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What is severence pay and how to calculate several pay according to China employment law?

I've received several inquiries this week about severance pay. One person I spoke to thought that her employer was required to give her a severance package (they aren't) and that she could negotiate a better deal than was offered. Another person has a very difficult decision to make. He can accept a generous severance package from his 25+ year employer or take his chances on being unemployed at the end of the year. That's a tough one.


Another concern, if you're lucky enough to be offered a severance package, or you have an employment agreement that provides for severance, is that severance pay is being downsized along with employees. I just read a BusinessWeek article that discusses how severance packages are on the chopping block.

What do you think? If you have lost your job were you offered severance? If so, would you consider it a generous package? Join our discussion or post a comment (below) to share your thoughts on severance pay.

Severance pay may be given to employees upon termination of employment. However, companies are not required to provide severance pay. Severance pay is usually based on length of employment. For example, it could be a week's pay for every year or service or a flat amount based on six weeks pay, or any other amount determined by the employer. When provided, it is given as either a lump sum or paid over a number of weeks.

A severance package may also include health insurance coverage for a certain period of time and other continuation of benefits coverage. There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay. Severance pay is a matter of agreement between an employer and an employee. The employer has no legal obligation to give severance pay to a departing employee.

With a population of 1.3 billion, a labor force of over 800 million, and more than 5 million graduates from institutions of higher learning each year, China has the potential to dominate global business in the decades to come. The country currently has the world’s second largest GDP in terms of purchasing power and received more than $80 billion in foreign direct investment in 2007 – five times the level in India during the same year.

With its rapid economic growth, China has experienced increased sophistication of human resources practices. New laws are being passed which regulate everything from hiring practices to minimum wage. Enforcement of labor laws by government officials and courts has also increased.

Among the most important HR issues for foreign invested enterprises (FIEs) in China are the legal requirements surrounding the issue of termination. It is never an easy task for HR managers to let employees go, but companies wishing to avoid costly labor disputes and penalties in China must be particularly vigilant.

Labor Contracts in China

China’s 1995 Labor Law requires contracts for all regular employees. All labor contracts must include the name and contact information of both the employer and employee. The employee’s national identification number must also be included. The contract must also provide a specified duration as well as a description of job duties and work location. Finally, the contact must include information on working hours and rest periods, leave, compensation, social insurance, and work safety conditions.

On January 1, 2008, a new Labor Contract Law came into effect in China, supplementing the 1995 Labor Law. This new piece of legislation is meant primarily to protect the interests of blue collar workers, but is technically applicable to all types of employees in China, whether Chinese citizens or foreigners. In addition to reiterating the requirement for written contracts, the new law also places limits on overtime and establishes new regulations with regard to hiring temporary workers. It also provides an automatic “unlimited” contract with guaranteed compensation and more stringent termination requirements for workers who have been employed at the same enterprise for ten or more years.

Termination Regulations

Termination of employment contracts in China is divided into two categories: termination with notice and termination without notice. The circumstances under which each is legal are specified in the 1995 Labor Law and 2008 Labor Contract Law.

Termination without notice is allowed if an employee is found to be in violation of company discipline or employment rules, is convicted of a crime, or causes damage to the employer through serious dereliction of duty. It is also allowed if an employee takes employment with another company that hinders the completion of his/her duties at the primary job.

An employee can also be terminated without notice if he/she is found to not satisfy the conditions of employment during the probation period. New regulations regarding probation periods in China allow more freedom in evaluating and terminating new staff before they begin permanent employment. Probation wages must not be less than 80% of the employee’s wage after probation, and can never be below minimum wage. Probation periods range from one month (for fixed-term contracts between three months and one year in duration) to six months (for fixed-term contracts over three years in duration). Probation periods are not allowed for part-time work or contracts based upon completion of a task.

There are several other circumstances under which termination of a contract is allowed, but must be accompanied by 30 days’ notice or pay in lieu of notice. These include situations in which the employee is found to be incompetent – and does not improve after training – or the employee cannot work due to a non-work-related injury or illness after a set period of time. The law also allows for termination when major changes have occurred in the “objective conditions” of the workplace. This point remains vague in Chinese labor law and gives companies some room for interpretation.

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