Termination of an employment contract is one of the situations most likely to trigger disputes and legal risk in a labour relationship. An enterprise that terminates on the wrong grounds, follows the wrong procedure, or fails to give proper notice may have to reinstate the employee, pay salary for the days not worked, and pay further compensation. This article sets out the lawful grounds, the obligations of each party and the procedure that must be followed.
Grounds for lawful termination
The 2019 Labour Code lists the lawful grounds for terminating an employment contract; those most common for enterprises include: expiry of the contract term; the parties having completed the work under the contract; termination by mutual agreement; the employee being dismissed as a disciplinary measure; unilateral termination by the employee or the enterprise carried out in accordance with the law; and the enterprise letting the employee go due to restructuring, technological change, economic reasons, or the division, separation, consolidation or merger of the enterprise.
There are also grounds linked to legal events outside the enterprise's control: the employee dies or is declared by a court to have lost civil act capacity, to be missing, or to have died; the employee is sentenced to imprisonment without suspension, sentenced to death, or is banned from performing the work specified in the contract; or a foreign employee is deported or their work permit expires. An enterprise needs to identify the correct ground before making a decision, since each ground carries different obligations.
Notice obligations of each party
When lawfully terminating a contract unilaterally, both the employee and the enterprise must comply with the notice period corresponding to the type of contract: longer for an indefinite-term contract, shorter for a definite-term contract, and shortest for a contract of under 12 months — an enterprise should check the exact number of days against the current implementing guidance before issuing notice, as this threshold has a direct bearing on the lawfulness of the termination.
An employee is exempt from the notice obligation in certain cases listed by law: not being assigned the agreed job, place or working conditions; not being paid in full or on time; being subjected to mistreatment or forced labour; a pregnant female employee being required to rest on the instruction of a medical facility; or reaching retirement age. On the enterprise side, the law also sets out certain cases in which the enterprise may not exercise its right of unilateral termination, such as while the employee is undergoing prescribed treatment for illness, a workplace accident or an occupational disease, is on annual leave or personal leave, or is a female employee who is pregnant, on maternity leave, or raising a child under 12 months old.
Severance allowance and job-loss allowance
There are two types of allowance an enterprise must clearly distinguish:
- Severance allowance: applies where the contract terminates on ordinary lawful grounds (expiry of the contract, mutual agreement, lawful unilateral termination by the employee, and so on), provided the employee has worked regularly for 12 months or more. The allowance is calculated per year of work and paid by the enterprise — it does not apply if the employee is eligible for a retirement pension or has voluntarily quit without a legitimate reason as defined by law.
- Job-loss allowance: applies where the enterprise lets an employee go due to restructuring, technological change, economic reasons, or the division, separation, consolidation or merger of the enterprise, provided the employee has worked regularly for 12 months or more. The allowance is calculated per year of work but is subject to a statutory minimum floor expressed as a number of months' salary.
The period of work used to calculate both allowances is the total actual working time, less any period during which unemployment insurance was paid and any period for which an allowance has already been paid, so as to avoid duplicating benefits. An enterprise should check the salary used as the basis for calculating the allowance (typically the average contractual salary over a number of months immediately preceding termination) against current implementing guidance, to calculate it correctly and avoid complaints.
Procedure to avoid disputes
An enterprise should follow this procedure, particularly for unilateral termination or letting employees go due to restructuring or technological change:
- Identify the correct legal ground and check whether the employee falls within a protected category (maternity, illness, workplace accident, and so on).
- Issue written notice, stating the ground and the corresponding notice period clearly, and send it to the correct address or by the method agreed.
- For cases of restructuring, technological change or economic reasons affecting a large number of employees, the enterprise must prepare a labour utilisation plan, discuss it with the employee representative organisation at the workplace, and notify the state labour authority.
- Within the statutory period from the date of termination, the parties must settle all amounts relating to each other's entitlements in full; this period may be extended in certain special cases, but not beyond the maximum allowed by law.
- The enterprise must complete the procedure to confirm and return the employee's social insurance book together with any other documents it has held; it must provide copies of documents relating to the employee's period of work if requested, with the cost of copying and sending borne by the enterprise.
Retaining full documentation evidencing the ground for termination (job performance evaluation records, disciplinary case files, the labour utilisation plan, and so on) is the single most important preventive step, since the burden of proving the termination was lawful usually falls on the enterprise in a dispute.
Consequences of unlawful unilateral termination
Where an enterprise unlawfully terminates a contract unilaterally, the consequences are severe: it must reinstate the employee, pay salary and social insurance, health insurance and unemployment insurance contributions for the days the employee was not working, and pay an additional amount equivalent to at least a number of months' contractual salary. If the employee does not wish to continue working, the enterprise must also pay severance allowance on top of the above amounts; if the enterprise does not wish to reinstate the employee and the employee agrees, the parties agree an additional compensation amount not lower than the statutory floor. If the enterprise also breaches the notice period, it must pay further compensation equivalent to the salary for the days of notice not given.
Conversely, an employee who unlawfully terminates a contract unilaterally is not entitled to severance allowance, must compensate the enterprise as required by law, and must refund training costs if any. An enterprise should carefully review the ground and the procedure before making a decision, to avoid falling into "unlawful unilateral termination", where the cost of remedying the situation is far greater than the cost of obtaining advice beforehand.
Frequently asked questions
Can an enterprise terminate a contract while the employee is on maternity leave? No. This is one of the cases in which the enterprise may not exercise its right of unilateral termination of the employment contract.
Can severance allowance and job-loss allowance be received at the same time? No. The two amounts apply to two different grounds for termination; an employee only receives the one corresponding to the actual ground for termination.
What evidence is needed to terminate a contract because the employee regularly fails to complete the assigned work? The enterprise needs performance evaluation criteria clearly set out in its internal regulations, together with actual evaluation records applying those criteria.
If an enterprise cuts headcount due to economic difficulty, does it need to notify the labour authority? Yes. Where restructuring, technological change or economic reasons affect a large number of employees, the enterprise must prepare a labour utilisation plan and notify the state labour authority.
Book a consultation with TLA Consulting before deciding to terminate an employment contract, to ensure the correct ground and procedure and to minimise the risk of disputes.
