China Employee Mutual Terminations In Pandemic Times

In these uncertain times during the pandemic, many employers in China are turning to layoffs, furloughs, and pay cuts to reduce their labor costs. Others are are using severance payments to induce employees to agree to mutually part ways. If you as a China employer are seeking to terminate an employee via a mutual termination, you should be sure to use an enforceable mutual termination agreement.

It is important to bear in mind that mutual terminations usually occur when the employer does not have a good legal basis to unilaterally terminate an employee so will pay the employee severance in return for the employee agreeing to leave.

Consider this hypothetical. The employer and the employee reach a mutual termination agreement where they agree the employer will pay the employee severance for this amount: “/”. The agreement also includes a full employee release. Suppose the mutual termination agreement is fully executed by both parties and there is no evidence suggesting coercion or deception on the part of the employer. The employee later brings a labor arbitration claim against the employer for statutory severance. The employer argues that the symbol “/” means the severance amount is zero. Will the employee prevail? The short answer is that the arbitration tribunal/court will likely deem the agreement too one-sided and unfair to be valid.

One might argue that the employee should have known the implications of signing a mutual termination agreement, and having signed the agreement, the employee now must accept its consequences (i.e., no severance payment). However in a recent case based on facts similar to those above, a Beijing court ruled that the clause regarding severance is unclear and the agreement itself is obviously unfair and so it disregarded the agreement and ordered the employer to pay severance to the employee. In that case, the employer argued that the employee resigned for personal reasons and the parties agreed no severance was owed to the employee. The court was not persuaded.

What are the key takeaways from this case?

First, when an employee resigns, you as their China employer should not use a mutual termination agreement, no matter what the employee says.

Second, whatever mutual termination agreement you use needs to be vetted by a China employment lawyer before you use it. An unenforceable agreement will not protect you and it will hurt you. We virtually never talk on this blog discuss the need to use an attorney, but because our China employment lawyers have seen far too many DIY mutual termination agreements I just cannot shut up on this point. This is a serious legal document that needs to protect you and there is no excuse for using one that does not.

Third, the mutual termination agreement must be fair and reasonable. If you are proceeding with a mutual termination, you should be prepared to make a severance payment in an amount at least equal to the statutory severance amount. Otherwise, you run a real risk of your employee not cooperating to reach a settlement or, as the case above demonstrates, eventually suing you to get the severance payment the employee believes he/she deserves.

What if the mutual termination agreement specifies that the severance amount is zero? Well, first of all, good luck getting an employee to sign an agreement in exchange for no severance at all. Next, even if your employee signs such a termination agreement, the chances of a court (especially a court in Beijing) upholding such an agreement are slim to none. As a general matter, the employer must pay the employee something for a mutual termination. Put simply, if it is not a mutual termination (e.g., employee resignation), then a mutual termination agreement should not be used to avoid confusing the employee and the arbitration tribunal or the court.

A related question is what if the agreement specifies an extremely small amount for severance: say, 10 dollars. Such a small amount will likely be considered unreasonable by all arbitration tribunals/courts in China. Choose the right amount of severance (no less than the statutory severance amount) so both you and your employee can move forward on separate paths. Otherwise you are just setting your company up to be sued in an expensive and time consuming lawsuit down the road.

If you want to know more about how to handle employment law matters in China, I urge you to attend my free webinar on June 23. For more about this webinar and on how to sign up, please go to FREE WEBINAR – China Employment Law: What Your Company Needs to Know.

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.