terminate an employee by providing the
employee with 30 days' written notice
if the employee is or becomes unfit for
the position and no suitable alternative
position is available, or if the purpose
for the position changes and parties are
unable to amend the labor contract. Note
that the employer will also be required
to pay a termination fee described in
section B below.
Finally, the employer and employee
may terminate the labor contract by
mutual agreement in which case they
generally agree on the termination
amount to be paid to the employee.
An employer must provide the former
employee with a certificate of termination
that states the effective date of termina-
tion, position held at termination, and
duration of employment. An employer
must also notify the relevant labor union,
if any, in the event of any unilateral
termination of an employee.
The termination requirements
apply equally to both foreign and local
employees. However, an employer should
also terminate a foreign employee's work
permit and residence permit.
Any employee fired unilaterally by the
employer with 30 days' written notice is
entitled to compensation. The amount
of compensation due is equal to one
month's salary per year of service.
The monthly salary amount is the
average salary earned over the previous
year, inclusive of any bonuses or other
monetary compensation, but is capped
at three times the average local salary
during the previous year.
Note that an employer will be
liable to pay double compensation if
he terminates the employee during any
of the following periods: work-related
disease/disability, pregnancy, maternity
from the delivery date). An employer
must also pay double compensation if
it terminates an employee that is within
five years of retirement and has worked
for the same employer for at least 15
consecutive years.
without a China Entity
nese entity to directly hire employees
in China, there are options by which a
foreign company without a Chinese entity
can hire individuals in China.
One option for a foreign company to
engage an individual in China is through
a third party employer agency (the
"Agency"). This arrangement is only
permitted through qualified companies
(i.e., FESCO).
In this arrangement, the foreign com-
pany enters into a service contract with
the Agency and the Agency then enters
into a contract with the individual. Ac-
cordingly, the Agency is the employee's
legal employer in China, and therefore is
responsible for the work conditions, sal-
ary payment, social charges and termina-
tion compensation, if any.
Consequently, the Agency's interests
may conflict with those of the foreign
company, especially regarding termina-
tion compensation, as the Agency will
want to provide a higher compensation
package to avoid any claims by the
former employee. The Agency often
requires that the foreign company enters
into a third party settlement agreement
and will not return any deposit paid until
all applicable termination payments have
been made.
Another alternative is to hire a local
individual through an independent
contractor agreement. This type of
Law of the PRC ("Contract Law") as
opposed to the LCL, and thereby gives
the foreign company more latitude in the
terms of the agreement. This also allows
the foreign company to engage an indi-
vidual in China without having a legal
entity in China.
Generally the independent contrac-
tor is responsible for his/her own income
tax on fees paid (which are not a salary
on a tax perspective) and social insur-
ance payments. It is important that these
be clearly structured as an independent
contractor agreement, as the foreign com-
pany may be liable for fines for illegal
employment and similar violations if a
court determines that it is a labor con-
tract instead of an independent contrac-
tor agreement.
Note that a Chinese individual can
only convert the equivalent of USD
50,000 into local currency per year,
which may limit the payment of services
fees. However, there is no limit on the
amount of foreign funds a Chinese indi-
vidual may receive, so there would be no
limit in the event the receiver does not
need to convert the funds.
hiring and firing employees, whether
local or foreign, is similar to that in
other jurisdictions. Furthermore, the
differences between local and foreign
employees are being reduced, making
it easier for foreign companies to
understand their requirements as
employers in China. As long as a foreign
company is aware of its responsibilities,
it should not encounter any difficulties
in hiring or firing either local or foreign
employees in China.