China Employee Terminations: Five Mistakes to Avoid

With all the recent turmoil in China and between China and the rest of the world, our China employment lawyers are seeing a pickup in China employee terminations. And with that pickup, we are also seeing a pickup in mistakes made with those employee terminations.

Because China is not an employment at will jurisdiction, mutual termination of an employee is usually the safest path for China employers that wish to terminate a China employee. Many foreign employers understand the risks of terminating a China employee (whether on a fixed-term or open-term contract or even on probation) and seek a mutual termination to reduce those risks. Nonetheless, mutual termination of a China employee requires much care and our China employment lawyers keep seeing the following five mistakes.

1. Using a non-Chinese style employee termination settlement agreement

An employer that uses a non China-centric settlement agreement probably will not have much problem getting its employee to sign it because the employee knows this agreement will not be enforced. I cannot tell you how many times one of our China attorneys has been contacted by a China WFOE needing help one or two months after having “settled” with an employee because that employee has returned to ask for more money or has just gone ahead and sued for it. If you are going to pay money to settle with one of your employees, you must get them to sign an agreement that will actually work.

2. Sending a mutual termination agreement as a total surprise to the employee

If you choose to go for a mutual termination, it usually means you lack a firm legal basis for a China employee termination and your employee almost certainly knows this. Just sending a mutual termination agreement to an employee to be signed usually leads to the employee rejecting the proposed agreement or to the employer having to pay much more than it would have otherwise. If the employee refuses to sign, the odds are good you will be stuck with this employee until the end of his or her employment term or perhaps until the employee reaches his or her mandatory retirement age. If you unilaterally terminate the employee, the employee will probably sue for unlawful termination and this may lead to his or reinstatement with the company. The better way to approach a mutual termination is to go to the employee seeking his or her buy-in and with a practical negotiation plan in place.

3. Presenting a mutual termination agreement with no or close-to-zero severance

China employees usually will agree to a mutual termination agreement with a quick and fair payout. But virtually no employee will agree to a mutual termination with no severance. In fact, the reason why this type of termination is called mutual termination is because the employee’s “price” for voluntary termination is a severance payment. If you offer no severance pay, you might as well forget about mutual termination. Since a mutual termination is like a contract negotiation, your offer will be perceived as negotiating in bad faith and the employee will not move forward with the negotiation. You should instead offer a fair amount in exchange for the employee’s voluntary departure and a written release of all claims against you.

4. Mailing a mutual termination agreement to the employee for signature

It is best to have the employee do this signing right in front of you on or before the employee’s last working day. If you mail a hard copy to the employee to sign, you had better take all necessary steps to ensure you receive an original of the fully executed agreement because if you don’t get that, it is essentially the same as having no written agreement at all. And with no written agreement, you as the employer will be at great risk of later legal action by the employee for the exact same issues you thought you had settled.

5. Leaving important matters open when concluding the mutual termination agreement

You need to carefully consider and seek to resolve all outstanding issues before starting any China employment termination. Are there unpaid wages? Did the employee give up unused vacation days for your business and not get compensated for that? Is the employee owed any bonus? Did the employee get all overtime compensation due? Act slowly and carefully and do not allow an employee to rush you into signing an incomplete agreement. Employees will often say something about how these agreements are “just a formality and we can figure out by email later how much more you need to pay me for things like the statutory vacations days I did not take while working for you.” Do not go along with this! The goal of your termination agreement and your severance payment should be to end the matter once and for all. If “tying up” all loose ends means you will have to pay a little extra, so be it.

Slow down and get your mutual termination agreements right.