China Employee Termination Guide: Legal Procedures and Severance Pay for Foreign Employers

Legal Grounds for Termination in China

Terminating an employee in China is significantly more restrictive than in most Western jurisdictions. The Labor Contract Law provides an exhaustive list of grounds on which an employer may unilaterally terminate employment, and failing to follow the correct procedure can result in the employee being reinstated with full back pay — a remedy unique to Chinese labor law that catches many foreign employers off guard.

Under Chinese law, employer-initiated terminations fall into three broad categories. Immediate termination without notice or severance is permitted only in narrow circumstances: where the employee seriously violates company rules, commits gross negligence causing substantial damage, is subject to criminal prosecution, or fraudulently obtained the position. The employer bears a heavy burden of proof for these grounds, and Chinese labor arbitration tribunals consistently demand clear documentary evidence. Verbal warnings, undocumented performance issues, or loosely drafted company handbooks rarely suffice.

Termination with 30 days’ written notice or payment in lieu applies to three scenarios: the employee is unable to perform their original work or reassigned work after medical treatment for illness or non-work-related injury; the employee is incompetent and remains incompetent after training or reassignment; or a major change in objective circumstances renders performance of the original contract impossible and the parties cannot agree on an amendment. The “incompetence” ground is notoriously difficult to prove — employers must demonstrate that they provided clear performance standards, documented the employee’s failure to meet them, offered genuine training or reassignment, and documented continued failure after those measures. Chinese courts and tribunals routinely reject termination based on vague performance reviews or subjective manager assessments.

Economic redundancy permits termination where the employer is undergoing restructuring under the Enterprise Bankruptcy Law, faces serious operational difficulties, or needs to reduce workforce due to changes in production methods or technology. Even then, the employer must comply with mandatory consultation requirements with the trade union or employee representatives, and must retain or prioritize rehiring certain categories of employees. Foreign employers should note that redundancy in China requires notifying the local labor bureau and is subject to greater procedural scrutiny than standard individual terminations.

Severance Pay Calculation

In most cases where the employer initiates termination, statutory severance is payable. The formula is straightforward but the application involves several nuances.

The standard formula provides one month’s salary for each full year of service, with partial periods of six months or more counting as one year and periods under six months counting as half a month. The applicable salary is the employee’s average monthly wage over the twelve months preceding termination, including base salary, regular bonuses, allowances, and overtime pay. For employees whose average salary exceeds three times the local average, the calculation is capped at three times the local average monthly wage, and the maximum service period counted is twelve years.

In cities like Guangzhou and Shenzhen, where average wages are relatively high, the cap is significant. As of 2026, Shenzhen’s average monthly salary serves as a reference point for calculating the three-times cap for high-earning employees. Employers must also pay any accrued but unused annual leave, settle outstanding wages and bonuses, and complete social insurance deregistration within prescribed timeframes.

If the employer terminates without statutory grounds or fails to follow proper procedure, and the employee opts for reinstatement rather than accepting double severance, the employer must pay full back wages from the date of termination to the date of reinstatement — a remedy that can result in liabilities far exceeding the original severance amount. This risk underscores the importance of rigorous documentation and legal review before any termination decision.

Employees Protected from Termination

Certain categories of employees enjoy enhanced protection and cannot be terminated through standard procedures. These include employees who have lost the ability to work due to occupational disease or work-related injury; employees receiving medical treatment within the prescribed medical treatment period for illness or non-work-related injury; female employees during pregnancy, maternity leave, and breastfeeding periods; and employees who have worked continuously for fifteen years and are within five years of the statutory retirement age.

Terminating a protected employee exposes the employer to claims for reinstatement and full back pay, plus potential administrative penalties. In practice, many foreign employers are unaware of these protections until they receive a demand letter from the employee following a termination. For employees in Shenzhen, Guangzhou, Foshan, and other Pearl River Delta cities where labor inspection is particularly active, the risk of an adverse ruling is high.

The protection is not absolute — a protected employee can still be terminated for serious misconduct or criminal conviction, or by mutual agreement with appropriate compensation. Mutual termination agreements are the preferred route for separating from protected employees, but they require genuine consent and adequate compensation to survive scrutiny by labor tribunals.

Termination Procedure Step by Step

Chinese labor law imposes a mandatory procedural framework that employers must follow. The key steps are:

Step 1 — Prepare the evidence file. Before communicating any decision to the employee, compile all supporting documentation. For performance-based terminations, this includes signed performance plans, documented reviews showing deficiencies, records of training or performance improvement plans, and evidence of continued underperformance. For disciplinary terminations, the company handbook must be in evidence, with proof that the employee received and acknowledged the handbook. The specific rule violated must be clearly identified, and all warning documentation must be present.

Step 2 — Notify the trade union. If the employer has a trade union, the union must be notified of the proposed termination and provided with the factual grounds. The union has the right to raise objections, and while the employer is not bound to follow the union’s opinion, failing to notify the union at all renders the termination procedurally defective. Many foreign WFOEs without a union mistakenly assume this step does not apply — but even in the absence of a company-level union, notifying the next-higher level trade union organization in the relevant district may be required depending on local practice.

Step 3 — Deliver the termination notice. The written termination notice must be delivered to the employee. If the employee refuses to sign, the employer should document the delivery attempt with witnesses or use registered mail to the employee’s last known address. The notice must clearly state the legal grounds for termination, the effective date, severance calculation details, and instructions for the exit process including social insurance transfer procedures.

Step 4 — Complete exit formalities. Within fifteen days of termination, the employer must issue a certificate of termination, complete social insurance and housing fund deregistration, transfer the employee’s personnel file if applicable, and pay all outstanding amounts including final salary, severance, and accrued leave compensation. The certificate of termination is a critical document — without it, the former employee cannot register with the unemployment insurance system or transfer their social insurance to a new employer.

Common Mistakes Foreign Employers Make

Several recurring errors in China termination cases reflect common misunderstandings by foreign management:

Relying on at-will employment assumptions. Managers accustomed to at-will employment in jurisdictions like the United States sometimes assume they can terminate an employee simply because the relationship is not working out. Chinese law provides no such flexibility. Every termination must be grounded in a statutory basis and must follow the prescribed procedure.

Ignoring the trade union notification requirement. Even in the absence of an enterprise-level union, the notification obligation may attach to a higher-level union. A termination that is substantively justified but procedurally defective because of missing union notification will be ruled unlawful.

Using vague or unenforceable company rules. The Supreme People’s Court has held that company rules must be both lawful and reasonable. Rules that impose disproportionate penalties or that were adopted without following democratic procedures (consultation with the employee representative congress or trade union) may be unenforceable, nullifying any disciplinary termination based on them.

Negotiating termination agreements without legal review. Mutual termination agreements are a common tool, but an improperly drafted agreement can be challenged as having been signed under duress or without full understanding. Agreements should clearly state the compensation amount, confirm that it covers all statutory entitlements, and include a waiver and release that is specific enough to comply with Chinese contract law standards.

The complexity of Chinese termination law makes it one of the highest-risk areas of HR management for foreign companies operating WFOEs. Proactive compliance — maintaining proper documentation, updating company handbooks, training local managers on Chinese labor law, and consulting with qualified professionals before making termination decisions — is an investment that pays for itself many times over in avoided litigation costs, reinstatement liabilities, and operational disruption.