Severance Pay in China (II)

Severance Pay in China (II): How Much Am I Entitled To?

KEY TAKEAWAYS:

（1）The severance pay will vary between “N”, “N+1” and “2N” depending on the specific circumstances of termination.

（2）"N" is calculated by multiplying the monthly average salary for the twelve months prior to terminating the labor contract with years of employment.

（3）“N+1” = standard severance pay (N) plus one month’s average salary

（4）The severance pay is limited to three times the average monthly salary in the local area, with the calculation period capped at twelve years.

（5）In addition to severance pay, you may also claim unpaid bonuses, commissions, overtime wages, wages for unused annual leave, compensation for refusing to sign a written labor contract, and compensation for non-competition if applicable.

（6）Not all courts in China will uphold the severance of a foreigner. However, it is worth noting that the majority of courts do so, with the exception of the ones in Shanghai.

1. What does “N” stand for?

The term “N“ typically denotes standard severance pay. Article 47 of the Labor Contract Law ("LCL") outlines that standard severance pay is calculated by multiplying the monthly average salary of the twelve months leading up to the termination of the labor contract by the length of employment. (“the monthly average salary of the twelve months leading up to the termination of the labor contract” hereinafter referred to as “average salary”)

If an employee has worked for less than six months, their severance pay will be calculated based on half a year; if they have worked for more than six months (including six months) but less than one year, their severance pay will be calculated based on one full year.

For example, the average salary amounts to CNY 10,000, with a working period of 3 years and 4 months. As a result, the corresponding severance pay of “N” is CNY 35,000.

Another instance shows an average salary of CNY 10,000 and a working period of 3 years and 9 months, leading to a severance pay (“N”) of CNY 40,000.

2. What does “N+1” refer to?

Article 40 of LCL mandates that employers must either provide one month's prior notice to employees or pay one month's salary as compensation in lieu of notice to terminate labor contracts legally and unilaterally. This implies that in the event of legal termination without one month's prior notice, the employer must offer an additional one month's salary as severance pay. Conversely, one month's salary is not mandatory.

Therefore, “N+1” refers to the standard severance pay plus an additional month’s average salary (to compensate for the absence of a notice period).

For example. If the average salary is CNY 10,000, and the employee has worked for 3 years and 4 months. The severance pay of “N+1”=CNY 10,000×3.5+CNY 10,000 =CNY 45,000.

3. What does “2N” stand for?

If the employer violates the law by terminating the labor contract, the employee has the right to either request the reinstatement of the labor relationship or demand that the employer pay double the standard severance pay, which is 2N.

For example, if the average salary is CNY 10,000 per month and the employee's total working period is 3 years and 9 months, then the severance pay of 2N would equal CNY 80,000.

4. Scenarios for “N”, “N+1”, “2N”

For the sake of clarity, we provide the following summary of the scenarios pertaining to "N", "N+1", and "2N" as presented in our previous article:

· Scenarios for “N” or “N+1”

(1)   Legal bilateral termination;

(2)   Failure of renewal;

(3)   Mass-layoff

(4)   Bankruptcy, dissolution, cancellation;

(5)   Employer’s legal unilateral termination (health issues or injury, incompetent in work, significant changes);

(6)   The employee’s legal termination (ONLY “N”)

“N+1” only applies in situations where the employer fails to provides the employee with 30  days' prior notice of termination.

“N” applies when the employer has given the notice period mentioned above, or when employees terminate the labor contract as per Article 38 of LCL

· Scenarios for “2N”

As previously stated in our article, the employer is obligated to compensate the employee “2N” under the following circumstances:

（1）Terminating an open-ended labor contract by the employer (“open-ended labor contract” does not apply to foreign employees as the employment period can not exceed 5 years.)

（2）Dismissing a female employee during her pregnancy, confinement or nursing period.

（3）Dismissing an employee who suffers from sickness or non-work-related injury within the prescribed medical treatment period.

（4）Dismissing the employee who has worked in conditions exposing them to occupational disease hazards during employment without a pre-employment occupational health examination, or dismissing an employee suspected of suffering an occupational disease during the period of diagnosis or medical observation;

（5）Dismissing the employee who has been working for 15 years consecutively with the employer and will retire in less than five years; or

（6）Any other dismissal that is unlawful or prohibited by law.

5. Is there a limit for severance pay?

Certainly. Severance pay shall be capped at three times the local average salary where the employee's average salary exceeds three times the average monthly salary of the previous year. Additionally, the calculation years of severance pay shall be limited to twelve years.

6. What else you may claim for?

（1）Unpaid bonus,allowance, commission, etc.

As long as these are agreed in the labor contract or other agreement.

（2）Overtime wage

Overtime wage on working days = hourly wage x overtime hours x 1.5

Overtime wage on weekend = daily wage x overtime days x 2

Overtime wage on statutory holiday = daily wage × overtime days ×3

（3）Wages for unused annual leave

Wages for unused annual leave=daily wage × overtime days ×3

（4）Compensation for failing to sign a written labor contract

 If the employer fails to sign a written labor contract within the period of more than one month but less than one year, it has to compensate the employee double salaries every month (generally capped at 11 months).

 （5）Compensation for non-competition

Only when the employer and employee have entered into a non-competition agreement.

7. Will the court uphold the severance pay of a foreign employee?

· Judicial Practice of Shanghai

(1)   In the event that both parties have expressly agreed in the labor contract that the foreign employee is entitled to severance pay, the Shanghai courts will uphold the severance pay as per the Answers of Shanghai High People’s Court to Several Issues Concerning the Trial of Labor Dispute Cases (“ALDC”);

(2)   Otherwise, most Shanghai court may not uphold the severance pay pursuant to the ALDC as they believe that foreigners are not eligible to apply the LCL since there are no laws explicitly stating that foreigners can apply the LCL.

· Judicial Practice of Beijing, Guangzhou, Jiangsu, and Zhejiang

Typically support the severance of foreign employees by arguing that the Administrative Provisions on Employment of Foreigners in China do not grant foreigners an exemption from the LCL. Thus, foreigners are eligible to cite the LCL.

Therefore, it is highly advised that foreign employees negotiate with their employer to cover a severance payment clause in the labor contract.

Q&A

(1)   How should I claim for severance pay?

You can initiate a labor arbitration procedure at the Labor Dispute Arbitration Committee where the labor contract is implemented or where the employer is located. For foreign employees in Shanghai, the labor arbitration procedure must be commenced at the Shanghai Municipal Labor Dispute Arbitration Committee.

(2)   If I’m not satisfied with the arbitration verdict, what should I do?

You may file a lawsuit in court. Otherwise, the arbitration verdict will be enforced. When you are unsatisfied with the court judgment, you may initiate a second instance by submitting an appellate petition.

(3)   If the employer fails to comply with the verdict or judgment, what should I do?

The employee may apply for enforcement once it takes effect.