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The issue of severance pay has sparked intense discussions among expatriates working in China. Therefore, I have taken the time to address the situations in which one would be entitled to severance pay, also known as economic compensation. The most common scenarios include unpaid social insurance, incomplete or delayed salary payments, termination of employment and non-renewal of contract.
Firstly, I would like to clarify a common misconception that severance pay must be explicitly stated in the contract to be legally effective. This is not true, and the reason is simple. What is already defined by law does not need to be reiterated in each contract, otherwise contracts would become excessively lengthy. The confusion arises because some contracts include breach penalty clauses, which impose a fixed fine on either party for terminating the contract prematurely. However, this concept is distinct from severance pay, which is a labor law provision applicable to all legal workers in China. Breach penalties in labor contracts are often invalid. If you would like to understand why, please refer to my article on breach penalties, which includes a link below.
Now that we understand the difference between severance pay and breach penalties, let’s delve into the first scenario: unpaid social insurance. Both expatriates and locals are legally entitled to social insurance, and it is illegal for employers not to contribute to it. Social insurance covers various aspects such as medical, maternity, housing, and pension, distinct from commercial insurance, which solely covers medical expenses. In over 99% of cities, if you discover that social insurance contributions are not being made, you may terminate the contract immediately and pursue severance pay through legal means. However, please note that there are exceptions in cities such as Shenzhen and certain areas of Zhejiang, like Ningbo, due to differing local policies.
Another common situation faced by expatriates is receiving incomplete or delayed salary payments. According to Article 38 of the Labor Contract Law, employees have the right to terminate the contract with immediate effect in such cases. However, for late salary payments to be considered a major breach, they must be delayed by 30 days. Unless your employer explicitly states that they will not pay you, I do not recommend terminating the contract immediately if your salary is only slightly late.
Illegal salary deductions, on the other hand, are easier to identify. Deducting half a day’s salary for being 5 minutes late, withholding 3 days’ salary for a single day of absence, imposing fines for attitude problems or disagreement with supervisors, and excessively restricting bathroom breaks are all illegal practices. Furthermore, there have been cases where expatriates were informed that taxes were deducted from their salaries, but when they attempted to obtain tax certificates as required by the bank for sending money home, they discovered that no taxes had been paid to the government at all.
In most cases, being fired also entitles you to severance pay. There are two scenarios to consider: illegal termination and economic layoffs. Illegal termination occurs when you are fired without proper cause, such as having an office romance. Generally, in order to terminate someone’s employment based on a specific reason, that reason must be listed in the contract, such as chronic lateness (more than three times per month) or excessive absences (more than five days per year). However, exceptions may apply if the employee has been convicted of a crime.
Economic layoffs occur when a company is unable to financially sustain its workforce and faces bankruptcy. In such situations, the company must either obtain consent from the labor union (if one exists) or seek your personal approval. Under this circumstance, the company must provide a 30-day notice period before terminating your employment. Alternatively, they can opt to pay you an additional month’s salary in lieu of the notice period.
Another common scenario that opens you up to severance pay is non-renewal of contract. When your labour contract ends, your employer is legally obliged to give you a renewal on the same or better terms. This means that if you are not offered a renewal at all, or your salary is decreased, you may reject such an offer and request for severance pay.
Having understood the situations in which severance pay is applicable, let’s discuss the calculation of severance pay. It is determined based on the duration of your employment with a company. For every six months of work, you are entitled to half a month’s salary as severance pay. This calculation is rounded up, meaning that if you have worked for two years and one week, you are entitled to 2.5 months’ severance pay. The amount is based on the average earnings from the previous year, including allowances, bonuses, overtime pay, and commissions. This rule applies to all the aforementioned scenarios, with the exception of illegal termination, which entitles you to double the amount of severance pay.
In conclusion, severance pay is a legal entitlement rather than a contractual provision. However, fulfilling the necessary conditions for it to be applicable is not a straightforward matter. Therefore, I highly recommend seeking legal advice before proceeding with a lawsuit to claim severance pay. This will enhance the likelihood of success in the legal proceedings.