Severance Pay in China (I): Am I Entitled to Severance Pay

KEY TAKEAWAYS:

• The employee is entitled to severance pay (“N” or “N+1”) under the circumstances of legal bilateral termination, failure of renewal, mass-layoff, bankruptcy, dissolution, health issues or injury, incompetency, significant changes.
• The employee is entitled to “2N” of severance pay when the employer’s termination is not permitted under the law or violates the law.
• Even if the termination is initiated by the employee, the severance pay (typically “N”) shall be paid by the employer in the event of the employer’s termination of open-ended labor contract, failure of paying remuneration or social security premiums and the employer’s fraud, coercion, violence or other conducts contrary to laws and regulations.

1. When the employee is entitled to severance pay?

According to Article 46 of the Labor Contract Law of PRC (“LCL”), the employer may terminate the labor contract but has to pay severance pay to the employee in the following circumstances:

–?? Legal bilateral termination (Article 36 of LCL)

When a company desires to terminate the labor contract, the LCL allows the company to enter into a mutual agreement with its employee on termination of employment relationship.

In such circumstance, a severance package (normally “n” or “n+1”) shall be involved in this termination agreement. The bilateral termination agreements are often used in the event of downsizing as it may avoid conflicts between both parties and legal costs for the potential legal proceedings.

–?? Failure of renewal

When a fixed-term employment contract expires, and the employer is not satisfied with the employee’s performance, it may choose not to renew the contract. However, a severance (typically “n” or “n+1”) has to be paid by the employer.

This rule changes when the second fix-term contract expires, in which case the contract becomes an open-term labor contract, and the employ has no right to not renew the contract, otherwise, it shall pay a severance of “2n” to the employee.

–?? Mass-layoff (Article 41 of LCL)

Under Article 41 of LCL, a mass-layoff refers to the collective termination of more than 20 employees or 10% of the total employees. A legal mass-layoff requires notification and explanation to labor union and all employees in advance, report to the labor administrative department for review.

Without the above procedures, the mass-layoff will be deemed as illegal termination which means the employee will likely be entitled to severance pay of up to “2N”. If the mass-layoff is approved by the labor administrative department, the employer still has to pay severance (normally “N” or “N+1”) to all the employees who were terminated.

–?? Bankruptcy, dissolution, cancellation

When the labor contract is terminated due to the employer’s bankruptcy, dissolution and cancellation, the employee is entitled to “N” or “N+1” of severance pay (Cause 4 and 5, Article 44 of LCL)

–?? Employer’s legal unilateral termination

The LCL (Article 40) allows the employer, in any of the following circumstances, to lawfully terminate the labor contract by (i) sending the employee a written notice 30 days in advance and paying severance of “N”; or paying severance of “N+1” instead of 30 days’ written notice in advance:

(1) Health issues or injury:

A worker suffers from an illness or a non-work-related injury and, after the expiry of the prescribed medical period, is unable to fulfil his/her original work or fulfil the work that has been otherwise arranged by the employer;

(2) Incompetent in work

A worker is incompetent in performing his/her work and remains to be incompetent in performing the work after training or adjusting the position;

e.g. the employee fails to meet the standard of performance appraisal for several times.

(3) Significant Changes

The objective circumstances under which the labor contract was concluded have significantly changed (e.g. enterprise migration, department abolishment), making it impossible to perform the contract, and the employer and the employee fail to reach a mutual agreement on changing the contents of the labor contract after negotiation.

–?? Employer’s illegal unilateral termination (2N)

The employer’s illegal unilateral termination will make the employee entitled to a severance pay of “2N”, and it refers to the following circumstances:

(1)?Termination of an open-ended labor contract by the employer

An open-ended labor contract has no expiration date and will continues until either the employer or the employee terminates the contract. If the employer and employee have entered into two consecutive fixed-term labor contracts, or if the employee has worked continuously in the company for 10 years, regardless of the labor contract, the employer and employee will automatically enter into an open-ended labor contract.

(2)??Dismissing a female employee during her pregnancy, confinement or nursing period.

(3)?? Dismissing an employee who suffers from sickness or non-work-related injury within the prescribed medical treatment period

(4)?? Dismissing the employee who has engaged in work exposed to occupational disease hazards during employment without a pre-employment occupational health examination, or dismissing an employee suspected of suffering an occupational disease during the period of diagnosis or medical observation;

(5)?? Dismiss the employee who has been working for 15 years consecutively with the employer and will retire in less than five years; or

(6)?? Any other dismissal that is unlawful or prohibited by law.

2. When the employee will NOT be entitled to severance pay?

HOWEVER, the severance pay shall not be payable in the following circumstances:

• The employee does not satisfy the recruitment criteria during the probationary period;
• The employee commits serious violation of the company rules and regulations.
• The employee commits gross negligence in duties or malpractice, thus causing significant damage to the employer;
• The employee simultaneously works for another company without consent of the current employer, which seriously affects the fulfillment of the current employer’s work tasks, or who refuses to rectify the situation upon the employer's request;
• Where the labor contract is rendered void under the circumstances stipulated in item (1) of the first paragraph of Article 26; or
• The employee has been held criminally liable pursuant to the law.

3. Are you entitled to severance pay even if the termination is initiated by yourself

Under Article 38 of LCL, the employee is also entitled to severance pay of “N” even if the termination is initiated by the employee in the following circumstances:

• The employer fails to provide labor protection or working conditions as defined in the labor contract
• The employer fails to pay remuneration in full and on time;
• The employer fails to pay social security premiums for employees;
• The rules and procedures of the employer are contrary to laws and regulations to the detriment of the employee’s rights and interests.
• The employer induces the employee enter into the labor contract against the employee’s true intention by illicit means such as fraud, coercion, or taking advantage of the employee’s unfavorable position, which ultimately leads to the invalidity of the labor contract;
• If an employer forces an employee to work by means of violence, threat or unlawful restriction of personal freedom, or if an employer violates the safety regulations and instructs an employee to engage in hazardous work and that jeopardizes the employee’s personal safety, the employee may terminate the employment contract immediately without prior notice to the employer.
• Other circumstances stipulated by laws and regulations

ABOUT AUTHOR

Saway Wang is a seasoned legal professional with nearly a decade of experience in providing comprehensive legal services to expatriates and foreign enterprises operating in Shanghai, China. Proficient in English and has garnered extensive expertise inrepresenting clients in a wide array of foreign-related litigation andarbitration cases.

She is also specialized in diverse areas of business law and excels in handling complex legal matters such as business establishment and transition, financing, mergers and acquisitions, contract negotiation and review, bankruptcy proceedings, compliance, and employment issues.