Our client Carlos has opened a company in Beijing with over 10 employees. The company is now planning to relocate to Shanghai. Carlos has consulted us regarding the situation where some employees are unwilling to relocate to Shanghai. He wants to know if compensation is required when terminating their employment contracts.

Under Chinese law, when an enterprise terminates an employment contract with a worker, there are certain circumstances where the enterprise may be required to provide severance payment to the worker. In other cases, compensation may be necessary if the employer fails to fulfill its obligations under the employment contract or if the termination is considered illegal or unfair.

What is severance pay in labor law?

In labor law, severance pay refers to the compensation or financial benefits provided to an employee upon termination of their employment contract. It is typically a lump-sum payment or a specific amount based on factors such as the employee’s length of service, salary, and the reason for termination. The purpose of severance pay is to provide financial support to employees who are being laid off or whose contracts are being terminated, helping them with the transition to new employment or providing temporary financial assistance.

Here are some situations where an employer is required to provide severance payment:

1. Mutual agreement: The employer proposes to terminate the employment contract, and the worker agrees.
2. The worker is unable to perform their original job due to illness or non-work-related injuries after the medical treatment period has expired, and they are also unable to perform any other assigned work.
3. The worker is incapable of performing their job even after training or job reassignment.
4. The company is bankrupt, facing operational difficulties, undergoing a major technological innovation, business model adjustment, or significant changes in objective circumstances.

In these situations, the employer is generally obligated to provide severance payment to the worker.

Provide a 30-day advance notice to the employee.

The reason for providing a 30-day advance notice to employees for contract termination, as stated in labor law, is to give employees sufficient time to transition or seek new job opportunities. The notification period is designed to protect the rights of employees, ensuring that they have enough time to mitigate the risk of unemployment, search for new employment opportunities, and make necessary adjustments.

The situations where an employer is required to provide a 30-day prior notice to the worker or pay one month’s salary are as follows:

1. The worker is unable to perform their original work after the medical treatment period due to illness or non-work-related injury, and they are still unable to be assigned to other work arranged by the employer.
2. The worker is incapable of performing their job even after receiving training or being reassigned to a different position.
3. The objective circumstances on which the labor contract was based undergo significant changes, making it impossible to fulfill the labor contract. Despite negotiations between the employer and the worker, an agreement on amending the contract could not be reached.

The most severe punishment: Paying compensation to the employee.

If the employer unlawfully terminates or terminates the labor contract, they shall be required to pay the worker compensation equal to twice the amount of severance payment.

The calculation method for severance pay is as follows:
Severance pay is calculated based on the number of years the employee has worked in the company, and it is paid to the employee at a rate of one month’s salary for each full year of service. For periods exceeding six months but less than a full year, it is calculated as one year. For periods less than six months, the employee is paid half a month’s salary as severance pay.

If the monthly salary of an employee exceeds three times the average monthly salary of employees in the local area for the previous year, the severance pay will be paid at an amount equal to three times the average monthly salary of employees for the previous year. The maximum number of years for which severance pay is paid is not more than twelve years.

Whether monthly salary includes social security, overtime pay, bonuses, and taxes is a question that would be best addressed by consulting our legal counsel.

In this case, our client intends to relocate its premises. Based on previous court precedents, we suggest that the client should first negotiate with their employees and listen to their thoughts. If an employee is unwilling to relocate with the company but is willing to terminate their contract, the company only needs to provide a 30-day advance notice to the employee and pay severance pay. However, if an employee does not agree to such an arrangement, terminating the employment contract by the company would be considered illegal, and the company would be required to compensate the employee with double the amount of severance pay as compensation.