What Are the Types of Employment Contracts in China?

China’s employment contracts fall into three main categories, each with its own rules regarding termination:

1. Probation Period Contracts in China: These are shorter-term trial contracts where employees are assessed for suitability.
2. Fixed-Term Contracts in China: These contracts last for a specified period, after which they may be renewed, converted to open-term contracts, or terminated.
3. Open-Term Contracts in China: After two consecutive fixed-term contracts or 10 years of continuous service, employees are entitled to open-term contracts, offering higher job security.

💡 Pro Tip: Employers in China should clearly define the type of contract in the offer letter and employment contract. Ambiguity may result in unintentional open-term contract obligations.

What Documents Should Employers in China Maintain for Termination?

Employers in China must maintain accurate and comprehensive documentation for each stage of the employment relationship. This is crucial if a termination is legally challenged. Here are key documents to maintain:

💡 Pro Tip: If you’re using an Employer of Record (EOR) in China, you can ensure these documents are managed centrally by the EOR partner, reducing the administrative burden on your business.

How Can Employers in China Terminate an Employee During the Probation Period?

During the probation period, employers in China have more flexibility in terminating employees, but they must still follow legal procedures.

Legal Grounds for Termination During Probation in China

1. The employee does not meet the job requirements.
2. The company must provide clear evidence (e.g., appraisal forms) that the employee failed to meet role expectations.

Key Steps for Termination During Probation in China

• Use a Probation Appraisal Form to document the employee’s performance.
• Ensure the job description presented to the employee is clear and measurable.
• Discuss the assessment outcomes with the employee and obtain their signature on any performance reviews.

💡 Pro Tip: If you’re partnering with an EOR in China, the EOR can support you by documenting employee performance and ensuring compliance with local labor regulations.

How Can Employers in China Terminate an Employee During a Fixed-Term Contract?

Terminating a fixed-term contract in China is more complex than probation terminations, and it can lead to significant financial liabilities for the employer.

Legal Grounds for Immediate Termination of a Fixed-Term Contract in China (Without Compensation)

1. Serious Violation of Company Rules (documented in the employee handbook).
2. Serious Loss Caused by Employee Misconduct (evidence required).
3. Conviction of a Criminal Offense (during the term of the contract).
4. Fraud or Misrepresentation (e.g., false education credentials).
5. Employee’s Outside Work Affects Job Performance (proof required).

Legal Grounds for Termination of a Fixed-Term Contract in China With Compensation (30 Days’ Notice)

1. Employee is incapable of fulfilling the role despite training.
2. Objective changes (e.g., restructuring, economic downturn, technological changes) make the role redundant.
3. Non-work-related illness prevents the employee from resuming duties after the statutory medical leave period.

💡 Pro Tip: Avoid the risk of litigation by working with an Employer of Record in China to ensure you follow the correct procedures and compensation rules.

What Are the Compensation Requirements for Terminating Employees in China?

If an employee is terminated outside of the approved grounds, the employer in China may be liable for:

1. Salary for the Remainder of the Contract
2. Legally Required Severance Compensation (calculated as one month of salary for each year of service)
3. Legal Costs and Court Fees (if the case goes to arbitration)

How is Severance Pay in China Calculated?

💡 Pro Tip: In China, compensation is capped at 3x the local average salary. If the employee earns more than 300% of the local average wage, their severance will be calculated using this limit.

What Happens at the End of a Fixed-Term Contract in China?

If a contract in China reaches its natural end, the employer has two options:

1. Renew the Contract (offer a new fixed-term or open-term contract).
2. End the Contract (pay statutory compensation if the contract is not renewed).

💡 Pro Tip: If an employer in China fails to formally terminate the contract and the employee continues to work, the employee may claim they have transitioned to an open-term contract.

How Does Termination Work for Open-Term Contracts in China?

An open-term contract in China offers the strongest job security for employees. It is typically offered after two renewals of fixed-term contracts or after 10 years of service.

Conditions for Termination of an Open-Term Contract in China

• The same legal grounds as fixed-term contracts apply, but with stricter evidence requirements.
• Special protection is granted to pregnant employees, employees on medical leave, and employees approaching retirement.

💡 Pro Tip: When planning to downsize in China, offer voluntary redundancy packages to encourage employees to leave willingly, reducing legal risks.

How is Severance Taxed in China?

Severance payments in China are subject to Individual Income Tax (IIT), but favorable tax treatment is available. The key steps are:

1. Exempt the first 3x of the average local social salary from taxation.
2. Calculate the IIT on the remaining balance, dividing it by the employee’s years of service (capped at 12 years).
3. Use the applicable IIT rate to calculate the tax burden.

Example Calculation:

💡 Pro Tip: Pay severance in China as a lump sum to maximize IIT benefits. Split payments over multiple months may increase the total tax burden.