I. Termination of Labor Contracts by Mutual Agreement (Lawful Termination)

Termination by mutual agreement is a lawful form of termination based on the consent of both parties and carries the lowest employment-related risk for an employer. The employment relationship is terminated by the employer and the worker on the basis of equality, voluntariness, and mutual agreement.

A. Statutory Prerequisites

Both parties act entirely voluntarily, with no fraud, duress, gross misunderstanding, or exploitation of the other party’s distress; and the terms of the termination do not contravene any mandatory provisions of law.

B. Compliance Procedures

1. Negotiation: The parties agree on the termination date, settlement of wages, overtime pay, annual leave, the final month for social insurance and housing fund contributions, handover of work, and non-competition obligations, and retain records of the negotiation, such as written documents, emails, or chat logs.

2. Executing a written agreement: An Agreement on Mutual Termination of the Labor Contract must be signed and confirmed by the worker personally, expressly recording the core terms that the termination is voluntary, that rights and obligations have been fully settled, and that there are no other disputes, so as to avoid an oral termination.

3. Completing the handover of work: The worker completes the handover, returns company property, documents, accounts, and equipment, and both parties sign the handover checklist.

4. Issuing a certificate of separation: The employer issues the worker a Certificate of Termination of the Labor Contract.

5. Transferring personnel files and social insurance: Within 15 days after termination, the employer completes the transfer of the worker’s personnel files and social insurance records.

6. Archiving records: The employer shall retain the termination agreement, handover records, and the labor contract for at least two years for future reference.

C. Compensation Standards

Where the employer proposes the termination and reaches an agreement with the worker, the employer shall pay statutory economic compensation (N); where the worker takes the initiative to resign, the employer is not required to pay economic compensation. For the specific calculation basis of economic compensation (years of service, the wage base, and the cap), see Chapter IV, “General Calculation Rules,” below.

II. Circumstances in Which an Employer May Lawfully Terminate the Labor Contract Unilaterally (Compliant Dismissal)

Lawful unilateral termination by an employer falls into three categories: termination for cause, no-fault termination, and economic layoff. Each category is subject to conditions and procedural requirements; the absence of any substantive condition or any procedural step may render the termination procedurally or substantively unlawful and lead to it being found to be unlawful termination.

A. Termination for Cause (Dismissal Based on Worker Fault)

Applicable provision: Article 39 of the Labor Contract Law

Nature: Where the worker commits a statutory fault, the employer may terminate the contract unilaterally without paying economic compensation. For the compensation standards applicable to this category, see “4. Compensation Standards” at the end of this section.

1. Statutory Grounds for Application

(a) the worker is proved during the probation period not to meet the recruitment conditions; (b) the worker seriously violates the employer’s rules and regulations; (c) the worker commits serious dereliction of duty or engages in malpractice for personal gain, causing significant damage to the employer; (d) the worker simultaneously maintains a labor relationship with another employer, seriously affecting the completion of work tasks for the current employer, or refuses to correct the situation after the employer has raised it; (e) the labor contract is rendered invalid because of the worker’s fraud; or (f) the worker is subject to criminal liability in accordance with law.

2. Statutory Compliance Procedures

(a) secure complete evidence of the fault; (b) the rules and regulations on which the dismissal is based must be adopted through democratic procedures and made public or notified to workers; (c) where dismissal occurs during the probation period, the specific reasons why the worker failed to meet the recruitment conditions must be clearly stated; (d) deliver a written notice of termination stating the facts and the legal basis; and (e) complete the handover, issue the certificate of separation, transfer social insurance records, and retain the relevant documents.

3. Circumstances Constituting Procedurally Unlawful Termination

Dismissal without evidence, dismissal based on rules that were not made public or not adopted through democratic procedures, dismissal without cause during the probation period, failure to deliver the notice of termination in writing, and dismissal on grounds beyond the six statutory categories of fault all constitute unlawful termination.

4. Compensation Standards

Where the employer lawfully terminates the labor contract unilaterally because the worker has committed a statutory fault, the employer is not required to pay economic compensation, payment in lieu of notice, or compensation damages; that is, the amount of compensation is 0.

B. No-Fault Termination (Statutory Termination Without Worker Fault)

Applicable provision: Article 40 of the Labor Contract Law

Nature: The worker bears no subjective fault; because objective circumstances make continued performance impossible, the employer may terminate the contract lawfully and unilaterally. For the compensation standards applicable to this category, see “4. Compensation Standards” at the end of this section.

1. Statutory Grounds for Application

(a) the worker, after illness or a non-work-related injury and upon expiry of the statutory medical treatment period, is unable to perform the original work and is also unable to perform work otherwise arranged by the employer; (b) the worker is not competent for the job and, after training or reassignment, remains incompetent; or (c) the objective circumstances that formed the basis for concluding the labor contract have undergone a major change, rendering the contract unperformable, and the parties fail to reach agreement on amending the contract through negotiation.

2. Compliance Procedures

(a) perform the statutory prerequisites: arrange an alternative position upon expiry of the medical treatment period, provide training or reassignment where the worker is incompetent, and first negotiate an amendment to the contract where objective circumstances have changed; (b) give the worker 30 days’ written notice or pay an additional month’s wages as payment in lieu of notice; (c) deliver the notice of termination in writing; and (d) settle the compensation and complete the handover and separation procedures.

3. Circumstances Constituting Procedurally Unlawful Termination

Dismissal without training or reassignment, dismissal without arranging an alternative position upon expiry of the medical treatment period, dismissal without negotiation where objective circumstances have changed, dismissal without prior notice or payment in lieu of notice, and dismissal of workers enjoying statutory protection all constitute unlawful termination.

4. Compensation Standards

Where the employer terminates the labor contract under Article 40 of the Labor Contract Law, it shall pay statutory economic compensation (N); if the employer fails to give the worker 30 days’ written notice, it must additionally pay one month’s wages as payment in lieu of notice, for a total of N+1. For the specific method of calculating economic compensation, see Chapter IV below.

C. Economic Layoff (Lawful Collective Termination)

Applicable provision: Article 41 of the Labor Contract Law

Nature: Where major statutory changes occur in the employer’s business operations and workers are reduced in large numbers, the statutory procedural requirements are the strictest. For the compensation standards applicable to this category, see “4. Compensation Standards” at the end of this section.

1. Statutory Grounds for Application

(a) the employer is undergoing reorganization in accordance with the Enterprise Bankruptcy Law; (b) the employer is experiencing serious difficulties in production or operation; (c) the employer is changing its line of production, undertaking major technological innovation, or adjusting its mode of operation and, after amending the labor contracts, still needs to reduce workers; or (d) other major changes in objective economic circumstances render the labor contracts unperformable.

Scope of application: reduction of 20 or more workers, or of fewer than 20 workers where such workers account for 10% or more of the total number of workers.

2. Compliance Procedures

(a) explain the situation to the trade union or all workers 30 days in advance; (b) solicit the opinions of the workers and the trade union and retain records thereof; (c) formulate a layoff plan and give effect to the priority retention of personnel; (d) report the layoff plan to the administrative department of labor; and (e) deliver the notice of termination, settle economic compensation, and complete the separation procedures.

3. Circumstances Constituting Procedurally Unlawful Termination

A layoff carried out without prior explanation to the workers, without soliciting their opinions, without reporting to the human resources and social security department, without implementing priority retention, or a collective reduction undertaken unilaterally without meeting the statutory grounds constitutes unlawful termination.

4. Compensation Standards

Where the employer lawfully implements an economic layoff, it shall pay statutory economic compensation (N); for the specific method of calculation, see Chapter IV below.

III. Determination of Unlawful Termination of a Labor Contract and Its Legal Consequences

Chinese law does not provide for a “statutory procedure for unlawful termination.” Unlawful termination is a negative legal characterization of an employer’s unilateral termination: where the employer’s unilateral termination fails to satisfy the statutory substantive conditions or fails to follow the statutory procedures, it constitutes unlawful termination.

A. Common Forms of Substantively Unlawful Termination

Dismissal without a factual basis, dismissal based on fabricated grounds, and dismissal supported by insufficient evidence; and dismissal of workers who are in a statutorily protected period during which termination is prohibited, including workers undergoing occupational disease examinations or within the observation period for suspected occupational disease, workers with work-related disabilities, workers within the statutory medical treatment period, female workers during pregnancy, childbirth, or breastfeeding (“the three periods”), and workers who have worked continuously for 15 years or more and are within five years of the statutory retirement age.

B. Common Forms of Procedurally Unlawful Termination

For the three categories of unilateral termination described above, the omission of any statutory step, the non-performance of any prerequisite obligation, the failure to deliver notice in writing, or the absence of key evidence may all result in the termination being found to be procedurally unlawful.

C. Legal Consequences and Compensation Standards

In accordance with law, the worker has the right to choose one of two remedies: 1. where the worker requires continued performance of the labor contract, the employer shall continue to perform it; or 2. where the worker does not require continued performance or the contract can no longer be performed, the employer shall pay compensation for unlawful termination (2N).

For the specific method of calculating the compensation (2N), see Chapter IV below; the compensation and economic compensation may not be claimed simultaneously.

IV. General Rules for Calculating Economic Compensation and Damages

The types and amounts of compensation payable in each category of termination are set out at the end of the corresponding sections above. The specific calculation rules are as follows.

A. Rules for Calculating Economic Compensation (N)

Scope of application: mutual-consent termination proposed by the employer, no-fault termination, and lawful economic layoff.

1. Calculation of years of service: one month’s wages shall be paid for each full year of service; service of more than six months but less than one year is counted as one year; service of less than six months entitles the worker to half a month’s wages.

2. Calculation of the wage base: the average pre-tax wages payable in the 12 months before termination are used, including all monetary income such as basic wages, performance pay, bonuses, allowances, and subsidies. Where the worker has worked for fewer than 12 months, the average is calculated over the actual months worked. Where the average wages are lower than the local minimum wage standard, the minimum wage standard is used.

3. Cap for high-income workers: where the worker’s monthly wages exceed three times the average monthly wages of local workers in the previous year, the compensation is capped at three times that average, and the number of years counted for compensation shall not exceed 12 years.

B. Rules on Payment in Lieu of Notice (+1)

Payment in lieu of notice applies only to lawful no-fault termination (Article 40 of the Labor Contract Law). Where the employer fails to give 30 days’ written notice, it must pay an additional month’s wages as payment in lieu of notice. The payment in lieu of notice is calculated on the basis of the worker’s normal wages for the previous month and is not subject to any cap.

C. Rules for Calculating Compensation for Unlawful Termination (2N)

Scope of application: where the employer is found to have terminated the labor contract in a substantively or procedurally unlawful manner.

1. Amount of compensation: compensation = economic compensation (N) × 2

2. Method of calculation: the wage base, the years-of-service rules, and the cap rules are identical to those for economic compensation.

3. Exclusion rule: the compensation and economic compensation may not be claimed simultaneously; once the 2N compensation is paid, no N compensation is payable.

Note: This article is provided for compliance reference only and does not constitute legal advice for any particular case. Dispute resolution practices for labor disputes vary across regions; for specific employment decisions, it is advisable to comply with the law in light of the evidence of the particular case.

Appendix: Applicable Statutory Provisions

Labor Contract Law of the People’s Republic of China

Article 36. An employer and a worker may terminate the labor contract upon reaching an agreement through consultation.

Article 39. An employer may terminate the labor contract where the worker: (1) is proved during the probation period not to meet the recruitment conditions; (2) seriously violates the employer’s rules and regulations; (3) commits serious dereliction of duty or engages in malpractice for personal gain, causing significant damage to the employer; (4) simultaneously maintains a labor relationship with another employer, which seriously affects the completion of the work tasks of the current employer, or refuses to correct the situation after the employer has raised it; (5) renders the labor contract invalid because of the circumstances provided in subparagraph (1) of the first paragraph of Article 26 of this Law; or (6) is subject to criminal liability in accordance with law.

Article 40. An employer may terminate the labor contract after giving the worker 30 days’ written notice in advance, or after paying the worker an additional month’s wages, where: (1) the worker, after illness or a non-work-related injury and upon expiry of the statutory medical treatment period, is unable to perform the original work and is also unable to perform work otherwise arranged by the employer; (2) the worker is not competent for the job and, after training or reassignment, remains incompetent; or (3) a major change occurs in the objective circumstances relied upon at the time of conclusion of the labor contract, rendering the contract unperformable, and the employer and the worker fail to reach an agreement on amending the contract.

Article 41. Where any of the following circumstances arises and it is necessary to reduce workers by 20 or more, or by fewer than 20 but accounting for more than 10% of the total number of workers of the enterprise, the employer may reduce the workforce after explaining the situation to the trade union or all workers 30 days in advance, soliciting the opinions of the trade union or the workers, and reporting the layoff plan to the administrative department of labor: (1) the enterprise is undergoing reorganization in accordance with the Enterprise Bankruptcy Law; (2) the enterprise is experiencing serious difficulties in production or operation; (3) the enterprise is changing its line of production, undertaking major technological innovation, or adjusting its mode of operation and, after amending the labor contracts, still needs to reduce workers; or (4) other circumstances in which the objective economic conditions relied upon at the time of conclusion of the labor contracts undergo major changes, rendering the labor contracts unperformable. When reducing workers, the employer shall give priority to retaining: (1) workers who have concluded fixed-term labor contracts of a relatively long duration with the enterprise; (2) workers who have concluded non-fixed-term labor contracts with the enterprise; and (3) workers from families with no other employed persons and who have elderly or minor dependents. Where the employer recruits workers again within six months after reducing workers pursuant to the first paragraph of this Article, it shall notify the workers who were laid off and give them priority in recruitment under equal conditions.

Article 42. An employer may not terminate the labor contract under Articles 40 and 41 of this Law where the worker: (1) is engaged in operations involving exposure to occupational disease hazards and has not undergone a pre-departure occupational health examination, or is a suspected occupational disease patient undergoing diagnosis or medical observation; (2) has contracted an occupational disease or suffered a work-related injury at the current employer and has been confirmed to have lost or partially lost the capacity to work; (3) is suffering from illness or a non-work-related injury and is within the statutory medical treatment period; (4) is a female worker during pregnancy, childbirth, or breastfeeding; (5) has worked continuously for the current employer for 15 years or more and is within five years of the statutory retirement age; or (6) is in other circumstances provided by laws or administrative regulations.

Article 46. An employer shall pay economic compensation where: (1) the worker terminates the labor contract in accordance with Article 38 of this Law; (2) the employer proposes to the worker that the labor contract be terminated by mutual agreement and terminates it in accordance with Article 36 of this Law; (3) the employer terminates the labor contract in accordance with Article 40 of this Law; (4) the employer reduces workers in accordance with the first paragraph of Article 41 of this Law; (5) a fixed-term labor contract is terminated in accordance with item (1) of Article 44 of this Law, except where the employer maintains or improves the conditions agreed in the labor contract for renewal and the worker does not agree to renew; (6) the labor contract is terminated in accordance with items (4) and (5) of Article 44 of this Law; or (7) other circumstances provided by laws or administrative regulations.

Article 47. Economic compensation shall be paid to a worker on the basis of the number of years the worker has worked for the employer, at the rate of one month’s wages for each full year. For service of more than six months but less than one year, the compensation is calculated as one year; for service of less than six months, the worker shall be paid half a month’s wages. Where the worker’s monthly wages exceed three times the average monthly wages of local workers in the previous year as published by the people’s government of the municipality directly under the central government or of the prefecture-level city where the employer is located, the standard for economic compensation shall be paid at three times that average, and the number of years for which compensation is paid shall not exceed 12 years. The term “monthly wages” as used in this Article refers to the worker’s average wages in the 12 months before the labor contract is terminated or expires.

Article 48. Where an employer terminates or expires a labor contract in violation of this Law and the worker requires continued performance, the employer shall continue to perform the labor contract; where the worker does not require continued performance or the labor contract can no longer be performed, the employer shall pay compensation in accordance with Article 87 of this Law.

Article 50. An employer shall, at the time of termination or expiry of the labor contract, issue a certificate of termination or expiry, and shall complete the procedures for transferring the worker’s personnel files and social insurance records within 15 days. The worker shall complete the handover of work as agreed by the parties. Where the employer is required by the relevant provisions of this Law to pay economic compensation, it shall pay it upon completion of the handover. The employer shall retain the text of labor contracts that have been terminated or have expired for at least two years for future reference.

Article 87. Where an employer terminates or expires a labor contract in violation of this Law, it shall pay the worker compensation at twice the standard for economic compensation provided in Article 47 of this Law.

Regulations for the Implementation of the Labor Contract Law of the People’s Republic of China

Article 27. The monthly wages for economic compensation as provided in Article 47 of the Labor Contract Law shall be calculated on the basis of the wages the worker is entitled to receive, including monetary income such as time-based wages or piece-rate wages, bonuses, allowances, and subsidies. Where the worker’s average wages in the 12 months before termination or expiry of the labor contract are lower than the local minimum wage standard, they shall be calculated at the local minimum wage standard. Where the worker has worked for fewer than 12 months, the average wages shall be calculated on the basis of the actual number of months worked.

For the official statutory text, see the Ministry of Justice of the People’s Republic of China. Explore more guidance in our legal insights.