3 things global employers need to know about severance pay in China

June 21, 2022

severance pay in China

If your global business strategy includes hiring in China, it’s important to understand the local employment laws, so that you can be sure your company policies are in compliance. 

Beyond the requirements for onboarding and employing—such as benefits and payroll—it’s also critical to know the laws for termination and severance, in the unfortunate event that you have to use them. 

Let’s explore minimum severance requirements for Chinese employees, the potential benefits of a mutual severance agreement, and the importance of remaining up to date on national employment laws.

The purpose of severance pay

Severance pay is the money an organization owes to its employee after their tenure ends—whether they’re laid off or terminated. Severance packages can include:

  • The cash equivalent of accrued sick leave, vacation time or other benefits earned
  • A financial safety net for employees until they can secure a new position

Severance pay also serves to foster an amicable relationship between employers and their terminated employees. 

Minimum severance requirements in China

China stipulates minimum severance requirements for employees, and employers should include the following considerations in their termination policies.

1. Severance wages

Severance packages typically include stopgap wages—money that employees can use to stay afloat until they find another position. 

Severance wages are usually calculated based upon an employee’s current salary or an hourly wage. Even if the employee’s home country stipulates minimum wage requirements, terminated workers typically receive wages comparable to their average monthly salary. 

Employees in China are entitled to the following severance wages:

  • One month of average wages per year of employment For employees who have worked for the same company for more than six months
  • One-half month of average wages for employees who have worked for the same company less than six months

While you may only seek to meet the minimum legal severance requirements for terminated employees, you should consider the benefits of going above and beyond compulsory severance wages. 

This is because:

  • The employee may be more likely to speak favorably of your company when they discuss their termination with friends, family and colleagues—people who could spread the word if you treated an ex-employee unfairly.
  • An employee’s wages generally signify their monetary value to the company. If the employee contributed significantly to a company’s profit margin at any point during their employment, you might consider it a show of good faith to compensate them for that contribution. This is especially true if they didn’t receive a bonus or commission for their hard work while they were still employed. 
  • Your former employee is more than just a number—they have families to support and bills to pay. Employers may want to go the extra mile to help former employees maintain their financial obligations while they search for a new position. 

2. Paid leave payout

Employees in China are entitled to minimum paid leave time while they’re actively employed. However, when it comes to severance, their paid leave is dependent upon the time an employee has spent in the workforce as a whole, not just the amount of time an employee has spent at one company. 

Minimum leave requirements in China are as follows:

  • Employees working one to 10 years receive five days of paid leave each year
  • Employees working 10 to 20 years receive 10 days of paid leave each year
  • Employees working for 20 years or more receive 15 days of paid leave each year

When an employee is laid off or terminated, they’re entitled to a payout for any accrued leave time they didn’t use during their tenure. For example:

  • An employee had been in the workforce for 15 years. This employee was, therefore, legally entitled to 10 days of paid leave from their employer each year.
  • The employee used five of their available leave days during the last 12 months of their employment, leaving five days remaining for an upcoming vacation or incidental use. 
  • If the employee’s average daily wages were ¥294, they would legally be owed ¥1,470 in accrued leave pay upon termination. 

3. Unemployment insurance benefits

China offers an unemployment insurance program for workers who have been recently terminated. The program provides minimal financial support while they search for a new job. Both Chinese employers and employees pay into the program. 

If your company employs workers in China, you must comply with unemployment insurance payments to ensure workers’ eligibility if they’re terminated or laid off. 

Upon termination, companies that do business in China should work with employees to facilitate their enrollment in the national unemployment benefits program. They must also ensure that employees can access their benefits while they search for and transition into a new job. 

While employers in China are not legally required to help their employees access unemployment insurance benefits, assistance with the often-cumbersome process is typically a show of good faith.

Consider a mutual severance agreement

While you craft your company’s termination or layoff procedures in accordance with Chinese employment laws, you should consider implementing mutual severance agreements. A mutual severance agreement serves as a legally binding document describing each party’s obligations during the termination process.

A severance agreement is signed by both employer and employee at the time of termination. It stipulates:

  • Dates of hire and termination
  • Gross and average wages throughout an employee’s tenure
  • Details of the employee-specific severance package
  • An explanation of how the severance package complies with local employment laws

It’s important to note that a mutual severance agreement can benefit both employers and employees. The potential benefits are as follows:

  • They provide employers with an executed agreement that the employee will not seek litigation after termination if the terms of the agreement are met.
  • They provide employees with peace of mind and an outlined plan for severance payouts. The severance agreement will help them to create financial plans that reflect their available capital while they search for a new job.

Stay up to date on legal changes in China

China is one of the fastest-growing economies in the world, with many pros and cons for doing business there. Employment laws in China have been significantly overhauled four times in the past decade, reflecting the changing needs of their workforce as the economy grows and workers’ class mobility opportunities increase. 

To ensure that your severance policies comply with Chinese laws, it’s crucial that you review the most up-to-date laws before terminating employees. You should also consider conducting regular compliance reviews to maintain a legal procedure and avoid being caught off-guard by law changes when it’s time to terminate an employee. 

One example of a major change is the 2017 modification to mandatory severance requirements. This change included stipulations for:

  • Abolition of the 12-month severance pay cap
  • Calculating average monthly wages for severance purposes
  • The number of years included in the severance pay calculation

When you employ workers in China, you contribute to the nation’s growing economy. As the country continues to increase its presence and competitiveness in the global marketplace, you can expect continued regulation changes. To maintain compliance, your business should take every step to implement legal changes as soon as possible. 

Ensuring severance law compliance in China

Like many other countries with competitive economies, Chinese law requires employers to pay severance packages to terminated employees in accordance with various employee circumstances.

But in a landscape of changing regulations, how can you ensure that you remain in compliance with severance laws in China, particularly if you’re new to employing in the country and don’t have local HR expertise? 

One way is to partner with a global workforce solutions partner like an employer of record. A China employer of record employs workers on your behalf, providing local guidance and ensuring compliance with all contract, HR and payroll requirements. All you have to do is manage your workers and their contributions to your goals in China.

Learn more by speaking to a global solutions advisor today

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