If you are a China employer, you must have a written employment contract with all your employees. Once you hire an employee in China it is generally difficult to terminate that employee during his or her contract term. It is also difficult to terminate your employees correctly in China, and there is usually a big price to pay for doing it wrong.
It feels like about half of our law firm’s China employment matters these days involve botched employee terminations. Terminating a China employee is never easy, but the following fairly easily remedied mistakes by China employers just keep showing up.
Failing to Pay Statutory Severance. China employers far too often just assume that they do not need to pay their terminated employee any severance, especially when the termination happens at the end date of a fixed term employment contract. Many think that if their employment contracts are silent about severance, they need not pay. The mindset that an employment contract is an agreement made by two completely equal parties does not work for China. Whether you owe statutory severance depends not so much on your contracts, but on the rules in your locale and on the circumstances of the termination. For example, if the employee wishes to renew their contract, and the employer refuses, the employer is usually required to pay statutory severance. If the employer wants to renew on terms not as good as the employee’s previous terms and the employee refuses the renewal, the employer is usually required to pay statutory severance. These are just general rules. Some places (Beijing being one) require the employer notify the employee in writing thirty days before the expiration of the current contract of its intent to end or renew the employment contract or pay in lieu of notice.
Failing to Get your Terminated Employee to Sign an Appropriate Settlement and Release Agreement. Think there is no need to enter into a termination/settlement agreement because your employee resigned (and thus no statutory severance is owed)? It is true that the employee quit, but what made her do so? Did she leave for a better job or because you failed in some way to comply with Chinese labor laws and she felt compelled to leave? If the latter is the case, and if you don’t address the issues via a settlement, you could end up having to answer in front of a judge or an arbitrator. If your employee’s departure has nothing to do with your wrongdoing, you should document that and even then, you may want a signed agreement that releases you from any future claims. I cannot tell you how many times we have seen instances in which an employer would have saved big money by paying an “unnecessary” severance to avoid the completely “unexpected” and costly litigation that followed.
Failing to Formally Execute Key Employment Documents. As a China employer you should have most of your employee-related documents formally chopped. Your legal representative’s signature alone is not enough. Your legal representative’s signature and your company chop is not enough if the employee’s signature is not there. Along the same lines, your employee agreements should specify their date of execution. If the document is long, it may be a good idea to fan out the pages and stamp your company chop across all the pages. Better yet— have your employee sign their name across all the pages.
Consider this hypothetical (based on a real case with its facts greatly simplified for this post). Employer and Employee enter into an employment contract for a non-fixed term. Several years into employment and before the end of the year, Employer issues a termination notice to Employee for immediate termination of the employment contract, but the termination notice fails to specify any basis for the unilateral termination. Employer pays Employee a big severance and an additional amount of money in lieu of advance notice for the termination. Employee demands Employer pay the year-end bonus and Employer claims no bonus is required because Employer’s rules and regulations say if an employee is terminated for any reason (including as a result of employee serious wrongdoing), the employee will not be entitled to any portion of the year-end bonus for that year. Employee brings a labor arbitration claim against Employer to collect the unpaid year-end bonus, among other things.
Employer lost big. What did Employer do wrong here?
Mistake #1: Issuing a termination notice without specifying the reason for termination.
This can and will lead to problems for the employer and yet many foreign employers in China do this, oftentimes because they want to quickly wrap up the employee termination. Terminating a China-based employee is almost always complicated and proceeding with a termination in haste is almost always a bad idea. In this case above, the employer did not have any legal basis for terminating the employee and it only claimed the employee was terminated for employee wrongdoing after it was sued. As a China employer you need to provide your soon-to-be-former-employee with appropriate notice of what led to the employee termination and you must do so at the time of the termination. If the employee did something wrong to bring about unilateral termination of that employee, you must make that clear in the termination notice.
Mistake #2: Claiming the employee was terminated for wrongdoing yet giving the employee a big severance payment.
This sort of thing confuses everyone – from the employee being terminated, to other employees in the company to — most importantly — the arbitrators and judges that eventually get the case. If an employer has a legally permissible ground for a unilateral termination, why pay severance? Paying severance oftentimes is used to show that the employer probably had no good legal grounds for termination. If that is the case, fine; but that would be a completely different type of termination and you cannot call that unilateral termination due to employee fault. It is called an employer-initiated mutual termination. On the flip side, if you as the employer know that your facts or evidence are not looking great from a legal standpoint, why not make clear that you are entering into a mutual termination deal with the employee? When terminating an employee, it is critical that both your severance payments and your termination documents line up with each other, and that both truly fit the situation.
Mistake #3: Not possessing good evidence to support the unilateral termination for alleged employee wrongdoing.
In a China employment dispute, the employer bears the burden of proving it had a valid basis for the employee’s termination. In real life this means that the moment you as a China employer realize you have a problem employee or the moment you realize that one of your employees has done something wrong you should start documenting everything you can so that you will eventually be prepared to argue your case in the event of a termination or employee dispute.
Mistake #4: Not resolving all outstanding issues at the time of termination.
In the real case on which the above hypothetical is based, the employee was a high-paid employee and the employer paid the employee a big severance before the employee sued. The employer should have had its employee sign a termination agreement that set forth employer-employee agreement on all necessary issues before it paid the employee the large severance. If you are going to pay one of your employees severance, there is no excuse for not doing what is necessary to get full resolution for doing so.
Mistake #5: Not understanding that an employee termination does not absolve you from having to pay a year-end bonus.
Bottom Line: Just because you have a company rule that says your employees are not entitled to something (like a year-end bonus) when their employment relationship with your company ends does not give you the right to terminate the employee. Employee terminations in China always require that you make sure the termination is done legally and correctly so you will not get sued over a termination after you thought you had completed the employee separation. I know this sounds harsh, but you should plan for your employee terminations pretty much from the day you hire.