The employment system in the People's Republic of China is quite different from that of the United States. Whereas the United States uses an employment-at-will system, where an employer may terminate a contract at anytime, China uses a contract employment system, which is heavily based on a North European legal framework. In a contract employment system, it is very difficult to terminate an employee that is still under contract. The latest labor law comes into effect in 2008 and governs regulations regarding contracts and severance.

Terms of Employment
Employees in China are hired on a fixed-term contract. After the expiration of the contract, it is up to the employer to decide whether to rehire the employee on a second fixed-term contract. Initial contracts typically last for 3 years that include a 6-month probationary period. After the expiration of the second contract, however, the employee is then hired on an open-term contract in which the employee may be dismissed at any notice.

Termination
Before terminating an employee, an employer must first give notice to any relevant labor unions that represent the employee. The approval of the labor union is, however, not required. An employee may only be terminated if he cannot work because of injury, incompetence, a major change in circumstances or by mutual agreement. Thirty days' notice is required for both the employee or any relevant labor union.

Severance
Termination without severance pay is only allowed if the employee is in breach of national, local or company regulations. Otherwise, severance is based on the number of years worked, in which 1 month's wage is paid for each year of service. The maximum severance available is calculated by taking 3 months' average salary and multiplying it by 12.

Enforcement
Local governments have the authority to routinely conduct inspections as well as question employees about their labor contracts. Because of the high level of corruption and bribery in China, however, the enforcement of labor laws varies from region to region.

Severance Pay upon Termination of Employment Contract

Foreign businesses looking to hire workers on the mainland should note that employees are eligible for severance pay upon termination of employment contract.

The law stipulates that an employee shall be paid severance pay based on the number of completed years of service upon contract expiration, except in cases where the employee chooses not to renew the contract despite that the same or even better terms and conditions are being offered by the employing unit. The severance pay shall be calculated at the rate of one month's salary for each completed year of service. Where the duration of service is over six months but less than one year, one month's salary shall be paid as severance pay. Where the duration is less than six months, half a month's salary shall be paid.

The term "monthly salary" refers to the employee's average salary during the 12 months prior to termination or expiration of his/her employment contract, which is applicable to contracts that take effect on or after 1 January 2008. Prior to the implementation of the Employment Contract Law, no such provision existed. Therefore it should be noted that the period of service prior to 31 December 2007 should be excluded when calculating the period eligible for severance pay unless such a provision was provided for in the employment contract prior to 31 December 2007.

Severance pay calculation

Severance pay amounts to one month's pay per year of service. For the purpose of calculating severance pay, an employment period ranging from 6 months to 1 year is to be counted as one year. If the employee has worked for less than 6 months, he will be entitled to half a month's pay.

If the monthly wage of a worker exceeds three times the average monthly wages of employees in the municipality where the employer is located, severance pay shall be paid to him at the rate of three times the local average monthly wages and and shall be for not more than 12 years of work.

tenure ≥ 6 months: 1 month(s)
tenure ≥ 9 months: 1 month(s)
tenure ≥ 1 year: 1 month(s)
tenure ≥ 2 years: 2 month(s)
tenure ≥ 4 years: 4 month(s)
tenure ≥ 5 years: 5 month(s)
tenure ≥ 10 years: 10 month(s)
tenure ≥ 20 years: 20 month(s)

Redundancy payment:

tenure ≥ 6 months: 1 month(s)
tenure ≥ 9 months: 1 month(s)
tenure ≥ 1 year: 1 month(s)
tenure ≥ 2 years: 2 month(s)
tenure ≥ 4 years: 4 month(s)
tenure ≥ 5 years: 5 month(s)
tenure ≥ 10 years: 10 month(s)
tenure ≥ 20 years: 20 month(s)

More EMPLOYMENT ISSUE To Discussion

With a population of 1.3 billion, a labor force of over 800 million, and more than 5 million graduates from institutions of higher learning each year, China has the potential to dominate global business in the decades to come. The country currently has the world’s second largest GDP in terms of purchasing power and received more than $80 billion in foreign direct investment in 2007 – five times the level in India during the same year.

With its rapid economic growth, China has experienced increased sophistication of human resources practices. New laws are being passed which regulate everything from hiring practices to minimum wage. Enforcement of labor laws by government officials and courts has also increased.

Among the most important HR issues for foreign invested enterprises (FIEs) in China are the legal requirements surrounding the issue of termination. It is never an easy task for HR managers to let employees go, but companies wishing to avoid costly labor disputes and penalties in China must be particularly vigilant.