Is an employer in the PRC obliged to make a severance payment when terminating an employee's employment?

This depends on the reason for which the employer is terminating the employee's employment.

If the employee's employment is terminated by the employer due to one of the following reasons, the employer is not required to make a severance payment (which was formally known as "economic compensation" under the PRC Labour Contract Law) to the employee:

  • during the probationary period, the employer can prove that the employee has failed to meet the standards required for the particular role for which the employee was recruited;
  • the employee has materially violated the employer's rules and regulations;
  • the employee has committed a serious dereliction of his or her duties or has engaged in malpractice for his or her own ends, resulting in substantial harm to the interests of the employer;
  • the employee has simultaneously established an employment relationship with some other employer which materially affects the completion of work tasks with the first employer, or the employee has not rectified the situation after it is brought to his or her attention by the employer;
  • the employee has used deception or coercion, or taken advantage of an employer's difficulty to enter into or change a labour contract so it does not reflect the employer’s intention; or
  • the employee has been convicted, in accordance with the law, of a criminal offence.

However, under the following circumstances, severance pay is payable by the employer to the employee on termination of employment:

  • the employer proposes to terminate the employee's employment and such proposal is agreed to by the employee;
  • after undergoing the specified medical treatment period for an illness or non-work related injury, the employee is incapable of performing his or her original duties and is unable to perform the duties of another job arranged by the employer;
  • the employee does not have the competences to perform the job and remains so after receiving training or being assigned to another job;
  • the employee's labour contract can no longer be performed due to a major change in the objective circumstances which were relied upon when the contract was concluded, which renders the contract unperformable and the parties cannot reach an agreement to vary the contract after consultation; or
  • the employee is made redundant due to economic retrenchment of the employer.

If the employer terminates the employee's employment for other reasons than those listed above, or without any reason, the employer will be regarded to have illegally terminated the employee, and will be ordered by the court to reinstate the employee, or to pay damages to the employee (which generally amount to twice the rate of the severance pay).

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