Employee terminations in China can be quite unlike terminating an employee in other countries. Whether the termination is for cause because the employee was embezzling from the company or for legitimate performance reasons, terminating an employee in China can often lead to a somewhat torturous and lengthy process that can turn very ugly very quickly. Terminated employees can threaten to turn on their employer and report the employee to the tax authorities, the local labor commission or some other government agency. Unless employers are fastidious about following Chinese law to ensure they are “squeaky clean” in all aspects of their operations as well as that they have well-crafted internal employment policies that were adhered to in connection with the employee’s termination, the situation can quickly get out of hand. In such an instance, employers in China (particularly foreign employers) would be wise to consult an expert on Chinese law in order to avoid not only the potential fallout that can come from terminating a potentially problematic employee, but also to avoid potential landmines in the termination process.
Legal Requirements to Terminate an Employment Contract under the PRC Labor Contract Law
The legal process for terminating an employee in China is much more employee-friendly than in some other jurisdictions like the United States. Under China’s labor laws, which are set forth in the PRC Contract Law (the “Labor Contract Law”), every employer is required to have a written employment contract with each of the employer’s full-time employees. The Labor Contract Law applies to both foreign employees who are working in China as well as Chinese nationals working for a foreign employer in China. Under the PRC Labor Contract Law, an employer may include probationary periods in labor agreements with employees. However, the maximum length of these probationary periods cannot last more than 1 month in the case of an employment contract of one year or less, 2 months if the contract length is greater than one year but less than three years and, where the contract term is more than 3 years or non-fixed, the probationary period may not exceed 6 months. After this probationary period has passed, termination of an employee in China usually requires good cause as well as a severance payment in most cases.
Most importantly, an employer also must be able to show that any unilateral termination of an employee was based on statutory grounds. China’s Labor Contract Law provides that an employer may terminate an employee under any of the following scenarios without first having to provide notice or economic compensation to the employee:
- the employee does not satisfy the conditions for employment during the probation period;
- (ii) the employee materially breaches the employer’s rules and regulations;
- (iii) the employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer;
- (iv) the employee has established an employment relationship with another employer that materially impact the completion of his or her tasks with his or her existing employer, or he or she refuses to terminate such employment relationship with the other employer, after required to do so by the existing employer;
- the employee uses deception or coercion, or takes advantage of the employer’s difficulties, to cause the employer to conclude the labor contract, or to make an amendment thereto, that is contrary to the employer’s true intent; or
- the employee has criminal liability imposed against him or her.
If an employer can successfully establish one of these statutory grounds, the employer can terminate the employee without notice or the payment of severance. Nevertheless, as discussed below, this is not always a scenario that plays out in the way a reasonable employer would expect it to; there are many potential landmines in this process for the unwary employer.
Other Considerations That Come Into Play When Terminating an Employee in China
Although a company may be well within its legal rights in terminating an employee under Chinese law in any of the six scenarios described above and may follow all applicable laws in the termination process, there also are other considerations that come into play when an employee is being terminated. This is particularly true for foreign employers who may not be familiar with not only the intricacies of Chinese law but also and maybe more importantly, the realities on the ground in China. As can be seen from even the brief discussion of the Labor Contract Law above makes clear, most provisions of the Labor Contract Law are very broad. Therefore, a problematic employee who wishes to fight his or her termination can easily make considerable noise (and trouble) in the process of doing so if he or she wishes. Employees often may threaten to go to tax or other government authorities and turn over sensitive information the employer may not want revealed to the Chinese tax authorities or to a competitor company unless the employer either forces the employer not to carry out the threatened termination or pay the employee an often substantial severance payment. It is also not unheard of for employees about to be terminated to physically threaten or harass other employees or their supervisor, simply to obtain severance the employee believes he or she is entitled. This can cause not only serious discomfort to the employer and its remaining employees, but also result in financial losses or adverse reputational consequences.
Employers Should Exercise Extreme Caution When Terminating Employees in China
Because it is so common for employees to threaten to go to the tax or other government authorities in China or take similarly drastic steps when threatened with termination, employers need to ensure that their operations are squeaky clean and that they follow all applicable Chinese laws in the operation of their business. This includes any internal employment guidelines or policies the employer may have which relate to employees and their conduct. This will allow an employer to avoid a potentially embarrassing situation if and when an employee in China threatens the company with extortion or worse when the employer attempts to terminate the employee. Employers should also ensure that their internal labor/employment policies are detailed and specific so that a rogue employee cannot exploit any loopholes or vagaries in an employer’s internal policies and procedures in addition to the vague nature of the Labor Contract Law. However, employers, particularly foreign companies doing business in China, should also be aware that even though a planned termination might be lawful and justified under the Labor Contract Law, it may sometimes be best to simply settle the matter with the problem employee to avoid any of the nightmare scenarios described above. Or the particular situation may call for fighting the problem employee with the local labor commission. This can be an even more difficult situation in the event an employee slated for termination is on the employer’s board of directors or, even worse, is the employer’s legal representative. In any such scenario, a company faced with the need to terminate a problem employee should always seek experienced legal counsel in order to minimize the chances of a termination going sour in the many ways described. Unfortunately, the Labor Contract Law has created a situation in which employers are at a distinct disadvantage when seeking to terminate an employee. Only then can the employer, in conjunction with a trusted legal advisor, make the right decision as to whether to terminate the problem employee quietly and without fanfare or fight the employee tooth and nail if the employee refuses to go without kicking and screaming. Ultimately, what any employer operating in China needs to understand is that terminating an employee in China can be a very difficult proposition that is filled with potential land mines that an employer should not face without first consulting a trusted legal advisor. We always advise our clients to collect – to the greatest extent possible – documentation of non-performance and misdeeds. These, in conjunction with the assistance of an experienced legal counsel, are often the keys to a smooth termination.