The severance pay in Chinese labor law (1)
Yuan Shen, Esq＊
The global financial crisis starting from the United States has quickly spread around the world and has now impacted upon various industries. In China, many enterprises have been closed down especially in the southeast provinces. It is reported that many enterprises in Guangdong Province have already went bankrupt or have been relocated. In other provinces, many domestic companies as well as foreign businesses are cutting down their labor force.
Under such circumstances, some enterprises even use dirty tricks to force the employee to resign in order to evade the severance pay. How to deal with the situation and how to protect the legitimate rights and interests of the laid-off employees as well as the employers is becoming a new challenge. Both employers and employees look at the Chinese Labor Contract Law for suitable solutions. In this article, we will conduct a summary analysis about the severance pay in case of dismissal.
1. The application of severance pay
In accordance with Article 40 of the Labor Contract Law, under any of the following situation, the employer can terminate the employment contract as long as he gives the employee a written notice 30 days in advance or one month’s wage in lieu of notice:
- The employee contracted an illness or sustained a non-work related injury and after the expiration of the set medical period he is unable to return to his original job or engage in other work arranged for him by the employer;
- The employee is incompetent and remains incompetent after training or adjustment of his position; or
- The objective circumstances relied on at the time of conclusion of the employment contract have materially changed, making performance thereof impossible and the employer and employee fail to reach agreement on amending the employment contract after consultation.
If the employer lay off the employee pursuant to the foregoing provisions, the employee should note that:
- Whether the company sends the notice 30 days in advance;
- Whether the notice is in written form;
- If the company fails to respect the two aforementioned procedures, employer should make a payment to the dismissed employee which equivalent to his monthly wages.
After the payment of one month’s wage, the employer is not released from paying the severance pay. Through detailed study of the Employment Contract Law, in addition to the three foregoing situations, the author has concluded the following situations under which the employer should make the severance pay to the employee:
- The employment contract is terminated through consultation which is initiated by the employer;
- The employer dismisses the employee because of restructuring which undertakes pursuant to the Enterprise Bankruptcy Law of PRC;
- The employer dismisses the employee due to the serious difficulties in production and/or business operations of the enterprise;
- The enterprise is to switch production, undergo a material technological makeover or adjust its mode of operation and still needs to reduce its workforce after the amendment of the employment contract, and the employer discharges the employee in accordance with the legal procedure;
- Other material change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts occurs, rendering the performance thereof impossible, and the employer discharges the employee in accordance with the legal procedure;
- The employee agrees to renew the employment contract but the employer does not when the employment contract has expired, and then the employer terminates the fixed-term employment contract;
- The employment contract is terminated due to the bankruptcy of the employer;
- The employment contract is terminated due to its business license is revoked, is ordered to close or is closed down, or because of the early dissolution of the company;
- Other circumstances prescribed in laws or administrative regulations.
(To be continued)