Those who regularly follow this Blog know China is not an employment-at-will jurisdiction and so terminating China employees will always be fraught with risk. Foreign companies doing business in China should realize that avoiding termination problems needs to go beyond just having well-crafted employment contracts and employer rules and regulations. Both of those things are absolutely crucial, but because China’s employment law system and employee culture are so different from the West, foreign companies need also understand the need to have a good understanding of Chinese employees.
Let me explain by using a couple of China employment scenarios our China employment lawyers see often.
Scenario 1. The foreign parent company determines it is no longer profitable for it to maintain its China office and decides to shut it as quickly as possible. Before determining whether it is eligible to initiate a mass layoff, it starts informing its China employees of the imminent shutdown, including an employee on maternity leave. To smooth things over and to show its appreciation for the good work of its soon to be terminated China employees, the foreign company offers all of them severance pay substantially above the statutory minimum and doubles that for the pregnant employee. A number of employees (including the pregnant employee) take the severance pay and then sue the company (in the courts and via labor arbitration) for unlawful termination.
Scenario 2. Employer has had a good working relationship with an employee for many years. But as the employee becomes more senior, the costs of retaining her have increased and so the employer asks her to consider voluntarily resigning in a year or so with a vague mention of working out some sort of severance package.
In the first scenario, in addition to failing to analyze what it would mean to do a mass layoff and what it would mean for each employee, the employer made the massive mistake of alerting its employees to its mass layoff decision. China considers informing employees of an impending mass layoff as a unilateral employee termination and it is unlawful to terminate an employee on maternity leave even as part of a mass layoff. See China Employee Terminations and Pregnant Employees. Unless the employee has committed a wrongdoing that warrants unilateral termination, an employee on maternity leave can only be terminated via a mutual termination. So instead of informing the employee of what is essentially an illegal unilateral termination decision, the employer should have requested she agree to a mutual termination and offered to pay her substantially to do so. See Terminating a China Employee: Why Mutual Termination is so Often the Key. Shutting down a China WFOE is always going to be difficult, but if you are facing employee lawsuits it becomes borderline impossible. See Closing Down a China WFOE: You Can Run But You Can’t Hide (Part 2)
The employer in the second scenario made two major mistakes. First, it should not have asked a long-term employee to resign. Under Chinese employment law, an employee who resigns is not owed any statutory severance and so employees usually view a request to resign as a firing in disguise and they don’t like it one bit. The employer’s second mistake was asking the employee to leave “in a year or so.” Even if an employee agrees to this sort of arrangement, there would be nothing to stop her from simply refusing to leave the company when her time is up. Chinese employees also do not generally do well with this sort of termination uncertainty (does anyone?) and it is not unusual for an employee in this sort of situation to become disgruntled and to retaliate in some way against the employer. When clients come to us with this sort of situation, we work with them on finding workable alternatives to a termination. Might the employee be open to working part-time? What about a mutual termination with an earlier date and a clear amount of severance and a mutual termination agreement?
Far too often foreign companies believe that if they pay their employees a good salary with benefits and act “reasonably” towards them, all will be good. This can help, but it rarely helps if you treat your Chinese employees in a “non-Chinese” way, especially in an employee termination situation. Foreign companies that do best with China employees usually do the following three things:
- Treat their employees well.
- Treat their employees per Chinese employee culture.
- Follow all relevant national and local employment laws (and even customs) to the letter.