China Employee Termination: Severance and Process

TL;DR

Start with the legal basis for separation, not the severance number. Mutual termination, employee-fault dismissal, non-fault termination, redundancy and contract expiry follow different rules.
Where statutory economic compensation applies, the usual starting point is one month of the employee's average monthly wage for each full year of service. Six months or more is rounded to one year; less than six months generally attracts half a month.
A correct calculation does not cure a defective process. The company still needs evidence, approvals, notice or consultation where required, a termination certificate, payroll and tax treatment, and a controlled handover.

If a proposed termination involves weak performance records, a protected employee or a disputed compensation figure, talk to ChinaBizPro before issuing the notice. Early review usually leaves more workable options than trying to repair an invalid process later.

Choose the termination route before calculating severance

There is no single China termination checklist that works for every case. First identify which route the facts may support:

Mutual termination: the employer and employee sign a negotiated separation agreement.
Employee resignation: the employee initiates the separation under the applicable notice or statutory rules.
Employee-fault termination: the employer relies on a statutory ground such as a serious breach of valid company rules.
Non-fault termination: limited statutory circumstances may allow termination with 30 days' written notice or one month's wages in lieu of notice.
Economic redundancy: a qualifying workforce reduction follows separate consultation and reporting requirements.
Expiry or another statutory termination event: a fixed-term contract ends or another legally specified event occurs.

The route affects the evidence, notice, consultation and compensation. Calling a dismissal a “mutual separation” does not make it mutual if the employee did not give informed agreement.

The China employment contract guide explains why the signed contract, job description and amendments should be checked before any decision.

How statutory economic compensation is calculated

When economic compensation is legally due, Article 47 of the Labor Contract Law provides the basic service-year formula:

one month of salary for each full year of service with the employer;
service of six months or more but less than one year is counted as one year;
service of less than six months is compensated at half a month's salary; and
the monthly salary is the employee's average monthly salary during the 12 months before termination or expiry.

For an employee whose monthly wage exceeds three times the prior-year local average monthly wage published for the relevant municipality or city, the statutory calculation uses a three-times cap and the compensated service period is capped at 12 years. Confirm the applicable local figure and whether the cap applies to the particular payment.

A simple calculation example

Assume statutory compensation is due, the uncapped monthly wage basis is RMB 20,000 and the employee has worked for four years and eight months. The service period is generally counted as five years, producing a starting calculation of RMB 100,000.

This example is not a universal settlement amount. The final package may also include unpaid salary, bonus, accrued leave, notice pay, contractual benefits or a negotiated amount. Tax treatment and the wording of the agreement should be reviewed separately.

Economic compensation, notice pay and damages are different

These terms are often mixed together:

Economic compensation is the statutory service-based amount payable in specified circumstances.
Pay in lieu of notice may replace 30 days' written notice for certain non-fault terminations under Article 40.
Damages for unlawful termination may be payable when an employer terminates illegally and reinstatement is not pursued or is no longer possible. The Labor Contract Law links this damages amount to twice the Article 47 economic-compensation standard.
A negotiated settlement is the amount and package agreed in a genuine mutual termination. The statutory position is an important benchmark, but the agreement can address wider risks and claims.

Do not describe every payment simply as “severance”. Separate the components in the approval paper, agreement, payroll and accounting records.

Eight-step termination workflow

1. Build the fact record

Collect the employment contract, amendments, job description, attendance, performance records, warnings, handbook acknowledgements, payroll history and relevant communications. Preserve original dates and versions.

2. Check the legal basis and protected status

Test the proposed route against the statutory conditions. Review whether the employee is in a medical-treatment period, pregnant, on maternity leave, nursing, affected by an occupational disease or work injury, close to statutory retirement after long service, or otherwise protected from certain forms of termination.

3. Review company rules and prior process

If the company relies on misconduct or a serious rule breach, confirm that the rule is lawful, was adopted through the required employee-consultation process and was communicated to the employee. The China hiring guide provides wider context on employment compliance and employer obligations.

4. Calculate every payment component

Prepare a schedule covering salary through the final day, overtime or commission where applicable, unused leave treatment, bonus, economic compensation, notice pay, reimbursement and deductions. Reconcile service dates and the 12-month wage basis.

5. Complete internal and union procedures

Obtain management, HR, finance and legal approvals under the company's authority matrix. Where a trade union exists and the employer unilaterally terminates, review the statutory union-notification requirement. A qualifying economic redundancy has additional employee explanation, consultation and labor-authority reporting steps.

6. Deliver the documents properly

Use a clear Chinese document or a controlled bilingual version. State the termination date, legal basis, payment items, handover obligations and contact channel. Keep evidence of delivery; an unsigned copy in HR's files does not prove the employee received it.

7. Complete payroll, tax and handover

Coordinate final payroll, individual income tax review, company property, system access, confidential information and work-product transfer. Do not use handover pressure to withhold undisputed salary.

8. Close the statutory records

Issue the termination or expiry certificate at separation. The Labor Contract Law requires the employer to handle employee-file and social-insurance transfer procedures within 15 days and retain the terminated labor-contract text for at least two years. Keep the complete decision and payment file longer where the company's retention policy or dispute risk requires it.

Termination file checklist

Keep one controlled file containing:

signed contract, amendments and job description;
employee master data and verified service dates;
handbook version and receipt or training evidence;
performance, warning, attendance or investigation records;
protected-status and leave review;
legal-basis memorandum and internal approvals;
compensation calculation and supporting payroll data;
union or redundancy materials where applicable;
notice, agreement and delivery evidence;
final payroll, tax and payment evidence;
handover and asset-return record; and
termination certificate and social-insurance transfer record.

Common mistakes

Deciding to dismiss first and searching for a legal ground afterwards.
Treating an unsigned or poorly communicated handbook as decisive evidence.
Using base salary instead of checking the statutory 12-month average wage basis.
Assuming every termination requires exactly “N+1”, or that “N+1” automatically makes the dismissal lawful.
Ignoring medical, maternity, work-injury or retirement-related protections.
Using a performance-improvement label without objective standards, support or a genuine review process.
Mixing compensation, notice pay, salary and bonus into one unexplained figure.
Failing to notify the trade union or follow redundancy procedures when required.
Cutting system access before preserving evidence and arranging an orderly handover.
Forgetting the termination certificate, social-insurance transfer or final tax reconciliation.

Frequently asked questions

Does every terminated employee receive economic compensation?

No. Entitlement depends on the route and statutory facts. A qualifying employee-fault termination may not require economic compensation, while various employer-initiated terminations, mutual terminations proposed by the employer and some contract-expiry situations may require it.

Is “N+1” the standard payment for every dismissal?

No. “N” commonly refers to statutory economic compensation by service years. The additional “1” often refers to one month's wages in lieu of notice for certain Article 40 terminations. It is not a universal formula and does not replace the need for a valid ground and process.

Can we terminate for poor performance?

Only after checking the specific statutory route and evidence. A low manager rating alone is weak support. The employer normally needs clear role standards, credible assessment records and evidence of training or job adjustment where the relevant non-fault termination ground requires it.

Can the employee waive all claims in a settlement agreement?

A well-drafted mutual agreement can settle many identified issues, but it should be voluntary, clear and supported by accurate payment. Clauses that attempt to waive mandatory rights regardless of the facts may not achieve the intended protection.

Terminating an Employee in China: Severance, Process and Common Mistakes