Focus on termination of labour contracts in China

By Xiang Lan, Boss & Young

The Labour Contract Law in China was passed and became effective on 1 January 2008, and its latest revision was passed and became effective on 1 July 2013. Since the law became effective, the protection for employees under China’s labour law system has much improved, and burdens for employers have correspondingly increased significantly.

When an employer decides to terminate a labour contract with its employee peacefully – avoiding a lawsuit against it through negotiations with the employee – and sign an agreement for termination, it might want to take the followings into consideration.

Xiang Lan Boss & Young
Xiang Lan
Boss & Young

Cause of the termination. When talking about termination of a labour contract, the Labor Contract Law gives the employer few options that can release the employer from paying the employee any economic damages or compensation.

According to the Labour Contract Law, an employer can refuse to pay an employee economic damages or compensation only where: (1) it is proven during the probationary period that the employee does not satisfy the employment criteria; (2) the employee has committed a serious breach of the employer’s rules and system; (3) the employee is guilty of serious dereliction of duties and corruption, and causes the employer to suffer significant damages; (4) the employee holds a labour relationship with another employer concurrently, which has a severe impact on his/her performance of work tasks assigned by the employer, or refuses to make correction as demanded by the employer; (5) the labour contract is rendered void under the circumstances that it is concluded or varied by use of fraudulent or coercive tactics, or by taking advantage of the counterparty’s unfavourable position to cause the counterparty to act against the contract’s real intention; (6) criminal prosecution is instituted against the employee pursuant to the law; or (7) the employee rescinds his/her labour contract.

Except for (7), all the other circumstances require the default of the employee, which is not easy to prove. What is worse is that even negotiations may result in the employer’s duty to pay an employee economic damages, if the termination was raised by the employer.

So, what the employer can do is make the employee propose to terminate the labour contract. Doing this gives the employee no legal foundation for claiming economic damages or compensation according to the Labour Contract Law. In practice, it requires not only putting the employee’s verbal resignation into the agreement for termination, but also the employee’s resignation letter in writing, with his/her signature as an annexure to the agreement for the termination.

Termination date. Since it is the employer’s duty to pay labour remuneration to, and social security for, the employee in the term of the labour contract according to relevant laws and regulations, the termination date is the basis to determine salaries, social insurance and housing funds, and therefore must be made clear in the agreement for termination.

Payment. When an employee consents to sign the agreement for termination, it is common that an arrangement of various payments has been negotiated and agreed to by the employer and employee. Normally the various payments include a lump sum payment and/or several separate payments. In order to keep the employee from claiming more, the employer should either include all possible payments and benefits that the employee may deserve in accordance with law into the lump sum amount, or specify each different payment separately and thoroughly.

The payments should at least include the employee’s salary, social insurance, housing fund, and unpaid annual leave (in other circumstances it may also include work injury-related subsidies when a work injury has been determined).

It is also important to state explicitly that employee’s social insurance, housing funds and taxes will be withheld by the employer from the amount to be paid to the employee in the agreement for termination, as according to the Regulation on the Administration of Housing Accumulation Funds, the Social Insurance Law and the Individual Income Tax Law, employees must pay their income tax, and employers and employees must jointly contribute to a basic pension insurance, medical insurance, unemployment insurance and housing fund. The income tax, social security premiums and housing fund payable by employees must be withheld by the employer.

No other dispute. As the labour law system in China is fairly comprehensive, and prone to protect the employee, and it is impossible to exhaust all legal rights and benefits of the employee, after completing the above-mentioned items, it is better to include a “no other dispute” clause into the agreement for termination, which states that the amounts to be paid to the employee contains all legal rights and benefits that the employee is entitled to obtain, and the employee waives all claims against the employer for any other legal rights.

XIANG LAN is an attorney-at-law with Boss & Young

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