Calculation and Payment of Economic Compensation

Under what circumstances am I not obliged to pay economic compensation when terminating an 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 pay "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 employer concerned, and the employee has not rectified the situation after it has been brought to his or her attention by that 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.

Under what circumstances am I obliged to pay economic compensation when terminating an employee's employment?

Economic compensation is payable by the employer to the employee on termination of employment if:

  • the employer proposes to terminate the employee's employment and such proposal is agreed to by the employee;
  • after undergoing a 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 is incompetent 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, thereby rendering the contract unperformable, and the parties cannot reach an agreement to vary the contract after consultation; or
  • the employee is made redundant by the employer due to economic retrenchment (this ground is only available if it is necessary to lay off 20 or more employees or there are less than 20 employees affected but they account for more than 10 percent of the total number of the employees; further, it requires that the employer must have sufficient evidence to prove the relevant situation, and that it has followed the statutory procedure, such as reporting to the local labour authority).

What will be the legal consequences if I wrongfully terminate an employee?

If you terminate an employee's employment for a reason outside one of those listed above, or without any justified reason, you will have illegally terminated the employee, and may be ordered by the court to reinstate the employee, or if the employee does not request reinstatement (or if the labour contract can no longer be performed, i.e., the position is cancelled or occupied), the employer is obliged to pay damages to the employee (which generally amount to twice the rate of the severance pay).

In addition, while the PRC Labour Contract Law is silent, in practice, it is most likely that you may still have to pay full salary to the employee during the period from the termination date to the date when final award takes effect, if the employee makes a claim for this.