Employee & Employer Guide to Severance Pay in China

guide to severance pay in china

Am I legally entitled to severance?

Severance pay in China is a compulsory financial compensation provision under labor law for employees who are terminated by the employer or who’s employer fails to renew the labor contract under identical terms as the previous labor contract. This means that in these two conditions, employees are absolutely entitled to a severance payout. However, there are many cases and loopholes resulting in negotiations between employer and employees.

How to calculate severance fee?

According to Article 47 of the Labor Contract Law of the People’s Republic of China: severance pay shall be paid to the worker at the rate of one month’s salary for each year of employment with the employer. If it is more than six months or less than one year, it is calculated on the basis of one year; if it is less than six months, the worker is paid half a month’s salary, provided the employee is not on his/her probation period.

If the worker’s monthly salary is higher than three times the average monthly salary of the employees in the region of the previous year as announced by the people’s government of the municipality directly under the Central Government or the municipality with districts, the severance pay shall be paid to the worker at the rate of three times the average monthly salary of the employees, and the maximum number of years of severance pay shall not exceed twelve years.

Severance pay in China

What if my employer doesn’t pay me my severance?

According to Article 87 of the Labor Contract Law of the People’s Republic of China: If the employer terminates or terminated the labor contract in violation of the provisions of article 47, it shall pay indemnity to the worker in accordance with twice the standard of economic compensation stipulated in Article 47 of this law.

Depending on the circumstances of separation, different compensation can be claimed. Such as double wages for not signing a labor contract, as well as back payment of social security. If employee-employer negotiations fail, you can file an arbitration claim according to the law, as well as request the company to pay economic compensation, withheld wages, overtime wages and unemployment insurance, etc.

Suppose an employee is dismissed. The company informs in writing one month in advance, and both parties agree. He was paid 30,000 yuan per month and worked in the company for 5 years and 7 months. Then, the company needs to pay 6 months of severance pay to him, totaling 180,000 yuan.

What are N, N+1 and 2N and what do they stand for?

Commonly cited, N is the number of years of work and is used to refer to the economic compensation in the Labor Contract Law.

N = Standard severance compensation

N+1 = Standard severance compensation + 1 month (to cover the lack of a notice period)

2N = Double severance compensation in the case of employer wrongdoing

There are 6 scenarios for “N” (standard) severance pay for the termination of a labor contract:

(1) Consensual termination proposed by the employer

(2) Resignation of the employee if the employer is at fault

(3) Dismissal by the employer if the worker is not at fault

(4) Economic redundancy

(5) Except for the case where the employer maintains or improves the terms and conditions of the employment contract and the worker does not agree to the renewal, the employment contract expires and is terminated;

(6) When the main body of the employer is extinguished (such as when the employer is declared bankrupt; when the employer decides to dissolve the contract in advance, etc.).

Which scenarios does “N+1” apply to? Basically any scenario where the employer does not give out the 30 day notice period:

(1) the expiration of the contract period.

(2) job incompetence & the employer does not give a notice period

(3) Significant change in objective circumstances where no notice period is given.

What does “2N” refer to?

2N is the compensation paid by the employer after the employment contract is terminated in violation of the law. If the employer terminates the employment contract in violation of the law, the worker has the following options.

(1) to request the reinstatement of the labor relationship

(2) to continue to perform the contract;

(3) or request the employer to pay compensation for the illegal termination of the employment contract, which is commonly known as 2N.

In the event that the worker requests the payment of compensation, or the worker requests the reinstatement of the employment but it is difficult to do so in practice, the employer shall pay the compensation to the worker, i.e. 2N.

severance pay in China

Relevant Laws and Regulations of the Labor Contract Law of the People’s Republic of China

Article 47

Economic compensation shall be paid to the worker according to the standard of one month’s salary for each year of employment with the employer. If it is more than six months or less than one year, it shall be calculated on the basis of one year; if it is less than six months, the worker shall be paid half a month’s salary as economic compensation.

Article 48

The employer violates the provisions of this Law to cancel or terminate the labor contract, the worker requests to continue to perform the labor contract, the employer shall continue to perform; the worker does not request to continue to perform the labor contract or the labor contract has been unable to continue to perform, the employer shall pay compensation in accordance with the provisions of Article 87 of this Law.

Article 87

If the employer terminates or terminates the labor contract in violation of the provisions of this Law, it shall pay compensation to the worker in accordance with two times the standard of economic compensation stipulated in Article 47 of this Law.

Conclusion

For employees

Know your rights when facing possible termination. Don’t make rash decisions or rush into (or out) of agreements without considering your options.

For employers

Focus on compliance and strive to mitigate risk. One great way to do so is to use a qualified HR service provider such as HROne!

How HROne can be beneficial to your business

HROne has more than 17 years of experience in the Chinese Labor market and is committed to ensuring the highest level of compliance standards for our clients. HROne helps you to safely and legally hire employees in China, where a direct employment contract is not desired or feasible, or where a company does not have a legal entity in China through Employee Leasing/Talent dispatching Service.

In addition to Mainland China, HROne also provides employment services in Taiwan and Hong Kong. HROne fulfills all essential responsibilities as that of a legal employer for employee termination aspects and also provides legal consultation service.

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