If you are a China employer, you must have a written employment contract with all your employees. This means that once you hire an employee in China it is generally difficult to terminate that employee during his or her contract term.
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 document says 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 your unilaterally terminating 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’s 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 the China employer from having to pay a year-end bonus. And please note: 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. In other words, even if your company rule is legal in your locale, the fundamental rule of China’s employment laws does not change: China is not employment-at-will jurisdiction.
Employee terminations in China always require 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.