China: How to Approach Employee Dismissals

Under PRC law, an employment contract can be terminated in three main ways, namely resignation by the employee, unilateral termination by the employer, or mutual separation. While resignation by the employee is generally straightforward, while other paths to termination must be manged carefully to mitigate risk. We recap the key points to consider with each approach to termination.

Unilateral termination by the employer

Under PRC employment law, an employer may terminate an employment contract unilaterally only under certain prescribed circumstances. The grounds which employers most commonly rely upon for unilateral termination are:

• a serious breach by the employee of the employer's internal rules;
• the employee is unable to satisfactorily fulfil the job requirements, even after receiving training and having his/her work position adjusted; and
• a major change in the objective circumstances relied upon at the time of the conclusion of the employment contract renders performance impossible and, after consultation, the employer and the employee are unable to reach agreement as to how the employment contract should be amended.

If the number of employees to be made redundant is 20 or more, or fewer than 20 but comprising more than 10% the enterprise’s workforce, this will be treated as a mass layoff.

Upon termination, an employer will generally be required to make severance payments to the employee based upon the employee's years of service with the employer.

In practice, it is often difficult for an employer to unilaterally terminate the employment relationship due to the high risk of a claim for wrongful dismissal. In defending such a claim, an employer must demonstrate that the termination was justified, and that the statutory procedures for termination have been fully complied with. Additionally, there are specific prohibitions against terminating the employment of certain categories of employees. For example, there are prohibitions against dismissing employees who are pregnant, in confinement or within the nursing period and against dismissing employees who have been working for the employer continuously for at least 15 years and are less than five years away from the legal retirement age.

Mutual separation

The employment relationship may be ended by mutual separation at any time. There is no formal statutory procedure to follow and a mutual separation agreement can set out the agreed arrangements for the termination of employment including the severance package.

Courts and tribunals will generally recognize a mutual separation agreement signed by an employer and an employee, unless the employee is able to prove that he/she was coerced into signing the mutual separation agreement, there is fraud on part of the employer or the employee had a material misunderstanding or was in an unfair position when entering into the mutual separation agreement.

Recommendations

Given the high risk of wrongful termination claims, where an employer is seeking to rely on a ground to unilaterally terminate an employment, they should:

• obtain evidence and documentation to support the ground and the legitimacy of the termination, so as to mitigate any potential litigation risk; and
• strictly follow any applicable, statutory procedures.

It may be necessary in the circumstances to seek a mutual separation. When doing so, employers should approach such discussions carefully to avoid the risk of the employee later claiming they were coerced into signing the mutual separation agreement or had a material misunderstanding of the terms. Further, severance packages should always be determined carefully with particular regard on the impact they may have on subsequent separations.

Written by Nanda Lau, Partner; and Alizee Zheng, Associate