In China, when an employer terminates an employee’s contract, they are required to provide the employee with a severance package. The amount of the severance package is determined by the length of the employee’s service with the company, and the reason for the termination. According to Chinese labor law, there are two types of severance payments: statutory and contractual.
Statutory Severance Payment:
Statutory severance payment is the minimum payment that an employer must provide to an employee when their contract is terminated, as mandated by law. The amount of statutory severance payment is calculated based on the employee’s years of service as follows:
• One month’s salary for each full year of service, for employees who have worked for the company for less than 6 years.
• Two months’ salary for each full year of service, for employees who have worked for the company for 6 years or more, but less than 10 years.
• Three months’ salary for each full year of service, for employees who have worked for the company for 10 years or more.
The “salary” used in the calculation of the severance payment includes the employee’s monthly base salary, allowances, bonuses, and other payments, but does not include social insurance contributions or housing fund contributions.
Contractual Severance Payment:
Employers and employees may negotiate and agree on a contractual severance payment that exceeds the statutory minimum. The amount of the contractual severance payment is usually calculated as a multiple of the employee’s monthly salary or a fixed amount agreed upon in the employment contract.
It’s worth noting that if an employee is terminated for serious misconduct or violation of the law, they may not be entitled to any severance payment.
Below are a few examples to help illustrate how the severance package is calculated when firing an employee in China:
Example 1:
Employee A has worked for Company X for 5 years and is terminated due to the company’s restructuring. The employee’s monthly base salary is 10,000 RMB, and they receive a monthly bonus of 2,000 RMB. To calculate the statutory severance payment, we can use the following formula:
(1 month’s salary) x (years of service) = severance payment
[(10,000 + 2,000) x 12] x 5 = 720,000 RMB
In this case, the employee is entitled to a statutory severance payment of 720,000 RMB.
Example 2:
Employee B has worked for Company Y for 8 years and is terminated due to poor performance. The employee’s monthly base salary is 8,000 RMB, and they do not receive any bonuses. To calculate the statutory severance payment, we can use the following formula:
(2 months’ salary) x (years of service) = severance payment
(8,000 x 2 x 8) = 128,000 RMB
In this case, the employee is entitled to a statutory severance payment of 128,000 RMB.
Example 3:
Employee C has worked for Company Z for 3 years and is terminated for violating company policy. The employee’s monthly base salary is 12,000 RMB, and they receive a monthly housing allowance of 2,000 RMB. Since the employee is terminated for serious misconduct, they are not entitled to any severance payment.
In summary, the severance package when firing an employee in China is calculated based on factors such as the employee’s years of service, reason for termination, and the type of payment specified in the employment contract. It’s important for both employers and employees to be aware of these factors and ensure that they are complying with Chinese labor law.