This article is adapted from the 66law.cn legal knowledge resource on labor contract termination and severance compensation in China.

Understanding Wrongful Termination

China’s labor law framework provides strong protection for employees, including foreign nationals. When an employer terminates an employment contract without lawful grounds, significant remedies are available.

• 📋 Employer-Initiated Termination — Requires specific statutory grounds: serious misconduct, incompetence after training, or fundamental change in circumstances
• 💼 Severance Pay — One month’s salary per year of service, capped at 12 years
• ⚖️ Double Compensation — Unlawful termination triggers twice the statutory severance

Lawful Termination Grounds

Employer-initiated termination is permitted only under specific statutory circumstances: failure to meet probation conditions, serious policy violations, substantial damage through gross negligence, criminal liability, or inability to perform after medical treatment. Each ground requires procedural compliance including 30 days’ written notice and union notification.

Protected Periods

Termination is prohibited during medical treatment for occupational disease, illness within statutory medical period, and pregnancy, maternity leave, or nursing. Termination during these periods is automatically unlawful.

Remedies

Employees may choose between reinstatement with back pay or enhanced severance at double the statutory rate. Foreign employees should note that termination may also affect work permit and visa status.

Practical Steps

Document everything, act quickly (one-year statute of limitations for labor arbitration), and file for mandatory arbitration first. Consulting local labor counsel is the most effective approach.

Employment Contract Requirements for Foreign Employees

Foreign employees working in China must have a written employment contract that complies with Chinese labor law. The contract should specify the term, job duties, work location, compensation, working hours, social insurance participation, and termination provisions. Minimum contract terms include the employer\\u2019s and employee\\u2019s names and addresses, contract duration, job description and location, working hours and rest periods, compensation and payment method, social insurance obligations, and working conditions and protection.

Additionally, foreign employees\\u2019 contracts must reference their work permit and residence permit. Changes to the employer\\u2019s name or legal representative do not require contract renegotiation, but changes in the employing entity itself require a new contract. Foreign employees transferred between related entities in China must execute new contracts with the new employing entity.

Probation Period Rules

Chinese labor law strictly limits probation periods based on contract duration: contracts under three months or for specific tasks cannot have probation; contracts of three months to one year have a maximum one-month probation; contracts of one to three years have a maximum two-month probation; contracts of three years or more have a maximum six-month probation. An employer may only establish one probation period per employee, even if the contract is renewed.

During probation, the employee\\u2019s wage must be at least 80 percent of the agreed post-probation wage and no less than the applicable minimum wage standard. If the employer determines the employee does not meet conditions during probation, termination must be supported by specific, documented evidence of failure to meet pre-established, objective criteria.

Annual Leave and Statutory Holidays

Employees who have worked continuously for one year or more are entitled to paid annual leave. The standard entitlement is five working days for one to ten years of service, ten working days for ten to twenty years, and fifteen working days for twenty years or more. Unused annual leave must be compensated at 300 percent of the employee\\u2019s daily wage if the employer requires the employee to forego leave.

China has eleven statutory public holidays each year, including Spring Festival, National Day, and others. Foreign employees may also negotiate additional leave for their home country\\u2019s holidays. Overtime pay is strictly regulated: 150 percent for overtime on regular working days, 200 percent for overtime on rest days (with compensatory time off as an alternative), and 300 percent for overtime on statutory holidays.

Severance Calculation and Payment

When employment is terminated through lawful means such as mutual agreement, expiration without renewal, employer-initiated termination for non-fault grounds, or employee-initiated termination due to employer fault, statutory severance is payable. The standard formula is one month\\u2019s average salary for each full year of service, with months beyond full years counted proportionally. The average salary is calculated based on the twelve months preceding termination.

The monthly salary used for severance calculation is capped at three times the local average social wage. For highly compensated foreign employees, this cap may significantly limit the severance amount. For example, in Shanghai where the average social wage is approximately RMB 12,000, the capped monthly salary for severance purposes would be RMB 36,000, even if the employee\\u2019s actual salary is RMB 100,000. Severance is also subject to individual income tax, though certain tax exemptions apply.

Foreign employees facing termination should seek immediate legal advice, as timing is critical for both arbitration claims and work permit cancellation procedures.

Work Permit and Residence Permit Implications

For foreign employees, termination of employment has immediate implications for their immigration status. The work permit is linked to the specific employing entity. When employment ends, the employer must cancel the work permit with the Bureau of Human Resources and Social Security. The foreign employee then has a limited period, typically 30 days, to find new employment and obtain a new work permit, or to apply for a different visa category, or to depart China.

For foreign employees covered by a collective redundancy plan, the employer may be required to negotiate the timing of work permit cancellations to allow employees reasonable time to seek new positions. Some cities have established grace period policies that allow foreign employees to remain in China for a specified period after work permit cancellation to facilitate job searching.

Special Considerations for Senior Executives

Senior foreign executives often have employment contracts that include special provisions such as guaranteed bonuses, stock options, housing allowances, education allowances for children, and annual home leave airfare. These benefits, if properly documented, may be included in the calculation of the average monthly salary for severance purposes. Stock option treatment in termination scenarios requires careful analysis of both the employment contract and the stock option plan terms.

Executive termination agreements often include severance packages above the statutory minimum. Such agreements should be documented in writing and clearly state that the enhanced severance constitutes full and final settlement of all claims. Care should be taken to ensure that the agreement does not inadvertently waive claims that cannot be waived under Chinese law, such as social insurance contribution claims.

Collective Redundancy and Mass Layoffs

When an employer needs to reduce its workforce by a significant number, special rules apply. Chinese labor law defines mass layoffs as reductions involving 20 or more employees or 10 percent of the workforce, whichever is smaller. Before implementing mass layoffs, the employer must explain the situation to the trade union or employee representatives 30 days in advance, submit the layoff plan to the labor administrative department, and consider the opinions of the union or employee representatives.

The selection of employees for redundancy must be based on objective criteria and cannot be discriminatory. Employees in protected categories such as those with occupational diseases, in medical treatment periods, or on maternity leave must be retained. Employees with longer service and those with family dependents may have priority for retention.

Settlement Agreements and Waiver of Claims

When negotiating a termination settlement, both parties should carefully document the terms. A well-drafted settlement agreement should specify the severance amount and payment schedule, treatment of bonuses and stock options, continuation or termination of benefits, return of company property including laptops, phones, and access cards, non-disparagement obligations, confidentiality obligations regarding the settlement terms, and a general release of claims. Chinese courts generally uphold settlement agreements that are freely negotiated and provide consideration that exceeds the employee\u2019s statutory entitlements. However, certain statutory rights such as social insurance claims cannot be waived by agreement.

Foreign employees should have their settlement agreements reviewed by independent legal counsel before signing, particularly if they are not fluent in written Chinese. The agreement is typically prepared in Chinese, and if a bilingual version is prepared, the Chinese version will prevail unless otherwise specified.