How to Avoid China Employment Law Problems, Part 4: Employee Terminations

As I wrote in Part 1, Part 2 and Part 3 of this series, now is not the time for employers in China (especially American companies) to be doing anything that does not fully comply with China’s employment laws. China’s relations with the West — especially the United States) are at a low point right now and this has and will continue to play out to the detriment of every Western company doing business in China. This has already translated into China significantly toughening its law enforcement against foreign businesses, including on the employment law front. All this means you as an employer in . China need to have well-crafted employment contracts and employer rules and regulations (aka employee handbook) for your China employees and you should also periodically conduct an employer audit to make sure your company’s China employment program is in good legal shape.

Even in the best of times, employee terminations in China are fraught with risk. A mishandled China employee termination (or even just the discussions surrounding the termination) can quickly cause you problems. China’s declining economy has weakened its job market and made both employees and the government more likely to fight back against any little termination mistake.

It is therefore critical that you perfectly map out and execute your China employee terminations. Better to be deliberate and correct than to act in haste and get even the smallest aspect of your employee termination wrong. You are far more likely to lose than save money by getting rid of an employee quickly.

For example, before you tell an employee that you will be terminating her or him you should first consider this fundamental question: What is the basis for the termination? In turn, the basis for the termination will determinate the path you should take. Will the termination be a unilateral termination with a legally permissible basis or should you seek instead to settle with the employee and have the termination be a mutual termination? Your answer  will determine how much severance you are required to pay (if any), which is a super important issue in China. There are other important issues that nearly always come up with China employee terminations, such as bonus, overtime pay, compensation for unused vacation days, reimbursement for work-related expenses and non-compete provisions. Ideally, you should consider each one of these before you even approach an employee regarding termination. At the very minimum, you should not initiate an employee termination until you have determined the basis for the termination and the severance amount you will need to pay.

Consider this by now common scenario. A U.S. company is going through structural changes in multiple office locations in the U.S. and is considering laying off employees in its China office as well. Without China-centric termination agreements and without checking with the local labor authorities, the HR head at U.S. headquarters informs China employees of the company’s termination decisions but does not inform them of how much severance they will get. The terminated employees then file a labor claim. By not being prepared, the employer has made things much worse. If the employer had worked out mutual terminations with its terminated employees and secured signed mutual termination agreements with each of them, it likely could have avoided employee lawsuits and government hot water. If it had not been feasible for this company to negotiate a mutual termination deal with every terminated employee, it still likely could have avoided (or at least reduced) its legal difficulties by first consulting with its local labor authorities regarding a mass layoff.

Here’s another example. A foreign company believes one of its employee engaged in an illegal activity. Without first checking its China employer rules and regulations and the employee’s employment contract and without making sure it has preserved tangible evidence supporting its belief that the employee engaged in illegal activity, the company unilaterally terminates the employee with no severance on the day it discovers the alleged misconduct. The employee will likely sue the employer claiming wrongful termination and it likely will win. No matter the eventual result of the lawsuit, it will likely be expensive and time consuming. When our China employment lawyers are confronted with situations like this, we usually start by determining whether the employee’s conduct (and the circumstances) warrant a unilateral termination under Chinese law. In many cases, it does not. If the employer is not legally entitled to a unilateral termination, what usually (but not always) makes sense is a mutual termination. However, in some cases, even if a unilateral termination comes with risks (as it virtually always does), it may be the employer’s best option. Whether or not our client goes ahead with a unilateral termination, our goal is to provide our client with enough information so it can know its risks and can make a thoughtful cost-benefit decision on how to proceed.

Foreign employers in China tend to want to move quickly when terminating a non-performing or problem employee before the employee’s probation period has ended. However in most of these cases, the probationary employee does not come within any particular grounds for termination under Chinese law that would allow the employer to unilaterally terminate. In these cases,  the employer’s best option is usually to pay the employee severance in exchange for the employee voluntarily leaving (i.e., a mutual termination). And since this termination will be structured as a mutual termination, whether or not the termination occurs within the probation period is not important.

With these leaner times in China, we have recently been seeing foreign companies terminating one or more of their employees and then “hiring” them back as a “consultant.” This is almost always fraught with problems. Before doing something like this, you should first answer why you want to terminate this person in the first place and why you want to “hire” her back as a consultant. Most importantly, you should be aware that China generally does not allow for independent contractors. Is there an alternative to terminating this employee? For example, when does her contract expire? Can you simply not renew her contract? If you do terminate this employee, is it really worth the risk to then bring her back as an independent contractor? Most importantly, might you not be better off just keeping this person as an employee, rather than taking the double risk of terminating her and then using her as an independent contractor? We have seen situations where the terminated employee eventually sues the employer both for the initial wrongful termination and for additional pay and benefits from the “independent contractor” stint. The employee alleges (almost always with a good basis to do so) that its consultant relationship should be deemed to be an employment relationship and seeks damages arising from the employer’s failure to treat her as an employee all along. These make for extremely messy and usually very expensive lawsuits.

Proceeding with prudence with any China employee termination will help you prevent legal and government problems and avoid HR hassles. Take  the  time necessary to ensure you have fully resolved all outstanding issues with the relevant employee to the extent you can and make sure you can check all of the “termination boxes” required by China’s local and national employment laws. The bottom line is that these days you cannot afford not to handle all your China employee terminations with extreme care.

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.