Our China lawyers recently assisted a USA based client who had discovered fraud and self-dealing from three high level employees at their China company. It seems these employees, foreigners had been making payments to fake suppliers. This kind of thing occurs more frequently than you may expect. Needless to say the USA based client wished to immediately proceed with firing these employees.
Chinese law generally favors employees. Employees are able to terminate an Employment Agreement without cause, though a 30-day notice period is required. In contrast, Chinese law does not allow an employer to terminate employment without cause. An employer wishing to terminate an employee must do so on a “for cause” basis matching a specific cause justifying termination by the employer as outlined in Chinese law.
Immediate Termination for Cause
China allows for immediate, notice free termination of an employee only in limited circumstances. One of these situations is serious failure of duty such as graft or self-dealing causing substantial loss to the company.
Care should be taken to document the legal causes resulting the termination. Specifically, an official Notice of Termination should be issued to the employee setting out and describing the precise actions of the Employee which justify immediate termination. This Notice should also document precisely what “substantial loss” the employee’s actions have caused to the employer.
Even with such notice, the employee will be free to challenge the termination at Labor Arbitration. If the termination is challenged at Labor Arbitration, and the tribunal finds the stated reasons for termination do not meet the legal requirements for termination, China law allows for reinstatement of the employment position, or for financial compensation to the employee.
Termination by Mutual Agreement
Because Labor Arbitration is always a potential in a unilateral termination, some employers choose to ‘bite the bullet” and reach a compensated termination by mutual agreement with the employee to be terminated, even where there may be wrongdoing at the level of justifiable cause for termination.
Generally, An Employer and an employee may cancel their labor contract if they so agree after consultation. In the vast majority of cases, this takes the form of some level of compensation paid to the employee, with both the employer and the employee signing a document whereby they agree to formally terminate the employment relationship. The benefit of this Mutual Agreement is to greatly reduce the risk of the employee going back to challenge the termination at Labor Arbitration. The downside is obviously the additional financial payout to an under-performing or malicious employee.