PRC law has stringent restrictions on the termination of employment contracts. Generally, an employment contract can be terminated by mutual agreement between the employer and the employee. In the absence of the employee’s consent, PRC law provides very limited grounds for termination of an employment contract by the employer. There are two categories of statutory grounds for unilateral termination by the employer: (i) termination for cause, where the employer is entitled to terminate the contract without prior notice and without payment of severance pay to the employee; and (ii) termination without cause, where the employer must give 30 days’ prior written notice (or salary in lieu of notice) and pay severance pay to the employee. Generally speaking, unsatisfactory performance of the employee or cuts in budget of the employer, which are common grounds for termination in other jurisdictions, are not statutory grounds for termination of an employment contract under PRC law. If the employer intends to terminate an employment contract unilaterally, it must notify the trade union (if any) in advance. The trade union may raise comments on the proposed termination and the employer must consider and respond to such comments and may amend the termination plan as appropriate.

Under PRC law, redundancy is a separate concept involving the severance of at least 20 employees, or where less than 20 employees are affected, at least 10% of the total work force of that employer. Redundancy also needs to satisfy at least one of the statutory criteria under PRC law, most of which involve financial difficulties of the employer. The redundancy also needs to go through various statutory procedures, e.g. consultation with the trade union (if any) or all employees and filing of the redundancy plan with the local labour bureau.

Under PRC law, if an employment contract is terminated by mutual agreement, or unilaterally by the employer based on a statutory ground of termination without cause, or under the redundancy regime, the employer must pay statutory severance pay to the employee. Generally, the statutory severance pay is calculated by reference to the employee’s service period with the employer, subject to certain limits.

If the termination is deemed unlawful dismissal by a labour arbitration tribunal or a PRC court, the employee is entitled either to be reinstated (in which case the employer must make up the remuneration applicable to the period during which the employment was purportedly terminated), or to claim double statutory severance pay.

Given the strict requirements on unilateral termination of an employment contract by the employer and the severe consequences of unlawful dismissal under PRC law, most employers in China opt to negotiate a mutually agreed termination with each employee. In practice, employers would normally offer a termination package higher than the amount than the employee would be strictly entitled to receive under law, to incentivise the employee to agree to termination.

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