Terminating employees in China: are compensation payments always required

Foreign Invested Enterprises (FIEs) often encounter challenges when entering or doing business in the China market. One common challenge is that of employment and, especially, the termination of employees.

China is not an ‘employment-at-will’ jurisdiction and termination is nearly always difficult. To prevent employment-related problems, you need enforceable employment contracts and employer policies that are clearly set out in an employee handbook.

The employment contract is a legally binding document that should set out in a clear and concise manner the exact terms of employment and the rights and responsibilities of both your business and its employees. The handbook should provide clear expectations for a business and its employees, as well as a centralised, uniform source of information about employment policies and procedures.

Both the contract and the handbook should be fully compliant with Chinese labour law and each employee should be required to acknowledge receipt. Both documents must be in Chinese; a second or third language can also be included, but non-Chinese languages are for reference only.

There are typically two situations in which a company can terminate an employee without the need to pay the employee compensation:

1. Termination during the probation period – When an employee enters a job, it is necessary to set out specific and quantifiable probationary requirements (which can include ‘Key Performance Indicators’, as well as other job requirements) in the employment contract. If it can be demonstrated that the employee is non-compliant in respect of his/her probationary requirements, a company can terminate an employee without paying compensation. It should be noted that termination should be effected before the end of the probation period.
2. Dismissal in violation of company policies – If an employee violates a company policy and it is clearly set out in the employment handbook that such a violation will result in termination, then the employment can be terminated without compensation. However, not all policy breaches are terminatable offences and there are specific steps that need to be followed when seeking to terminate an employee in this manner. In many cases, even when terminating an employee with cause, the terminated employee will take the company to arbitration. It is always therefore advisable for managers to consult with a lawyer who is experienced in this area.

In both the situations above, it is essential that an employer should be satisfied that:

• The company’s policies are in compliance with all national and local employment laws
• The employee has signed documentation acknowledging that he/she has received and understood the employee handbook and company policies
• The employee contracts and handbook are written in Chinese
• There is documented proof of policy violations
• All steps required by law to terminate an employee have been taken

Sovereign may also be able to assist in some of your HR-related matters in China. For example, we can support you in the development of employment contracts and handbooks, ensuring your organisation’s full compliance with current Chinese labour law. We can also provide on-boarding and payroll services, amongst others. Please contact china@sovereigngroup.com for more information.