China Employee Terminations: Make Them Mutual When Possible

Terminating China-based employees is difficult. Article 40(2) of China’s Labor Contract Law permits an employer to unilaterally terminate an employee, with severance, if the employee is incompetent and remains incompetent after training or assignment to a different position. In practice though, Chinese courts tend to be very strict in applying this law and employers that fail to have “checked all the boxes” before the termination almost always face adverse consequences.

Consider hypothetical 1: The employer and the employee enter into a written employment contract in year 1. The employer also provides its employee with a written statement explaining its expectations and performance requirements for the employee’s position. The employee signs on that statement but the employee’s performance perpetually fails to meet the employer’s expectations, The employer unilaterally terminates the employee for “poor performance” and pays the employee statutory severance: three months salary, plus one additional month’s salary in lieu of advance notice. The employee sues on the basis of unlawful termination.

How will a Chinese court likely rule: This termination will almost every time be deemed unlawful because the employer failed to generate good contemporaneous evidence of its employee’s failure to meet the job requirements.

Now, let’s consider hypothetical 2. Same facts as above, except that the employer did yearly performance reviews and documented the results. These performance reviews indicated the employee was not cutting it and they were acknowledged and signed by the employee. Then during the next 6-month period, the employee did nothing to improve her job performance and it became clear the employee was not going to get better at her job. The termination notice in year three was the same: unilateral termination of the employee with the same amount of severance for “poor performance..”

In this scenario, the employer did a better job documenting the employee’s incompetence but it will still almost certainly lose. The employer will lose because it did not follow the law in making the termination decision as it did not provide the employee with any training so she might improve at her job nor did it ever assign her to a different position. For these reasons, the employer will lose for failing to meet its burden of proof regarding the need to provide a failing employee with training or a different position.

Hypothetical 3. Same facts as above, except: during the 6-month period before termination, the employer worked with the employee diligently to come up with a corrective plan for improvement. The employer worked with the failing employee on correcting her work errors, on monitoring her work progress and on providing her with ample training, all of which the employer documented clearly in writing.

Will this employer prevail in a legal proceeding initiated by the employee? Probably yes. I say “probably,” for two reasons. First, generally speaking, if there is a workers union, the union needs to be consulted before a unilateral termination decision can be made final. Failing to go through this step may subject to the employer to liabilities for unlawful termination. Second, even assuming there is no workers union, there may still be additional requirements imposed by the local authorities and those will need to be followed as well.

Your outcome from your termination decisions will, of course, depend on the facts, including where your company and your terminated employee are based. Note though that even in the last hypothetical the multiple hoops with which employers must jump through to satisfy their burden of proof it oftentimes makes sense even for employers that have followed all termination steps to come to a mutual termination agreement with their terminated employee to avoid the legal battles altogether. The more you do right, the less you will usually need to pay.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.