating compliance with legal requirements and can be crucial in resolving any future disputes.
*Source: Taylor Wessing and HRD
Cultural Considerations in Employee Termination in China
Navigating the process of terminating an employee in China requires a deep understanding of cultural nuances, particularly the concepts of ‘face‘ and harmony. In Chinese culture, maintaining ‘face’, ‘面子’– which refers to an individual’s reputation and dignity – is paramount. Any action that might cause public embarrassment or conflict can have far-reaching negative consequences. Therefore, handling terminations with utmost sensitivity is crucial to avoid unnecessary distress and maintain workplace harmony.
Face and Harmony
In Chinese society, ‘face’ and harmony are integral to interpersonal and professional relationships. Terminating an employee without regard for these cultural values can lead to a significant loss of morale, both for the individual affected and for the broader team. For instance, if an employee is terminated in a manner that causes public embarrassment, it can damage their social standing and create a ripple effect of discord within the workplace.
Communication Style
The communication style in China tends to be indirect and respectful, particularly in sensitive situations like employee termination. Confrontational or direct communication is often avoided to prevent causing undue stress or conflict. Instead, framing the conversation around mutual benefits and future opportunities can help soften the blow. For example, discussing how the termination might open new career paths for the employee or how the company will support them during their transition can make the conversation more palatable and less damaging to their ‘face.’
Key Actions for Cultural Sensitivity
To navigate these cultural considerations effectively, several key actions can be taken:
- Private Discussions: Always conduct termination discussions in a private setting to preserve the employee’s dignity. This approach prevents public embarrassment and shows respect for the individual’s ‘face.’
- Respectful Language: Use empathetic and respectful language throughout the termination process. Acknowledging the employee’s contributions and expressing regret for the situation can help minimise emotional distress and maintain a sense of respect.
- Support Transition: Offering support during the transition period can significantly mitigate the negative impact of termination. Providing assistance in finding new employment, writing references, or offering career counselling are ways to show continued support and respect for the employee’s future.
By understanding and integrating these cultural considerations, employers can manage terminations in China more effectively. Respecting ‘face’ and maintaining harmony not only helps preserve the dignity of the departing employee but also promotes a positive and respectful workplace environment for those who remain. This approach can lead to a smoother transition and better long-term outcomes for both the company and its employees.
Source: Forbes
Further reading: Understanding Cultural Nuances in Business Negotiations Across APAC
The Role and Benefits of Employer of Record (EOR) Services in Managing Firing in China
Navigating the complexities of employee termination in China can be daunting for many companies, especially given the intricate legal landscape and cultural considerations. This is where Employer of Record (EOR) services come into play, offering invaluable support and expertise. Imagine a scenario where a multinational corporation needs to lay off a portion of its workforce due to economic downturns. The company’s HR team, unfamiliar with the specific labour laws in China, faces potential legal pitfalls and administrative burdens. By engaging an EOR provider, the company can ensure that all termination processes comply with local labour laws and regulations, significantly minimising the risk of legal disputes.
EOR services take over the administrative load, handling everything from meticulous documentation to accurate severance pay calculations and even liaising with labour authorities. For instance, if a tech firm downsizes its operations in Shanghai, the EOR would manage all the necessary paperwork and formalities, allowing the company to focus on strategic decisions rather than getting bogged down by bureaucratic procedures.
One of the standout benefits of EOR services is their deep cultural expertise. Terminating employees in China requires sensitivity to local cultural norms, such as maintaining “face” and harmony. EOR providers, with their on-the-ground knowledge, guide companies through these nuances, ensuring that terminations are conducted respectfully and without unnecessary friction. This cultural insight can be crucial in maintaining the company’s reputation and ensuring a smooth transition for departing employees.
Moreover, EOR services offer substantial risk mitigation. By outsourcing the termination process, companies can significantly reduce the risk of non-compliance with local laws and the associated financial penalties. For example, a manufacturing company facing the need to lay off several employees due to automation might risk substantial fines if they fail to adhere to the specific legal requirements in China. An EOR ensures that every step is legally sound, protecting the company from potential legal repercussions.
In summary, EOR services provide a comprehensive solution for managing employee terminations in China. They offer compliance assurance, administrative support, cultural expertise, and risk mitigation, making the complex process of layoffs and terminations much more manageable and less risky for companies operating in a foreign environment.
Conclusion
Handling employee termination in China requires a solid understanding of legal requirements, cultural nuances, and proper procedures. From adhering to the Labour Contract Law to respecting cultural values like ‘face’ and harmony, employers must approach each step with care. Different types of termination—mutual agreement, employee-initiated, and employer-initiated—each has its own challenges that need careful handling to avoid legal issues and maintain a positive work environment.
Key elements such as the role of labour unions, statutory notice periods, and severance pay calculations are essential for proper management. Additionally, understanding the steps for terminating foreign employees, with the support of EOR services, can simplify the process, ensuring compliance and reducing administrative burdens.
By understanding these legal and cultural factors, employers can manage terminations effectively, fostering a positive workplace and safeguarding their reputation. For expert guidance and support, Eos Global Expansion offers comprehensive EOR services to help you navigate these challenges smoothly.
Contact Eos Global Expansion today to learn how our EOR services can help you manage terminations in China efficiently and confidently.
