Terminating Employees in China through Negotiations

Welcome back from your holidays! In this edition, I will focus on firing employees. My favorite topic, for a strange reason.

Navigating employee terminations in China requires a nuanced approach. Recently, a US company approached us about an employment issue involving their Shanghai subsidiary. They had terminated several employees due to the elimination of their positions and paid severance.

Despite this, the employees filed claims in labor arbitration, seeking economic compensation (two times severance) for unlawful termination and, in one case, reinstatement.

Chinese labor laws are stringent about unilateral termination by the employer, permitting it only on specific grounds. Immediate termination without compensation is allowed mainly for material breaches of the employer’s rules or serious dereliction of duties causing substantial losses.

Other legal grounds require conditions to be met, allowing termination with severance:

• Liquidation of the company
• Expiry of the employment contract (notice required in some cities)
• Economic redundancy (subject to approval from the labor bureau)
• Non-performance even after training or adjustment of position (notice + proof required)
• Material change in objective circumstances that make the contract impossible to perform (notice + proof required)

Employees can challenge the application of these grounds by filing a labor arbitration claim, which is easy and inexpensive, making it challenging for the company to prove the legal ground for termination.

Negotiating a Settlement

To avoid such challenges, the best approach is to negotiate a settlement at the time of termination. Once a settlement agreement is signed, and unless it is clearly unlawful or unreasonable, there is little incentive for the former employee to file a claim. Therefore, we almost always seek to terminate based on mutual agreement.

Reaching a mutual agreement can be challenging, but our experience shows that most employees are quite amenable to a settlement if:

• It is pursued at termination rather than later,
• A reasonable amount of compensation is offered, and
• Negotiations are led by a seasoned HR or legal professional.

From the employee’s perspective: either a reasonable settlement is reached, and they receive payment quickly, or they spend over a year fighting for compensation in labor arbitration and the courts.

Common Approach

So, what is our standard approach? If you have a strong HR department, they should be able to calculate a reasonable package and negotiate a settlement with the employee for most cases. For more difficult cases, including senior employees, employees under special legal protection (e.g., pregnant or in nursing period), or group terminations, involving an expert legal professional will help you get the optimal result. They will advise you on a realistic plan, map out the strategy, and help you implement the plan on Exit Day.

Key Takeaways

Navigating the intricate HR landscape in China demands strategic depth and cultural finesse. By incorporating these detailed strategies into your HR playbook, you position your organization for sustained success in the ever-evolving Chinese business terrain. Here are three key takeaways to consider:

• Employee Resignation: If the employee resigns, only a 30-day notice is required (3-day notice during the probation period, with a possible extended notice period for managerial employees).
• Employer Termination: An employer cannot easily terminate a contract unless lawful reasons apply. Even then, notice and compensation are required. Only in cases of serious misconduct can dismissal occur without compensation.
• Negotiation and Documentation: The stronger your case, the less you will pay in settlement negotiations. Good contracts, employee handbooks, and legal counsel can lead to significant cost savings and better control of the situation.

For more tips, I recommend delving into our in-depth guides:

• Employment Law Guide
• Terminating Employee Guide
• Hiring Employees Guide

I hope this is helpful to you now or in the future. As always, I’m happy to answer any questions or thoughts you might have; just send me an email!

Until the next edition,

Robin