Employers in China must consider the cost as well as the risk when making employment termination decisions. So how does an employer determine cost of the termination? One factor that employers must examine: severance pay.
- One month salary in lieu of the notice: for certain termination grounds, such as non-performance, employers must give 30 days prior notice of termination or pay one month salary in lieu of the notice.
- Statutory severance fee: Employers must provide one month salary for every year of service or half month salary for any period less than 6 months. This severance is capped at three times the average salary of the previous year in the city where the employer is located and the total severance is subject to 12 months city average salary.
On January 1, 2008, the PR Labor Contract Law became effective. (For more information regarding this law and its impact, see Squire Sanders’ May 2010 China Update) (pdf) Because of the changes in the law, terminating a senior manager now costs an employer less than prior to 2008. The PRC Labor Employment Contract Law provides that before January 1, 2008, any period less than one year is treated as one year. Thus, an employee who worked only six months of service before January 1, 2008 still receives one month salary. However, after January 1, 2008, six months of service equals half month salary. Additionally, there is no cap to the employee’s average monthly salary for service prior to January 1, 2008. However, service after January 1, 2008, is subject to the caps mentioned above. Thus, the change to the law has drastically decreased the cost of terminating a senior level manager.
Employers can avoid or drastically decrease some of the costs associated with terminations in China by carefully managing terminations. For example, employers should be conscious of timing an inevitable termination prior to the announcement of the average salary of the city. Normally, the average salary of the city for the previous year is announced during March to April each year. Sometimes, when last year’s average salary has not yet been announced, the average salary of the year before the last year will be used—resulting in a savings for employers.