China Employee Terminations: Unilateral is Tough

Employee terminations in China are almost never easy and employer-initiated unilateral terminations are exponentially more difficult. Foreign companies terminating their employees in China can and often do get tripped up when they attempt unilateral employee terminations.

Consider this hypothetical. Employee is a regular, full-time employee of Employer. Employer and Employee executed a few fixed-term employment contracts before signing an open-term contract (which essentially means the employee must be employed until mandatory retirement age). There have not been any issues with Employee’s work performance. A few years into employment, Employee signs off on Employer’s Rules and Regulations which lists the faking of credentials as a terminable misconduct. Employer discovers one of the diplomas Employee provided during Employee’s onboarding is a fake. Employer terminates Employee right away based on the fake diploma. By the time the termination occurs, Employee has worked for Employer for over a decade. Employee brings a labor arbitration claim against Employer for wrongful termination.

How will the case turn out for Employer?

In the real case on which this hypothetical is based, the employer ultimately lost and had to pay the employee a lot of money for the unlawful termination. The court basically held that the employer’s termination decision was not reasonable. First, the employer never made clear the employee’s degree (for which she provided a fake diploma) was required for her position nor did the employer specifically require the employee hold such a degree. The employer also never informed the employee that it would not have signed an employment contract with her if she did not hold such a degree.

The Chinese court therefore held that it would not make sense to treat the employment contract as invalid simply because the employee had provided a fake diploma. The employer’s failure to produce evidence to show the employee was not competent at her job or otherwise failed to meet the employer’s expectations for her position was an additional reason for the Chinese court’s decision. The court found that because the employer had renewed the employee’s employment contract a few times before entering into an open-term contract with her the employer was generally satisfied with the employee’s job performance. The court also ruled that because the employer rules and regulations were implemented years after the employee provided the fake diploma, applying the employer’s rules and regulations retroactively against the employee would not be fair. The court also held that even though employees have a duty to act in good faith with their employers and this duty includes providing accurate and correct information during onboarding, the employer has a duty to review its employees credentials within a reasonable time after an employee’s start date and permitting an employer to annul an employment contract based on something that happened years after commencement of the employment relationship would not be reasonable. In other words, failing to act for so long after an employee’s misconduct precludes an employer cannot from using that misconduct as a basis to terminate the employee. Lastly, the court ruled that the employer had not suffered any losses from the employee’s having faked one of her diplomas.

Based on the above, the court ordered the employer to pay the employee double the statutory severance for the unlawful termination.

What are the key takeaways from this case?

First, you need to make sure your employer Rules and Regulations are enforceable in your locale. That is, for you to unilaterally terminate an employee for a serious breach of your employer Rules and Regulations, you need a legally enforceable provision in your rules and regulations on which you can  rely to justify the termination. If you make a termination decision based on a provision that is not enforceable, you risk a Chinese court deeming your termination decision to constitute an unlawful termination and you will then be hit with the adverse consequences that come with that. This is yet anther reason why employer audits  have become essential for rooting out problems and inconsistencies with your employment documents.

Second, use your employer’s Rules and Regulations wisely and, in particular, note that you may not apply your rules and regulations retroactively to punish an employee for a past behavior. This also means you need to need to make sure your employees actually receive a copy of your Rules and Regulations and that you have proof that they did so. We typically have our clients get signed receipts from each employee attesting to having received a copy of the Rules and Regulations.

Third, though not specifically addressed in the court’s decision, the sort of employee behavior mentioned above is usually best addressed before the end of the employee’s probation period, provided there is a written basis (e.g., your employment contract) on which to act.

Last but certainly not least, think long and hard before you terminate an employee especially if you are not paying him/her any severance. In the actual case discussed above, the employer claimed it had other grounds under which it was permitted to terminate the employee but the court held that its evidence was not sufficient to justify the dismissal. This case and pretty much every case we read shows how challenging it is for employers in China to terminate an employee without having to pay severance. China does NOT have employment at will and this means it is almost always difficult to terminate a China employee. With China’s economic slowdown and the various tensions these days between the U.S. and China and the EU and China, the odds of your company winning a termination lawsuit against a Chinese employee is verging on impossible.

Our advice: If you truly believe an employee termination is inevitable, consider how strong your case is and how good your evidence is and then consider mutual termination.

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.