China Employee Terminations: Make Them Mutual When Possible

​Terminating China-based employees is difficult. Article 40(2) of China's Labor Contract Law permits an employer to unilaterally terminate an employee, with severance, if the employee is incompetent and remains incompetent after training or assignment to a different position. In practice though, Chinese courts tend to be quite strict in applying this law, and employers that fail to check all the boxes before a termination usually face adverse consequences.

Employee Termination Hypothetical One

Suppose the employer and the employee enter a written employment contract in year one. The employer provides the employee with a written statement explaining its expectations and performance requirements for the employee's position. The employee signs that statement, but the employee's performance perpetually fails to meet the employer's expectations. The employer unilaterally terminates the employee for poor performance and pays the employee statutory severance: in this case, three months' salary, plus one additional month's salary in lieu of advance notice. The employee sues for unlawful termination.

How will a Chinese court likely rule? This termination will usually be deemed unlawful because the employer failed to generate good contemporaneous evidence of its employee's failures to meet the job requirements.

Employee Termination Hypothetical Two

Assume the same facts as above, except the employer did yearly performance reviews and documented the results. These performance reviews indicated the employee was poorly performing and the employee acknowledged the performance reviews via signature. Then during the next six-month period, the employee did nothing to improve job performance and it became clear the employee was not going to get any better. The termination notice in year three was the same: unilateral termination of employee with the same amount of severance for poor performance. The employee sues for wrongful termination.

In this scenario, the employer did a better job documenting the employee's incompetence but it will still likely lose. The employer will likely lose because it did not follow the law in making the termination decision as it did not provide employee training that might have led to performance improvements, nor did the employer ever assign the employee to a different position. For these reasons, the employer will likely lose the wrongful termination lawsuit for failing to meet its burden of proof regarding the need to provide a failing employee with training or a different position.

Employee Termination Hypothetical Three

In another hypothetical, the facts are again the same as above, except during the six-month period before termination, the employer diligently worked with employee to come up with a corrective plan for the employee's improvement. The employer worked with the failing employee on correcting work errors, closely monitored the employee's work progress and provided the employee with ample training. The employer also contemporaneously documented all of this in writing.

Will this employer prevail against the employee's wrongful termination lawsuit? Probably yes. But there are a few more things the employer should have done to increase its chances. Generally speaking, if there is a workers' union, the union needs must be consulted before a unilateral termination decision can be made final and failing to go through this step may subject an employer to liabilities for unlawful termination. Even assuming there is no workers' union, there may still be additional requirements imposed by the local authorities and those local rules must be followed as well.

Your outcome from your China employee termination decisions will depend on the facts, including where your company and your terminated employee are based. Note that even in the last hypothetical above, employers must jump through multiple hoops to satisfy their burden of proof. This is why it nearly always makes sense for employers to do their utmost to secure a mutual termination agreement from any leaving employee.

Bottom Line

Mutual termination agreements are the best way to reduce your risk of being sued by a departing employee. If you cannot get your employee to agree to a mutual termination agreement, the next best thing is to be sure to do everything right in terminating your employee.

Arlo Kipfer is an attorney with Harris Bricken in Beijing and Seattle. © 2023 Harris Bricken. All rights reserved. Reposted with permission of Lexology.