Things you have to know on termination of the Labor Contract in China

These two days, news of large-scale layoffs in Shopee, a well-known e-commerce platform in Southeast Asia, has been trending. It is heard that the compensation standard paid by Shopee is N + 2.

Since the beginning of this year, affected by the epidemic and other factors, the economic situation is sluggish, many well-known factories have opened the mode of layoffs, layoffs are inevitably causing the problem of labour compensation. Most employees only know what it called "N, N + 1, N + 2, 2N", but do not know the exact amount of labour compensation, even what "N" means. Let me explain under Chinese labor law as follow:

(I) First of all, let's talk about what "N" means. "N" refers to the number of years an employee has worked for the employer.

Article 47 of the Labor Contract Law stipulates that "Economic compensation shall be paid to a worker according to the number of years of service of the worker with the employer and at the rate of one month's salary for each full year of service.

If the period of service is more than six months but less than one year, it shall be deemed as one year for computation; if it is less than six months, the employer shall pay half a month's salary to the worker as economic compensation. "

For example, if the employee has worked for the employer for 10 years, then N is equal to 10; if he has worked for nine years and four months, then N is equal to 9.5; if he has worked for nine years and seven months, then N is equal to 10. This N is the basis for calculating the economic compensation, which is determined according to the number of years of service of the employee for the employer. The N we usually say refers to the N months' salary paid by the employer to the employee when the labor contract is terminated, which is called economic compensation in law.

(II) In fact, Many people doesn't actually know what's difference between "labor compensation" and "economic compensation", and mix them up. We have explained the economic compensation above, which corresponds to the commonly said N. What about the labor compensation?

Article 87 of the Labor Contract Law stipulates that "Where an employer rescinds or terminates an employment contract in violation of the provisions of this Law, it shall pay the employee twice the economic compensation standard stipulated in Article 47 hereof."

Thus, the labor compensation is what we usually call "2N".

(III) When are N and 2N applicable?

1. Application of "N"

Let's review how it is provided in Labor Contract Law:

According to Article 46 of the Labor Contract Law , "The Employer shall make monetary compensation to the employee under any of the following circumstances: (1) the employee rescinds the labor contract pursuant to Article 38 hereof; (2) the Employer proposes rescission of the labor contract to the employee pursuant to Article 36 hereof and agrees with the employee on rescission of the labor contract; (3) the Employer rescinds the labor contract pursuant to Article 40 hereof; (4) the Employer rescinds the labor contract pursuant to Paragraph 1 of Article 41 hereof; (5) a fixed-term labor contract is terminated pursuant to Item (1) of Article 44 hereof, except that the employee disagrees to renew the labor contract even though the conditions offered by the Employer are the same as or better than those stipulated in the current contract; (6) the labor contract is terminated pursuant to Items (4) and (5) of Article 44 hereof; or (7) any other circumstances prescribed by laws or administrative regulations."

What does it mean? Let me sum up as follows:

If the employer has the following situations, it shall pay "N"to the employee :

(1) the employer fails to pay salary, contribute social insurance or provide labor protection, damage the rights and interests of the employee and so on, and the employee requests to terminate the labor contract (provisions of Article 38);

(2) the employer and the employee have agreed on the termination of the labor contract (provisions of Article 36);

(3) the employee suffers from diseases or is incompetent, and remains incompetent after the change of a new post or training, or the labor contract cannot be performed and cannot be amended (provisions of Article 40);

(4) the employer suffers from economic layoff (provisions of Paragraph 1 of Article 41);

(5) the employer refuses to renew the labor contract upon expiration of the labor contract or reduces the employer's benefits, which forces the employee to refuse to sign a labor contract (provisions of Paragraph 1 of Article 44);

(6) the employer goes bankrupt, is revoked, closed or dissolved in advance, etc. (provisions of paragraphs 4 and 5 of Article 44).

2.Application of “2N”

There are the following situations that the employor is entitled to terminate the labor contract without compensation:

Article 39 of the Labor Contract Law stipulates that "the employer may terminate the labor contract with a worker in any of the following circumstances: (1) the worker is proved to have failed to meet the recruitment requirements during the probation period; (2) the worker seriously violates the rules and regulations established by the employer; (3) the worker seriously neglects his/her duties or engages in malpractice for personal gain, causing severe damage to the employer; (4) the worker simultaneously enters an employment relationship with another employer, which seriously affects the completion of the tasks assigned by the employer, or the worker refuses to take remedial steps after the employer has requested that he/she does so; (5) the labor contract is invalid due to the circumstance stipulated in Item 1, Paragraph 1 of Article 26 hereof; or (6) the worker is prosecuted for criminal liability by law."

Except the circumstances mentioned above, if the employer terminates the labor contract unilaterally, it shall be deemed illegal termination by the employer and the provisions of "2N"shall apply.

(IV) How should the employer compensate the employee because of the layoff ?

It shall be noted that the the labor law sets out requirements for the application of economic layoff by the employer.

Article 41 of the Labor Contract Law stipulates that "if any of the following circumstances makes it necessary to reduce the workforce by 20 persons or more, or by a number of persons which is less than 20 but accounts for 10% or more of the total number of employees of the enterprise, the employer shall make an explanation to the trade union or to all of its employees 30 days in advance. After it has considered the opinions of the trade union or the employees, the employer may have the workforce reduction after reporting the workforce reduction plan to the labor administrative department: (1) the employer undergoes restructuring pursuant to the Enterprise Bankruptcy Law; (2) the employer encounters serious production and/or business operation difficulties; (3) the employer goes through a product transition, significant technological renovation, or change of business operation, and, upon modification of labor contracts, it is still necessary to conduct layoff; or (4) the objective circumstances on which the labor contracts are based change significantly, making it impossible to perform the labor contracts."

In other words, the employer may only conduct the economic layoff under certain special circumstances (e.g. restructuring, serious operation difficulties, significant business transition, etc.) and the economic layoff shall also be subject to mandatory legal procedures (including the explanation, hearing, report to labor administrative authority, etc. 30 days in advance). If the layoff complies with the law, as required, the employer shall pay N as economic compensation. However, if the layoff is just an excuse and does not comply with the law, and the employer does not comply with the mandatory legal procedures, the layoff shall be deemed as illegal dismissal, and the employer shall pay 2N as labor compensation.

(V) What are the meaning of "N + 1" and "N + 2"?

There are relevant laws and regulations in respect of "N + 1".What it says as follow:

Article 40 of the Employment Contract Law provides, "In any of the following circumstances, the Employer may terminate the employment contract by giving the employee 30 days' prior written notice or one month's salary in lieu of notice: (1) The employee suffers an illness or a non-work-related injury and is unable to resume his original position after the expiration of the medical treatment period as specified, nor can he assume any other position arranged by the Employer; (2) The employee is incompetent for the position and remains unqualified even after training or being reassigned to another position; (3) The objective conditions on which the conclusion of the employment contract was based have changed so significantly that the employment contract can no longer be performed and no agreement on amending the contents of the employment contract can be reached after negotiations between the Employer and the employee."

In conclusion, when an employee is sick or incompetent and remains incompetent even after taking a new position or receiving training, or the labor contract cannot be performed or modified, the employer has the right to dismiss the employee by giving the employee 30 days' prior notice or paying one more month's salary and demand the employee to leave immediately. At the same time, when "N" is also applies to the above provision, so if the employer chooses to want the employee to leave immediately, the amount to be paid is "N + 1".

As for other amounts of compensation such as "N + 2" and "N + 3", there are no explicit provisions in Chinese labor law. These compensation amounts are reached by employers and employees through their negotiation based on actual operation conditions, humanitarianism and other factors, as long as it is negotiated and agreed by both parties on an independent and equal basis.

The cold winter of economic environment has yet to go, both employers and employees are the victims. When termination of labor contract is inevitable, it is particularly important to follow the laws and regulations, balance rights and interests of both parties and build harmonious employment relationship.