The Labor Contract Law provides an exhaustive list of situations
under which an employer may lawfully dismiss its employee. It
depends on the situation whether severance pay is required -
severance pay (or termination pay) is the amount an employer has to
pay to an employee that is lawfully terminated. Situations that
require severance pay include termination due to restructuring,
termination as a result of a mutual agreement or termination as a
result of the expiration of a fixed-term labor contract. In case
severance pay is required, employers are obliged to provide this
amount to their employee in addition to other contractual
arrangements that are in place. Any unlawful termination by the
employer will result in reinstatement of employment or a punitive
compensation equal to the doubled severance pay.
Severance pay is calculated at one-month salary for each year.
Any working period of six months or above but less than one year
must be counted as one year and for working periods less than six
months, half a month's salary must be paid as severance. For
example, in case an employee worked for 13 months for the same
company, he will receive severance pay that amounts to 1.5 month
salary. The one-month salary is calculated – with certain
limitations – at the employee's average monthly salary
during the last twelve months.
For any period after 1 January 2008 – the date of the
enactment of the Labor Contract Law – where the
employee's average monthly salary is more than three times the
average monthly salary in the location of employment, the latter
will be used to calculate severance pay. For example, in Shanghai,
the average local monthly salary of 2012 is RMB 4,692, and three
times this amounts to RMB 14,076. Thus, an employee whose
employment is lawfully terminated in Shanghai can only receive up
to RMB 14,076 as severance for each year of employment after 1
January 2008; this rule does not apply to the period prior to the
enactment of the PRC Labor Contract Law.
In addition to this "three-times" restriction, the PRC
Labor Contract Law also limits the total amount of severance to a
maximum of twelve months average salary. In other words, a lawfully
terminated employee can only receive 12 months average salary in
maximum even if he or she works for a company for over 12
Severance pay agreements
Although employers in China are obliged to provide severance pay
to their ex-employees, many employers choose to close severance pay
agreements with their employees. Under such an agreement, both
parties offer each other additional conditions that are not
required by law. For example, an employer can agree to pay a higher
amount of severance – this can also be a lump sum – in
exchange for the employee's agreement not to file a claim
against the employer. However in case the agreed amount of
severance pay is lower than the amount the employee is entitled to
anyway by law or by other legal documents such as the employment
handbook, the agreement will be deemed invalid.
A severance pay agreement can be an efficient measure for an
employer with insufficient termination reason to prevent a
potential dispute in case the employee would have had a wrongful
termination claim, but accepted the severance pay agreement in
Besides negotiating about the amount of severance pay, the
employee can also ask for non-monetary benefits, such as a
reference letter or keeping certain company properties, e.g. a
company laptop. The employer will try to persuade the employee to
agree upon waiving as many employment law claims the employee has
against the employer as possible. However, certain claims related
to minimum wage, overtime, unemployment benefits, compensation
benefits and other mandatory legal rights cannot be waived;
otherwise such a severance pay agreement would not be valid.
Severance pay agreements usually contain certain other clauses
as well. Provisions such as the date of termination,
confidentiality clauses and non-competition clauses are common for
severance pay agreements. Also, an employer may insert a 'no
rehire' provision or a 'return of company property'
provision, depending on the specific situation.
Final remark for foreign employees
Foreign employees need to fulfill a specific requirement upon
receiving severance pay. As their employment depends on their work
permit, foreign employees are only entitled to severance pay for
the period they have a work permit. The duration of foreign
employee's work permit is normally shorter than the term of the
labor contract. Therefore it is critical for foreign employees to
ensure the local employers timely apply for and renew their work
permits in order to get full protection of local labor laws.
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.
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