China is not an “at-will” employment system—terminations require legal grounds, careful communication, and severance. Learn how to plan and manage layoffs to reduce disputes and costs.

Economic slowdowns force some companies, particularly in retail, to make tough headcount decisions. For foreign companies operating in China, termination cases demand heightened care: compliance with Chinese labor laws is closely scrutinized, and missteps can quickly escalate into costly disputes.

Handled well, terminations can help reduce costs and maintain fairness to productive employees. Handled poorly, they can damage morale, trigger legal battles, and tarnish a company’s local reputation.

China Is Not an “At-Will” System

Unlike in the U.S., employees in China cannot be terminated without cause or without severance. Permitted grounds under Chinese labor law are narrow—clear violations of written company rules, gross misconduct, or certain legally recognized redundancies.

Common problem: a U.S. manager or HR staff member tells an employee they’re being terminated without citing a legal ground under Chinese law, or without discussing severance. This misstep often sets the stage for conflict.

Start with a Plan and a Legal Ground

Termination planning should begin with identifying a legitimate, lawful reason for dismissal. Ideally, this is documented in the local employee handbook.

Examples:

• Clear, repeated violations of workplace rules
• Documented habitual lateness
• Failure to complete assigned work during work-from-home periods
• No handbook? You may still rely on grounds like “change in economic circumstances” or “position redundancy,” but these require careful handling and often function more as negotiation starters than winning arguments in litigation.

Why Tone Matters

A termination conversation without a stated reason, severance offer, or respectful tone often backfires.

Employees may:

• Seek advice from labor lawyers or HR contacts
• Rally support from colleagues
• Dig in for a protracted fight out of pride as much as legal positioning
• Aggressive handling tends to escalate, not resolve, disputes.

Common Employee Countermoves

As talks become contentious, expect tactics such as:

• Continuing to show up for work but refusing assignments
• Going on sick leave (termination is generally prohibited during this period)
• Producing doctor’s notes—sometimes easily obtained
• Raising past claims (unpaid overtime, unused vacation)
• Threatening to disclose damaging information about the company

Offer Severance—It’s Required

By law, severance is generally 1 month’s salary per year of service, with partial years rounded up. Offering severance from the outset—ideally above the statutory minimum—sets the right tone and can avoid lengthy disputes.

If the employee rejects the offer, the employer can issue a unilateral termination notice, leaving it to the employee to decide whether to file for labor arbitration.

What to Expect at Arbitration

Arbitration panels in China generally avoid forcing reinstatement. They prefer to push both sides toward settlement, often within the statutory framework.

Large companies are less susceptible to arbitration threats because “giving in” sets a precedent for future claims.

Smaller companies—especially those without senior local leadership—are more vulnerable due to the cost, disruption, and need to engage outside counsel to attend proceedings.

Beware of Overreliance on Ambiguous Grounds

Chinese labor law lists other grounds—such as incompetence after training or “objective changes” to the contract’s basis—but these are difficult to prove in litigation. They can serve as talking points in negotiation, but are rarely decisive in a contested case.

Practical Takeaways

• Have a handbook: It’s your best protection.
• Document performance issues: Especially repeat behavior after warnings.
• Communicate respectfully: Avoid aggressive, surprise terminations.
• Offer fair severance: More than the minimum when possible.
• Be realistic: Don’t rely on hard-to-prove legal grounds to win in court.

Handled with planning, clear reasoning, and respect, terminations in China can be resolved more quickly and at lower cost—in terms of time, money, and stress.

Need help terminating employees in China? Contact us at inquiries@chinalawsolutions.com