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China severence pay law and how to calculate severence pay



In China, severance pay policy is included in the Labor Contract Law. Severance pay is a kind of compensation pay for the employee when the employer terminates the employment contract; or when the employee terminates the employment contract due to the employer’s breach of the Labor Contract Law. The normal circumstances that could warrant a severance pay include layoffs, job elimination and mutual agreement to part ways, etc.


Severance pay is money that an employer might want to provide for an employee who is leaving their employ. Normal circumstances that can warrant severance pay include layoffs, job elimination, and mutual agreement to part ways, for whatever reason.


Severance pay usually amounts to a week or two of pay for each year the employee supplied service to the company. For executives, the severance pay may even constitute up to a month’s pay for each year of service. For senior positions, severance pay may be dictated by an employment contract. In some instances, a severance package might also include extended benefits and outplacement assistance.

What Is an Employer Required to Pay?

No law requires an employer to pay severance pay. The Fair Labor Standards Act (FLSA) requires that an employer pay an employee whose employment has been terminated their regular wages through their completion date and for any time that the employee has accrued.This normally includes accrued vacation time, but not normally sick days. But, severance pay is totally up to the goodwill of the employer unless the employer is obligated to pay by an employment contract or by a severance policy stated in the employee handbook or elsewhere in writing.


Because of the way unemployment compensation is calculated, in most states, paying the severance in a lump sum during one weekly paycheck may be in the employee’s best interests. This reduces the unemployment compensation in the week it is paid, but enables the employee to collect the full amount going forward. If the severance is paid weekly over time, the unemployment compensation will be reduced each week.


Negotiation and Severance Pay

A laid off employee may try to negotiate more salary and benefits than the employer offered in his or her severance package. In doing so, technically, the departing employee has turned down the employer’s offer. This does legally allow the employer to offer no severance pay.

But, assuming you are asking the employee to sign a release of claims in return for the severance pay, I recommend you either tell the employee that the offer is not negotiable which is recommended if you are laying off other employees, too. Or, you can negotiate, especially in circumstances where there is no written company policy; no past practices exist; and no promises in an employee handbook have been made.


Require a Release From All Claims in Return for Severance Pay

In return for severance pay, you should require that the employee sign a release that frees you from all potential law suits in the future. Without severance pay, there is no reason for an employee to sign and release you from all claims. Obtaining the release is important in a world in which anyone can sue you at any time for any reason – or no reason at all.


Remember to obtain a separate release from employees who are over age 40 that includes a release from age discrimination suits. Adhere to the timeline required in your state and country, too. In Michigan, as an example, the employee has 21 days to decide whether to sign the release and accept the severance pay. Once signed, the employee then has an additional seven days during which he or she can renege.


Concluding Thoughts on Severance Pay

To provide severance pay to a departing employee is both a kindness on the part of the employer and a legal necessity in this era of law suits. The departing employee receives pay that will supplement his or her unemployment compensation and cushion his or her standard of living while job searching.
Since many times a person's employment is terminated through circumstances external to their work, the provision of severance pay is a positive and supportive gesture. The payment of severance pay is also viewed as positive by the employees who remain who judge their employer by his or her actions.


Situations for the Occurrence of Severance Pay


  • The employment contract is terminated by the employee in the following situations where the employer fails to provide the following labor protection or specified working conditions as per the employment contract,
    • Employer fails to pay labor compensation in full and on time.
    • Employer fails to pay the social insurance for the employee in accordance with the law.
    • Employer has his own rules and regulations that violate laws or regulations, thereby disregarding the employee’s rights and interests.
  • The employment contract is terminated by the employer in the following situations,
    • Employee cannot engage either in his/her original work or in other work arranged for him/her by the employer after the set period of medical care for an illness or non-work-related injury.
    • Employee is incompetent and remains incompetent after training or adjustment of his/her position.
    • A major change in the circumstances relied upon at the time of conclusion of the employment contract renders it unperformable and after consultations, the employer as well as the employee is unable to agree upon the amendment of the employment contract.

Note: Based on the circumstances mentioned above, the employer should give the written notice to the employee himself/herself 30 days in advance, or one month’s wage in lieu of this notice.


  • The employer and the employee terminate their employment contract after their consultations.
  • If the company carries on restructuring, which could reduce the workforce by 20 persons or more or by a number of persons that is less than 20 but accounts for 10 percent or more of the total number of the enterprise’s employees; the company may do so after it has explained the circumstances to the Trade union or to all of its employees 30 days in advance. The company must show that it has considered the opinions of the Trade union or the employees and has subsequently reported the workforce reduction plan to the Labor Administration Department.
  • The employment contract is a fixed–term contract and its term expires; if the employee refuses to renew the contract under the same or improved conditions as stipulated in the current contract offered by the employer, the employer should not issue any severance pay.
  • The employment contract is terminated if the employer is declared bankrupt.
  • The employment contract is terminated if the employer has its business license revoked, is ordered to close down or the employer decides on an early liquidation.

The Calculation of Severance Pay


Severance pay is calculated based on the number of years that the employee has worked with the employer. The rate is one month’s wage for each full year worked. Any period of not less than six months but less than one year shall be counted as one year. The severance pay payable to the employee for any period of less than six months shall be one-half of his monthly wages. If the monthly wage of the employee is greater than three times the average monthly wage of employees in the employer’s area as published by the People’s Government at the municipality directly under the central government or municipality (divided into districts of the area where the employer is located), the rate for the severance pay payable to him/her shall be three times the average monthly wage of employees and shall be for not more than 12 years of work.

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