A US company recently approached us on an employment matter. Their Shanghai subsidiary terminated several employees due to the elimination of their positions, but after paying them severance these employees still filed claims in labor arbitration claiming economic compensation (which is two times severance) for unlawful termination, and in one case reinstatement.
Chinese labor laws are relatively strict when it comes to unilateral termination by the employer. This is only permitted for one of several grounds listed in the law. Some of these legal grounds allow immediate termination without compensation –mainly material breach of the employer's rules, and serious dereliction of duties or graft for personal gain (causing substantial losses to the employer).
Other legal grounds are conditional, allowing the employer to terminate subject to payment of severance + fulfilment of other conditions:
- 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).
- When a material change in the objective circumstances relied upon at the time of conclusion of the employment contact renders it impossible for the contract to be performed, and the parties are unable to agree on amending the contract (notice + proof required).
A key point to remember however, is that an employee always has the option to challenge the application of a certain legal ground by filing a claim in labor arbitration. Such a claim is easy and inexpensive to make, and can present the company with the often-formidable challenge of evidencing the legal ground for termination.
Negotiating a Settlement
The best way to avoid this kind of challenge, is to negotiate a settlement at termination. Once a settlement agreement is signed and unless the settlement is clearly unlawful or unreasonable, there is little point for the (former) employee to file a claim. Therefore in practice, and unless there are other priorities (e.g. setting an example), we will almost always seek to terminate based on mutual agreement.
Reaching a mutual agreement can be difficult as well, but our extensive experience suggests that most employees are quite amenable to a settlement as long as:
- 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.
Or look at it from the employee's side: either a reasonable settlement is reached and he (or she) receives payment very quickly, or the employee needs to spend more than a more than 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, then they should know all of the above, and for most cases be able to calculate a reasonable package and negotiate a settlement with the employee. 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 to implement the plan on Exit Day.
In any case one should always explore options in advance, and consider carefully how to approach the subject of terminating one or more employees in China. What you want to avoid at all cost: a complicated dispute drawn out over several years, where you still end up paying much more than would have been needed to settle in the first place.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.