Working Abroad in China: Severance payment

Dec 06, 2019

Working Abroad in China

Severance payment

Authors: Normand Gauthier, Zainab Sylla

Working in China as a foreign national is a great experience for many. However, when employment issues arise, it can quickly become a nightmare. Over the years, I have noticed that the misunderstandings and questions are recurring. Thus, I created this series “Working Abroad in China” which explores and discusses some key matters foreign employees should know. As said in the previous article, termination of employment relationship, all good things come to an end. Sometimes there is a silver lining in such situations: economic compensation.

Severance Payment Criteria

It is essential for foreign employees to be aware of the different situations in which a severance payment can be obtained. Severance payments are received through a set of conditions involving termination of contracts. It is important to distinguish the circumstances in which economic compensation is available according to the Labor Contract Law. Generally, it occurs when the employment relationship ends without it being the employee’s fault. There are specific conditions under which the employer must pay the severance sum for termination of employment contract:

1.The employee immediately dissolves the contract due to employer’s fault.

2.The employer proposes to dissolve the employment contract and an agreement is reached between both parties.

3.The employee is injured or sick for non-work-related reasons and cannot resume his original position or any arranged position by the employer.

4.Incompetency, the employee does not have the capabilities of assuming its responsibilities at the company, even after adequate training or change of position.

5.A change of a term has been introduced into the contract. This term was heavily relied upon by both parties, which causes complications. After due negotiations, both the employer and the employee cannot reach an agreement. Eventually, this amounts to the termination of the contract.

6.Economic lay-off based on revitalization in accordance with the Enterprise Bankruptcy Law.

7.The employer is declared bankrupt, liquidates the business ahead of schedule, his business license is revoked, is ordered to close down or dissolve.

8.Other circumstances proscribed by other laws or administrative regulations.

Although it is not exactly a termination, an expiration of a fixed-term contract naturally occurs when the employment contract has reached its end date and the employee may also be entitled to economic compensation. What happens if the contract expires because of the employee’s refusal to renew the contract? In that case, the employee is not entitled to severance payment if the conditions offered by the employer are the same or better. There are protections when an employment relation is ongoing despite of the contract’s expiration. However, the employment contract’s expiration date is usually aligned with the Work Permit expiration date. Additionally, a foreign employee cannot claim a de facto employment relationship.

Severance Payment Calculation

Regarding the calculation of the sum of money owed to the employee, special criteria apply. Any period between 6 months and a year shall be considered as a year. Any period less than 6 months shall be considered as half a year. Additionally, the employer has the option to pay-in-lieu of the 30-day notice, hence the common saying “N+1”.

Furthermore, the severance pay will be paid in accordance with the concerned period. Indeed, economic compensation is calculated depending on the employee’s monthly salary for the last 12 months. Moreover, the severance payment will be capped at 12 years of work: the employee will not be economically compensated beyond this period. The other cap mainly concerns highly paid employees, the maximum monthly salary. It is capped at three times the local average wage declared by the local government. This average is declared annually, commonly around spring. As of the time of writing this article the caps are CNY 26,295 in Shanghai and CNY 23,564.5 in Beijing.

To summarize:

Economic Compensation = Monthly salary x working years
Monthly wage calculation	Working years calculation
Average monthly wage for 12 months prior to the dissolution of the labor contract.	Capped at 12 years
Capped at three times the average local wage declared by the local government	Less than six months	Half a year
	Six months to a year	A year

If a contract is not terminated on statutory grounds, the employee is entitled to either gain back their initial position or be awarded double economic compensation. Realistically, re-instatement is highly unlikely for foreign employees and thus, it is considered as a better choice to aim for double economic compensation.

In summary, the situations in which severance payment is available are clearly determined in the Labor Contract Law. The calculation of the payment depends on the number of years worked by the employee and his salary. For successful negotiation, it is important to keep in mind the requirements and calculation of economic compensation.

This article is a vulgarization of laws and regulations and does not constitute legal advice. The author is not responsible for any loss caused by using any information provided in this article. For more information please contact Normand@Laodongfa.com.

For all intent and purpose, the term China in this article refers to the People’s Republic of China.