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Terminating Your China Employee. It Ain't Easy....

By Dan Harris and Steve Dickinson

It has been long enough and I will be merging enough different cases/clients into one that I can talk about it now without talking about any one client or case in particular. The subject is termination of employees in China and it definitely ranks among the things relatively smart American companies seem to get wildly wrong in China. And I intentionally said "American" here, not "Western," because I think this problem is mostly an American one. I have previously written on the cultural disconnect between China and the US when it comes to terminating employees:

Last week, I attended co-blogger Steve Dickinson's lecture on China labor law. Steve's lecture was part of a truly superb Doing Business in China seminar put on by Global Nav. The thrust of Steve's speech was that labor laws in China have changed, they are being enforced against foreigners, and they are very different from U.S. labor laws. In a nutshell, the biggest differences are that written contracts with all employees are required in China and firing an employee generally must be for cause. Neither of these are true in the United States. Judging from the audience questions (and this was an extremely sophisticated audience), many were surprised by this and many had trouble understanding the full import. A few days later, Steve and I were talking about this with the Chinese lawyers we work with in Qingdao. In explaining to them some of the cases we have handled for American clients who got themselves into trouble by improperly laying off Chinese employees, it soon became apparent to Steve and me that the Chinese lawyers were not grasping why these American companies were making these mistakes. They would ask questions like, "how could these American companies really believe they could lay off 100 people without first securing their approval and that of the government as well?" When Steve and I told them about US labor laws, the Chinese lawyers found them so bizarre, they actually laughed. We told them of how there is a saying in the US that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination). We talked about how one might fire an employee for wearing a green shirt. We told them of how most employees in the United States do not work under written contracts and how companies generally prefer not to use them. It took us at least a half an hour for us to give a basic explanation of employer-employee relations in the US and even then, it was pretty clear that these exceedingly bright lawyers were still nonplussed. It was a good exercise for Steve and me and only reinforced why it is that Americans (the labor laws in Europe are not so wildly different in China) in China so often act on Chinese employment law matters based on completely false assumptions as to how things are really done there.

Americans: Just remember, no matter how capitalist China seems, it still, on at least some level, aspires to be a workers paradise. China's Labor Contract Law distinguishes between full and part time employees and this post is going to deal only with full time employee. This post is also going to focus only on the situation where the employer wants to end its relationship with its employee(s) and the employee(s) do not desire likewise, aka, unilateral termination. Employers in China may terminate their employees without advance notice and without severance pay in very limited circumstances, such as when an employee has severely violated company rules, engaged in such a serious dereliction of duty or been so corrupt as to substantially damage the employer, established an employment relationship with another company, or become subject to a criminal investigation. Because no law defines what constitutes either a severe violation or severe damage, it is essential for the company's employee manual to spell this out. Termination for these reasons does not require payment of severance whereas pretty much every other termination does. With at least thirty days notice (or by paying one month's salary), an employer (at least in theory), may terminate employees for the following: -- An employee's inability to perform his or her job after returning after the statutory medical treatment period for illness or a non-work related injury. -- Clear incompetence that has not been remedied by additional training or reassignment to a new position. Do not even think about this exception unless you have built up an incredibly good written record stretching back quite some time. --There has been a "material change" in "objective circumstances" such that the employment contracted for can no longer be performed. I am not aware of "material change" or "objective circumstances" having been defined anywhere, nor am I aware of any company having won on these grounds. I am guessing that along the lines of a tsunami shutting down the factory will be required to win on this provision. Terminating twenty or more employees or more than ten percent of the total workforce has its own, additional requirements. The point of this post is not to set out in detail the rules for firings in China; it is to point out that there are many rules in China related to firings and that those rules are complicated and/or vague. Firings in China should not be done without real planning and legal analysis. US rules do not apply.

Full post as published by China Law Blog on January 09, 2010 (boomark / email).