Wrongful Termination in China:Severance Pay vs Reinstatement

What are the core features of China employment law that employers must understand?

China's employment law heavily protects employees and strictly limits unilateral termination. Employers must use written contracts, follow statutory procedures, and rely on specific legal grounds for dismissal or risk reinstatement orders or double severance.

The main legal framework includes the PRC Labor Law, the PRC Labor Contract Law (LCL), the Labor Dispute Mediation and Arbitration Law, and several Supreme People's Court (SPC) judicial interpretations on labor disputes. Key features include:

• Mandatory written contracts: You must sign a written labor contract within 1 month of the employee's start date. Failure triggers double salary penalties up to 11 months.
• Strong termination protection: The LCL lists exhaustive termination grounds; anything outside them is highly likely to be ruled illegal.
• Statutory severance (economic compensation): Usually triggered by no-fault terminations (e.g., economic layoff, mutual separation initiated by employer, non-renewal under certain conditions).
• Reinstatement as a primary remedy: For illegal dismissal, employees can usually choose reinstatement with back pay or 2N compensation.
• Mandatory social insurance: Pension, medical, unemployment, work-related injury, maternity, and housing fund contributions are compulsory and enforced locally.
• Dispute forums: Labor disputes must first go to a local Labor Dispute Arbitration Commission, then can be litigated before a People's Court.

When can employees in China demand reinstatement instead of severance?

Employees can usually demand reinstatement whenever a unilateral termination is found illegal and reinstatement is still objectively possible. The recent SPC judicial interpretation emphasizes that courts should prioritize reinstatement where the employment relationship can continue, rather than simply awarding money.

Under the Labor Contract Law, an employee who succeeds in an illegal termination claim normally has two main options:

• Reinstatement plus back pay: Return to the job (or equivalent role) and receive salary from the dismissal date to reinstatement, often including bonuses and allowances.
• Monetary compensation: If the employee does not want to come back, or reinstatement is not feasible, the court/arbitration can order the employer to pay 2N compensation instead.

What is "illegal termination" under Chinese law?

A termination is usually considered illegal if:

• The employer did not have a valid statutory ground under the LCL (for example, vague "poor fit" with no evidence or process).
• The employer failed to follow mandatory procedures (e.g., no PIP and no reassignment before incompetence termination, no consultation before mass layoff).
• The employer dismissed a specially protected employee (e.g., pregnancy, work-related injury during medical treatment period, statutory protected periods) except in very narrow misconduct circumstances.
• The employer used an invalid or discriminatory rule that conflicts with law as the basis for dismissal.

When will courts order reinstatement instead of 2N compensation?

The SPC judicial interpretations instruct courts to favor reinstatement where both sides can realistically continue the employment relationship. Employers cannot automatically "pay to exit" if the employee insists on coming back.

Reinstatement is more likely when:

• The employer is still operating and the role or a similar role exists.
• The employee is not in a senior leadership position where personal trust is critical.
• The conflict arose mainly from procedural or technical mistakes by the employer, not serious misconduct by the employee.
• The employee explicitly requests reinstatement during the arbitration or litigation.
• The employee has an open-ended contract or is under a protected status (e.g., pregnant, on medical treatment for work injury or illness).

When can courts refuse reinstatement and award money instead?

Even if the termination is illegal, courts can deny reinstatement where continued cooperation is objectively impossible. In those cases, they will usually award 2N compensation instead.

Typical scenarios where courts often refuse reinstatement include:

• Objective impossibility:
  • The employer's business license is revoked, or the company is shut down or liquidated.
  • The original position is lawfully canceled due to major restructuring, and no comparable position exists.
• Severe relationship breakdown:
  • The employee committed serious misconduct that harmed trust, but the employer failed to prove it procedurally.
  • The parties show strong, lasting conflict that makes cooperation impractical (e.g., assaults or serious defamation).
• Contract expiration with valid non-renewal:
  • The labor contract has expired, and the employer had a lawful basis not to renew (for example, the employee was incompetent and PIP plus reassignment failed).
• Employee does not want to come back:
  • The employee explicitly asks for money instead of reinstatement.

Practical risk management for employers on reinstatement

Employers should treat reinstatement as a real outcome, especially for non-management employees where the relationship may still be workable. To manage that risk:

• Build legal grounds upfront: Choose the right statutory basis (misconduct vs incompetence vs redundancy) and follow the full process.
• Document everything: Warnings, investigations, PIP records, consultation minutes, redundancy criteria, and filings with authorities.
• Use mutual terminations where possible: Offer enhanced severance plus releases in exchange for a fully documented mutual termination agreement.
• Plan for reinstatement scenarios: HR should have a plan for what to do if a court orders reinstatement, including where to place the employee and how to manage team impact.

How is "double severance" (2N) calculated for unlawful termination in China?

Double severance (2N) uses the same formula as statutory economic compensation (N) but doubles the amount. It is still subject to the legal caps on salary base (3x local average) and years of service (12 years cap for the capped portion).

Under Article 47 and Article 87 of the Labor Contract Law:

• Economic compensation (N):
  • 1 month of "average monthly salary" for each full year of service with the employer.
  • Service between 6 and 12 months counts as 1 full year.
  • Service less than 6 months counts as half a month salary.
• Average monthly salary:
  • Usually the average of the employee's normal wages over the last 12 months before termination.
  • Capped at 3x the local average monthly salary published by the local government.
  • If you apply the cap, you can only count up to 12 years of service for the capped portion.
• 2N compensation:
  • Equal to 2 x N using the same formulas and caps above.

Sample 2N calculation (with and without salary cap)

The following table shows typical 2N calculations. Local salary caps vary by city; values below are illustrative.

How does 2N interact with back pay and other claims?

In an illegal termination case, 2N compensation typically replaces normal statutory severance (N), not in addition to it. However, 2N can sit on top of other liabilities.

Depending on the case, the employer may also owe:

• Back pay: Salary from the illegal termination date to the date of judgment or reinstatement.
• Unpaid bonuses and allowances: Where contract, policies, or past practice support them.
• Social insurance shortfalls: Employer-side contributions and sometimes late payment penalties.
• Double wage for no written contract: Up to 11 months if the employer failed to sign a written contract on time.

What grounds for dismissal are relatively safe for employers in China?

The safest dismissals are those that strictly align with the Labor Contract Law: proven serious misconduct, incapacity after documented PIP and reassignment, and properly run economic redundancy or mass layoff. Even then, employers must follow clear procedures and keep strong evidence.

Key statutory grounds include:

• Serious violation of employer rules (summary dismissal under Article 39).
• Incompetence after training or reassignment (Article 40(2)).
• Major change in objective circumstances making performance impossible and no agreement on contract change (Article 40(3)).
• Economic redundancy / mass layoff meeting Article 41 conditions.
• Expiry of fixed-term contract where legal non-renewal conditions are met.

Termination for serious misconduct or rules violation

Summary dismissal for serious misconduct can avoid severance, but courts apply a high proof standard. Employers must show both valid rules and factual violations.

• Requirements:
  • Clear, lawful rules and employee handbook, properly disclosed and often consulted with staff or union.
  • Rules specify what conduct constitutes "serious violation" or "gross misconduct".
  • Investigations, witness statements, emails, CCTV, or other evidence of actual misconduct.
• Typical grounds:
  • Serious fraud, embezzlement, violence at work.
  • Serious breach of conflict-of-interest or confidentiality rules.
  • Repeated absence without approval, despite previous written warnings.
• Risks:
  • If the alleged misconduct is not clearly defined in the rules, courts may reject summary dismissal.
  • Procedural unfairness or weak evidence often turn a "misconduct" dismissal into illegal termination with 2N exposure.

Termination for incompetence (performance-related)

Performance-based dismissal is allowed but only after the employer gives the employee a fair chance to improve and considers reassignment. Courts closely examine whether the employer actually implemented a proper PIP or similar measures.

• Legal anchor: Article 40(2) LCL - the employee is not competent for the position and remains incompetent after training or position adjustment.
• Key elements:
  • Reasonable, measurable performance standards, communicated in writing.
  • Objective performance data showing failure to meet standards.
  • Documented training, coaching, or support.
  • Attempt to adjust the employee to another suitable position if available.
• Procedure:
  • Advance written notice (30 days) or 1 month salary in lieu of notice.
  • Payment of statutory severance (N) at termination.

Economic redundancy and mass layoff

Economic redundancy is lawful when the employer faces genuine operational or economic difficulties and follows Article 41 procedures. Cutting staff without meeting those conditions is highly likely to be treated as illegal termination.

• When Article 41 applies (any of the following):
  • Restructuring under bankruptcy law.
  • Serious production or business difficulties.
  • Enterprise switches production, major technological update, or business mode change, leading to contract modification, but employees refuse modified terms.
  • Objective economic circumstances relied on at contract formation have changed significantly, making performance impossible, and employer-employee cannot agree on contract change.
• Mass layoff threshold:
  • 20 or more employees, or
  • Less than 20, but representing at least 10% of the workforce.
• Key procedural steps:
  • Consult with the trade union or all staff at least 30 days in advance.
  • Explain the situation, redundancy plan, and selection criteria.
  • File the plan with the local labor administration (usually the Human Resources and Social Security Bureau).
  • Apply statutory priority retention rules, and pay severance (N) to those laid off.

How should employers manage performance-based dismissal (incompetence) to reduce legal risk?

To make an incompetence dismissal defensible, employers should implement a structured, documented PIP and either train or reassign the employee before termination. The more transparent and data-driven the process is, the safer it will be in arbitration or court.

Step-by-step PIP process aligned with Chinese law

1. Define performance standards:
   • Translate job description and KPIs into clear, quantifiable criteria.
   • Ensure these standards are consistent with internal policies and past practice.
2. Identify performance gaps:
   • Use regular appraisals, written feedback, and objective metrics (sales, error rates, output quality).
   • Document specific incidents or results that show underperformance.
3. Provide written warning and meeting:
   • Hold a performance meeting; explain deficiencies, expectations, timeline, and possible consequences.
   • Issue a written warning (bilingual if needed) and have the employee sign acknowledgment (or record refusal).
4. Implement a PIP:
   • Set a reasonable PIP period, commonly 2-3 months for normal roles; more for complex or senior roles.
   • Outline specific goals, support measures, check-in meetings, and documentation requirements.
   • Record each meeting, feedback, and employee response in writing.
5. Offer training or coaching:
   • Provide relevant training, mentoring, or supervision; record attendance and content.
   • Keep evidence (slides, sign-in sheets, emails) to show genuine effort to improve competence.
6. Assess outcome and consider reassignment:
   • If performance improves to acceptable levels, end the PIP.
   • If not, document the failed PIP and actively look for any suitable alternative position.
   • If a role exists, make a written offer; record the employee's response.
7. Terminate only as last resort:
   • If no suitable role exists or the employee refuses reasonable reassignment, you may terminate under Article 40(2).
   • Provide 30 days written notice or pay 1 month of salary in lieu, plus statutory severance (N).

Common mistakes that trigger illegal-termination findings

• No clear performance standards: Vague reasons like "not a team player" with no metrics or written appraisals.
• No real PIP: One or two verbal warnings, then termination, with no structured improvement period.
• No reassignment attempt: Ignoring open internal roles where the employee might fit.
• Retaliatory timing: Termination shortly after the employee complains about overtime, harassment, or statutory rights, suggesting retaliation.

How can companies lawfully conduct a mass layoff or redundancy in China?

To lawfully implement a mass layoff, companies must satisfy Article 41 conditions, follow consultation and filing procedures, apply retention priorities, and pay statutory severance. Failure on any of these points can convert the layoff into illegal termination with reinstatement or 2N exposure.

Legal triggers and thresholds

Mass layoff rules apply when you intend to reduce your workforce by:

• 20 or more employees, or
• Less than 20 employees, but at least 10% of total staff.

You must also show one of the legally accepted reasons (bankruptcy reorganization, serious business difficulties, technological upgrade, or major change in objective circumstances) and be prepared to produce supporting documents (financials, board resolutions, restructuring plans).

Procedural roadmap for mass layoff

1. Prepare internal business justification:
   • Draft a restructuring or cost-cutting plan with objective data.
   • Get internal approvals (HQ, board, regional management) and document them.
2. Design selection and retention criteria:
   • Article 41 requires priority retention of:
     • Employees with longer fixed-term or open-ended contracts.
     • Employees who are the only income earner in their household.
     • Employees with family dependents (elderly or minors) relying on them.
   • Define objective and non-discriminatory selection criteria for others (skills, performance, business needs).
3. Consult with union or all employees:
   • At least 30 days before implementing the layoff, consult the trade union or full staff.
   • Explain reasons, scale, selection criteria, and severance scheme.
   • Record minutes, comments, and any modifications to the plan.
4. File with labor authorities:
   • Submit the redundancy plan to the local Human Resources and Social Security Bureau.
   • Include justification, list of affected employees, and consultation records.
   • Some cities require acknowledgement before implementation; practices differ by locality.
5. Communicate with affected employees:
   • Issue written notice to each impacted employee.
   • Offer at least statutory severance (N); many employers offer a premium to obtain mutual-termination agreements and releases.
6. Implement and document payments:
   • Pay severance and any outstanding wages, annual leave, and bonuses on or near the last working day.
   • Obtain signed receipts and, ideally, settlement agreements for each employee.

Special protections and pitfalls in redundancy

• Protected employees:
  • Pregnant employees, employees on maternity leave, those in medical treatment periods for illness or work injury, and others enjoy extra protection.
  • Mass layoff usually cannot override these protections except in rare statutory cases (e.g., company closure).
• Rehiring obligation:
  • If the employer hires again within 6 months after the layoff, Article 41 expects it to give preference to the laid-off employees, and inform them of the openings.
• Substance over label:
  • Courts look at what actually happened, not what you call it. A "voluntary resignation drive" that strongly pressures staff may still be treated as de facto mass layoff.

What does the labor dispute process in China look like and how long does it take?

Most employment disputes in China must go through mandatory labor arbitration before court litigation. From filing to a final court judgment, complex termination cases can easily take 12-24 months.

Basic procedural path

1. Internal complaint or mediation (optional but useful):
   • Try to resolve disputes through HR, internal grievance channels, or local mediation centers.
2. Labor arbitration:
   • Employee files at the local Labor Dispute Arbitration Commission where the employer is located or where work is performed.
   • Limitation period: normally 1 year from the date the employee knew or should have known of the rights violation.
   • The commission aims to issue an award within about 45 days, extendable by 15 days in complex cases.
3. Court litigation:
   • Either party can file a lawsuit against the arbitration award (in most cases) within 15 days of receiving it.
   • The People's Court will hear the case de novo (full rehearing on facts and law).
   • First-instance trials often take 6-12 months; appeals to a higher court can add several more months.
4. Enforcement:
   • If the employer does not voluntarily comply, employees can apply to the court for enforcement.
   • Court can freeze bank accounts, seize assets, or place credit restrictions on legal representatives of non-complying companies.

Typical outcomes in termination disputes

• Termination upheld: No liability beyond unpaid wages or minor adjustments.
• Termination converted to lawful severance-based exit: Employer pays N (sometimes plus a small premium) instead of reinstatement or 2N.
• Illegal termination with reinstatement: Employee returns, employer pays back pay; relationship management becomes the key challenge.
• Illegal termination with 2N: If reinstatement is not feasible or the employee prefers money, employer pays double severance.

When should employers in China hire a labor lawyer or external expert?

Employers should engage professional support whenever the legal or financial stakes are high, or when dealing with complex or sensitive dismissals. Early advice often avoids costly arbitration, 2N awards, or reinstatement orders.

High-risk situations requiring expert input

• Terminating protected employees:
  • Pregnant employees, employees on maternity leave, those with work injuries, union representatives, or employees on medical leave.
• Senior managers or key employees:
  • Disputes can involve trade secrets, non-compete clauses, stock options, and significant reputational risk.
• Mass layoffs or restructuring:
  • Multiple jurisdictions in China, complex selection criteria, and significant aggregate severance costs.
• Allegations of discrimination or harassment:
  • Gender, age, disability, or other sensitive grounds raise litigation and PR exposure.
• Cross-border or secondment arrangements:
  • Expatriates, dual contracts, and global policies can clash with Chinese mandatory rules.
• Arbitration or litigation already filed:
  • Once you receive a notice from an arbitration commission or court, you should assess case strategy, evidence, and settlement options quickly.

What are the next steps for employers to reduce termination risk and 2N exposure in China?

Employers should proactively tighten their HR fundamentals: contracts, rules, documentation, and structured processes for performance and redundancy. Systematic preparation is far cheaper than reacting to reinstatement orders or 2N judgments.

Action checklist for HR and management

• Audit labor contracts:
  • Ensure written contracts exist for all employees, with accurate position, workplace, working hours, and compensation details.
  • Confirm use of appropriate terms (fixed vs open-ended) and probation periods aligned with law.
• Update employee handbook and policies:
  • Clearly define serious misconduct, performance standards, investigation procedures, and PIP steps.
  • Ensure policies are lawful, translated where needed, and properly communicated and acknowledged.
• Standardize PIP and documentation templates:
  • Create templates for warnings, PIP plans, coaching records, and reassignment offers.
  • Train line managers on how to use these tools consistently.
• Design a redundancy playbook:
  • Define internal processes for economic layoffs, from business justification to consultation and filing.
  • Align global restructuring policies with Chinese local requirements.
• Track local rules and practice:
  • Monitor updates from local Human Resources and Social Security Bureaus and SPC interpretations.
  • Understand city-specific practices on salary caps, arbitration tendencies, and authority filings.
• Plan negotiation strategies:
  • Set internal ranges for enhanced severance in mutual terminations to avoid prolonged disputes.
  • Develop standard settlement agreements with releases and confidentiality clauses that comply with Chinese law.