Terminating an Employee in China: What Foreign Managers Need to Know

Table of Contents

Terminating an employee is harder in China than in most countries where foreign companies operate. Chinese labor law is strongly protective of employees, and getting the process wrong can cost your company months of back pay, double compensation, and in the worst case, a reinstatement order you can’t refuse.

We see this issue come up regularly with foreign-invested enterprises in Shenzhen and Guangzhou. A foreign manager is accustomed to at-will employment, terminates someone for poor performance, and then discovers that poor performance alone is not a legal ground for dismissal in China.

Here’s how the system works in practice.

The only legal grounds for unilateral termination

An employer in China can unilaterally terminate an employee only for specific reasons listed in the Labor Contract Law. The most commonly used are serious violation of company rules, serious dereliction of duty or graft causing substantial damage, criminal liability, and the employee’s inability to perform the original work or any rearranged work after the medical treatment period.

“Not a good fit” is not a legal ground. “We need someone stronger” is not a legal ground. “The team doesn’t work well together” is not a legal ground.

If you terminate someone without a legally valid reason, it’s an unlawful termination. The employee can choose between two remedies: reinstatement with back pay from the date of termination, or double the statutory severance amount. Most employees choose the money, but if they choose reinstatement, the employer generally must comply.

Serious violation of company rules: your best option

This is the most commonly used ground for termination, but it’s only valid if you have done the groundwork. The rules the employee violated must be written down, legally adopted through proper procedures, and communicated to the employee. A verbal policy doesn’t count. An employee handbook the employee never received doesn’t count. A rule you made up after the incident doesn’t count.

To rely on this ground, you need: a written employee handbook or policy that clearly states the rule; evidence that the employee was aware of it (signed acknowledgment is the gold standard); evidence the rule was violated; and evidence the violation was serious enough to justify termination under the policy as written.

Chinese labor arbitration panels tend to look skeptically at single minor infractions being treated as serious violations. If your handbook says “being five minutes late is grounds for immediate dismissal,” an arbitrator will likely disregard that as unreasonable. The standard is higher than many foreign employers expect.

The mutual agreement route

The smoothest path to ending an employment relationship in China is mutual agreement. You negotiate a separation package, both parties sign a termination agreement, and the employee leaves voluntarily. This avoids the risk of an unlawful termination claim entirely.

The cost is usually higher than a statutory severance payment — the employee knows you want them gone and will negotiate accordingly. A common structure we see: the employee receives notice pay (30 days if not working during the notice period), statutory severance of one month’s salary per year of service, plus an additional goodwill payment. Total package might run two to four times the statutory minimum, depending on the employee’s seniority and the company’s risk tolerance.

For senior employees or cases where the legal grounds for unilateral termination are weak, the mutual agreement route is often the better business decision, even if it costs more upfront.

Who you can’t terminate

Even if you have a valid legal ground, certain employees are protected from termination. You cannot dismiss an employee who is on medical leave for a work-related injury and has lost or partially lost work capacity. You can’t dismiss someone who is in the statutory medical treatment period for a non-work-related illness or injury. You can’t dismiss a female employee who is pregnant, on maternity leave, or breastfeeding.

If you discover these circumstances after a termination decision, the termination is invalid regardless of your underlying reasons.

Severance: how it’s calculated

For a lawful termination (such as mutual agreement or the employer proposing termination), statutory severance is one month’s salary per year of service. Partial years are rounded: six months or more counts as a full year, less than six months counts as half a year. The monthly salary used for calculation is the employee’s average monthly wage over the twelve months before termination, capped at three times the local average monthly wage for employees with very high salaries and long service.

For an unlawful termination, the employee can claim double this amount.

The process matters almost as much as the reason

Even when you have solid grounds, you need to follow procedure. If you have a trade union, you must notify the union of the proposed termination and hear its opinion before acting. The termination notice must be in writing. The employee must receive a termination certificate and their final paycheck, including any unused annual leave compensation, on or before the last day of work.

The employer must also complete the formalities for the transfer of the employee’s social insurance and personnel file within fifteen days. Failing to do this can create additional complications, especially if the employee needs their file for a new job.

What arbitration looks like in practice

If the employee challenges the termination through labor arbitration — which is free for employees and doesn’t require a lawyer — the employer bears the burden of proof. You have to prove the termination was lawful, not the other way around.

Arbitration typically takes two to three months from filing to award. The standard of evidence is high, and arbitrators tend to be more protective of employees than courts would be in many common law jurisdictions.

If you lose at arbitration, you can appeal to the people’s court. If the employee wins, the award is generally final for the employer in cases involving modest amounts.

What this means for your HR practices

Invest in your employee handbook before you need it. It should include clearly defined rules about what constitutes a serious violation, with examples. Every employee should sign an acknowledgment of receipt. Disciplinary actions should be documented in writing, with the employee’s signature or at least a witness.

When you’re considering terminating someone, consult a professional early — before you have the conversation, not after. Most of the serious problems we see could have been avoided if the employer had asked about the legal framework before acting rather than trying to fix things afterward.