Terminating an employee in China — lawful grounds, process, and how severance is calculated

China has no at-will employment. An employer cannot end a valid labour contract simply because it wants to — a lawful unilateral termination needs a statutory ground and the correct procedure. Get either wrong and the exit becomes an unlawful termination, exposing the company to reinstatement or double severance. There are three clean ways out — mutual agreement, for-cause dismissal, and no-fault termination on statutory grounds (plus economic redundancy) — and the money follows a formula: N, N+1 or 2N.

There is no "at-will" employment in China

Employers used to the US model need to reset one assumption before anything else: in China you cannot terminate a valid contract at will, with or without notice, and pay your way out later. A unilateral termination is lawful only if it fits a ground the statute recognises, and the burden of proof sits on the employer. If a dismissed employee files for arbitration — the near-universal first step in a China employment dispute — it is the company that must produce the ground and the paperwork behind it. This is the mirror image of the hiring discipline we set out in hiring employees in China as a foreign employer: the contract you sign on day one shapes how, and how expensively, you can exit on the last day.

The lawful ways to end the relationship

There are four routes, and the choice of route drives both the process and the severance.

• Mutual agreement. The cleanest exit. The parties sign a separation agreement settling severance and releases. If the employer proposes the split, statutory severance is still owed — but a negotiated package that closes the door on future claims is usually worth the premium.
• For-cause dismissal (Article 39). Immediate termination, no notice and no statutory severance, where the employee seriously breaches a lawfully adopted rulebook, commits serious dereliction of duty or self-dealing that causes material loss, holds undisclosed dual employment that harms the work, is criminally prosecuted, or obtained the job by deception. This route is powerful but evidence-hungry: you need a valid, published rules-and-regulations document, proof the employee acknowledged it, and a record of the specific breach.
• No-fault termination (Article 40). Three grounds only: the employee cannot resume the original or a reassigned role after the statutory medical period for a non-work illness or injury; the employee is incompetent and remains so after training or reassignment; or a major change in objective circumstances makes the contract unperformable and the parties cannot agree a variation. This route requires 30 days' written notice or one month's pay in lieu, plus severance.
• Economic redundancy (Article 41). A mass layoff — 20 or more staff, or 10%+ of the workforce — on grounds such as restructuring in insolvency, serious operating difficulties or a major change in production. It carries its own procedure: explain the plan to the union or all staff 30 days in advance, hear their views, and report the plan to the local labour administration, with statutory priority-retention rules.

How severance is calculated — N, N+1, 2N

Statutory severance ("economic compensation") is deliberately mechanical. N = one month's pay for each full year of service. A period of 6 to 12 months rounds up to one year; a period of under 6 months counts as half a month. The "one month's pay" is the employee's average monthly wage over the 12 months before termination, including bonuses and allowances — not just base salary.

The three shorthands foreign managers hear:

• N — the base severance, owed on a no-fault termination, an employer-proposed mutual exit, a redundancy, or a non-renewal on the employer's initiative.
• N+1 — N plus one extra month, where the "+1" is pay in lieu of the 30-day notice. It applies only to the Article 40 no-fault grounds; it is not a universal top-up, and it does not apply to for-cause dismissals or most redundancies.
• 2N — double the standard severance, payable when a court or arbitrator finds the termination unlawful (wrong ground, or no ground). The employee can instead demand reinstatement — the choice is theirs, and reinstatement is often the more disruptive outcome for the business.

The two caps that limit severance

Two ceilings protect high earners' employers from open-ended exposure. First, the monthly base is capped at 3× the local average monthly wage of the previous year, as published by the city government where the employee works. Second, for employees earning above that level, the years counted are capped at 12. So a highly paid executive's severance is limited to 12 × (3× the local average wage), however long the service or high the salary. Below that wage threshold, there is no 12-year ceiling — full years of service are counted. Because the "local average wage" varies city to city, the same package costs different amounts in Shanghai, Beijing or a tier-2 city; price the exit against the correct local figure, not a national one.

Process is where dismissals actually fail

Most terminations that unravel do so on procedure, not on the underlying merits. Build the file before you act:

• Documentation. A lawfully adopted rulebook (consulted with staff and acknowledged in writing), dated performance records, PIP paperwork, or medical evidence — depending on the ground you are relying on.
• Union notice. Where a workplace union exists, the employer must notify it in advance of a unilateral termination and consider its response. Skipping this step alone can render an otherwise-valid dismissal procedurally defective.
• Protected categories. No-fault and redundancy routes (Articles 40–41) cannot be used against employees who are pregnant, on maternity or nursing status, within a statutory medical period, or confirmed to have a work-related injury, among others. For-cause dismissal remains available, but the bar is high.

None of this is exotic — it is ordinary employment hygiene. The teams that terminate cleanly in China treat the exit as a documented process, not an announcement, and they build the record while the relationship is still live. If your China entity carries wider HR, data or governance exposure, our corporate, compliance & data practice can pressure-test the whole framework, not just a single dismissal.

Frequently asked questions

Sources

• China Briefing — Terminating Employees in China — the four exit routes, the N / N+1 formula, partial-year counting, and the 3× / 12-year caps.
• L&E Global — Termination of employment contracts in China — statutory grounds under Articles 39–41 and unlawful-termination consequences.
• Gaojin Law — Corporate, Compliance & Data — how we support foreign employers on China HR, governance and data compliance.

This article is general information for foreign companies, not legal advice on any specific matter. Rules and practice change; please take advice on your facts.

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