Terminating an Employee in China: A Decision Process for Foreign Employers

Who this guide is for

Foreign founders, directors and HR leaders considering dismissal, redundancy, non-renewal or a negotiated exit at a mainland China entity. This is a high-risk framework, not a substitute for advice from China-qualified employment counsel on the facts and local practice.

Choose the route before discussing the outcome

Route	Core requirement	Typical payment position
Mutual separation (Article 36)	Real, informed agreement; document money, releases, dates and permit handling.	Negotiated. Statutory economic compensation applies when the employer proposes and the parties agree under Article 46.
Employee fault (Article 39)	Prove a listed ground, such as serious policy violation under a valid, communicated rule.	No statutory economic compensation for a valid Article 39 dismissal.
Non-fault unilateral termination (Article 40)	Prove one of three listed grounds and required preceding steps.	Economic compensation plus 30 days’ written notice, or compensation plus one additional month’s wage instead of that notice.
Economic layoff (Article 41)	Statutory threshold, qualifying business ground, explanation/consultation and report to labor administration.	Economic compensation; selection and priority rules apply.
Expiry or other statutory termination	Confirm Article 44 event, renewal facts, protected-status extension and Article 46 payment rule.	Depends on the precise event and renewal offer.
Unlawful termination	No valid ground or required procedure fails.	Employee may seek continued performance; if not required or impossible, Article 87 damages are twice the Article 47 compensation standard.

What Article 40 actually requires

Article 40 covers: (1) inability to perform the original or another arranged job after the statutory medical-treatment period for non-work illness or injury; (2) incompetence that continues after training or job adjustment; and (3) a major change in objective circumstances that makes the contract impossible to perform, after consultation fails to produce an amendment. Each is a sequence, not a label.

For performance, define the job, provide reasonable resources, prove the gap, and document the required training or reassignment. Supreme People’s Court Guiding Case No. 18 confirms that being placed at the bottom of a forced ranking does not by itself prove incompetence. For objective change, explain the external change, its impact on the contract and genuine amendment discussions. Local courts can scrutinize all of these facts closely.

N, N+1 and 2N without the myth

N is shorthand for economic compensation calculated under Article 47: generally one month’s wage for each full year of service, with six months or more counted as one year and less than six months counted as half a month. “Monthly wage” generally means average wage in the 12 months before termination. A statutory cap applies to an employee whose monthly wage exceeds three times the local average monthly wage published for the preceding year: the calculation base is capped at that three-times figure and the service period for compensation is capped at 12 years. Confirm the correct local published figure and treatment of compensation components.

N+1 usually describes Article 40 economic compensation plus one month’s wage paid instead of 30 days’ prior written notice. It does not apply to every termination, and the “+1” calculation rule is not necessarily identical to N’s average-wage base; the Implementing Regulations address the substitute-notice wage.

2N is shorthand for Article 87 damages at twice the Article 47 economic-compensation standard when the employer unlawfully terminates or ends the contract and continued performance is not ordered. Paying 2N in advance does not create an at-will option. Article 48 gives the employee a possible continued-performance remedy.

Protected situations and procedural gates

Before using Articles 40 or 41, check Article 42. Restrictions cover specified occupational-disease examination/exposure situations, work injury with confirmed loss of capacity, statutory medical-treatment periods, pregnancy/maternity/nursing periods, qualifying long service near retirement, and other statutory cases. The exact consequence and contract extension require fact-specific review. These protections do not necessarily block every Article 39 fault dismissal, but never make that inference without counsel.

If the employer has a trade union, Article 43 requires prior notice to the union of a unilateral termination and correction if the union identifies a legal or contractual problem. Economic layoffs have additional thresholds, timing, explanation, consultation/reporting and retention/priority rules. Local filing practice should be checked before announcing a restructuring.

Termination decision workflow

Freeze communications. Tell managers not to announce, lock out or demand resignation.
Build the chronology. Contract, policies, performance, warnings, training, leave, medical status, protected status and manager messages.
Select one primary route. Map every fact to each element of the statute; do not combine incompatible labels.
Audit the evidence. Confirm policy validity and communication, contemporaneous proof, employee response and consistent treatment.
Check procedure and timing. Union notice, consultation, training/reassignment, layoff process, written notice and authorized decision-maker.
Calculate separately. Earned salary, overtime, unused leave, bonus/commission, expenses, economic compensation or damages, and any negotiated amount.
Prepare documents. Decision or settlement, delivery proof, termination certificate, handover, payroll and social-insurance transfer; for foreign workers, permit/residence steps.
Run a red-team review. Ask China counsel what the employee’s best reinstatement and damages arguments would be.

Hypothetical situations

Hypothetical 1 — poor performance: a regional director wants to dismiss a salesperson after two low quarters. There is no agreed target, the territory changed, and no training or reassignment occurred. Paying “N+1” does not supply the missing Article 40 sequence.

Hypothetical 2 — serious misconduct: an employee shares confidential data, but the handbook rule was never validly adopted or delivered. Preserve the facts and investigate other possible legal routes; do not rewrite the acknowledgment.

Hypothetical 3 — restructuring: headquarters closes a product line and lists employees before HR checks Article 41 thresholds and protected workers. Stop the announcement and perform the statutory and local-procedure analysis first.

Exit file and dispute readiness

✓ Statutory route and every element written down
✓ Protected-status check completed
✓ Policy adoption and employee receipt proved
✓ Training/reassignment or consultation evidence, where required
✓ Union and layoff procedures checked
✓ Compensation worksheet identifies source and local wage data
✓ Written reason, authority and delivery proof
✓ Termination certificate and transfer formalities
✓ Final salary, leave, bonus and expenses reconciled
✓ Foreign-worker permit and residence plan
✓ Arbitration evidence preserved

Labor-arbitration limitation is generally one year from when a party knew or should have known its right was infringed, with special treatment for wage claims during an ongoing relationship. Do not destroy records after the exit. This article has High legal risk and should be reviewed by China-qualified counsel before any real termination decision.

Official sources

General information only. This guide is not legal, tax or immigration advice. National rules, local implementation and the facts of a case can produce different results. Confirm time-sensitive procedures with the competent local authority or a qualified China professional.