Firing an Employee in China — What Foreign Employers Must Get Right or Pay For

Introduction

You hired someone. It is not working out. In most countries, you give notice, pay severance, and move on. In China, the cost of getting this wrong can far exceed your expectations.

China's labor law is structured to protect employees. The burden of proof in any termination dispute rests on the employer. If you cannot prove the termination was lawful, the wrongful termination 2N penalty applies — double the statutory severance — plus the employee can demand reinstatement with back pay for the entire period between dismissal and reinstatement.

This guide covers the legal framework for fire employee China WFOE decisions: the four termination categories, the severance formulas (N, N+1, 2N), the documentation requirements, and the procedural traps that turn a straightforward termination into a costly arbitration case.

The Four Types of Termination

Chinese labor law recognizes four termination categories, each with different notice periods, severance obligations, and procedural requirements.

Mutual Agreement Termination (协商解除)

This is the cleanest option. Both parties sign a severance agreement confirming the termination is by mutual consent. The employee waives future claims against the employer.

Severance: N is standard, but the amount is negotiable. Some employers offer N+1 to secure the agreement quickly. The key advantage: the employee cannot later claim wrongful dismissal because the termination was by consent.

Risk: The agreement must be carefully drafted. A poorly worded waiver can be challenged if it does not specifically cover all potential claims (social insurance, overtime, bonuses).

Employee Fault Termination (过失性解除 — Article 39)

This is the only category that allows termination with zero severance and no notice. But the bar is high. The employer must prove one of the following:

1. Proven incompetence during probation period — The probation period standards must have been objectively defined and communicated in advance
2. Serious violation of company policies — The policies must exist in writing, the employee must have acknowledged them, and the violation must be material
3. Serious dereliction of duty causing material harm — Must demonstrate both the dereliction and the quantifiable harm
4. Dual employment — The employee has a second job that materially affects performance, and refused to stop after being notified
5. Criminal liability — The employee has been subject to criminal prosecution
6. The company policy must be in writing and signed by the employee as having been received
7. The violation must be documented with evidence (emails, witness statements, surveillance footage)
8. A formal written warning must be issued before termination
9. The termination notice must cite the specific article of the company policy that was violated

No-Fault Termination (无过失性解除 — Article 40)

This covers three situations where the employee is not at fault but the employment relationship cannot continue:

1. Medical incapacity (医疗期满): After the statutory medical treatment period expires and the employee cannot resume their original role or any alternative role offered by the employer.

2. Incompetence after training (不胜任): The employee is assessed as not competent for the position. The employer must provide training or reassignment. If the employee still does not meet standards after a reasonable period, termination is possible.

3. Material change in circumstances (客观情况重大变化): A significant change in the company's situation (e.g., relocation, departmental closure) makes the original contract unenforceable, and no agreement can be reached on modification.

Severance for all three: N+1 (if no 30-day notice given) or N (if 30-day notice is provided).

The incompetence route (Scenario 2) is the most commonly attempted and the most frequently failed. Many employers skip the training/reassignment step and go straight to termination. The labor arbitration tribunal will ask: what training did you provide? What was the performance improvement plan? How long did you give the employee to improve? If the answer is "none," the termination is wrongful.

Economic Layoff (经济性裁员 — Article 41)

This applies to structural situations: the company is undergoing restructuring, has serious operational difficulties, or is converting production methods. The thresholds are high, and the procedure is complex:

1. Must notify the trade union or employee representatives 30 days in advance
2. Must report to the labor administration authority
3. Must give priority to retaining employees with longer service or family dependents
4. Must offer re-employment priority if hiring within six months

Severance Calculation — N, N+1, and 2N

The formulas are straightforward. The application is not.

What "N" Means

N equals the number of years the employee has worked for the company, with the following rounding rules:

1. 6 months or more but less than 1 year = 1 year (1 month severance)
2. Less than 6 months = 0.5 years (0.5 month severance)
3. Each full year = 1 month severance

The Calculation Base

The severance base is the employee's average monthly salary for the 12 months preceding termination. This includes:

1. Base salary
2. Performance bonuses
3. Overtime pay
4. Allowances and subsidies
5. Commissions

N+1 — When the +1 Applies

The "+1" in severance N+1 China is "payment in lieu of notice" (代通知金). It applies only when the employer terminates under Article 40 (no-fault) and does not give 30 days' written notice.

The +1 is calculated as the employee's salary for the previous full month (not the 12-month average used for N).

Example: An employee with 5 years and 8 months of service earns an average monthly salary of RMB 10,000. They are terminated under Article 40 (medical incapacity) without 30 days' notice.

1. N = 6 (5 years 8 months rounds up to 6)
2. +1 = 1 (payment in lieu of notice)
3. Total severance = 7 × RMB 10,000 = RMB 70,000

2N — The Wrongful Termination Penalty

Wrongful termination 2N applies when the employer terminates without a legally valid reason or without following proper procedure. The employee has two options:

1. Reinstatement: The employer must take the employee back and pay all wages and social insurance for the period between dismissal and reinstatement
2. Double severance: 2 × N (based on the same calculation)
3. Termination based on "incompetence" without documented training or performance improvement plan
4. Termination for "serious violation of policy" where the policy was not properly communicated to the employee
5. Termination during protected periods (medical treatment, pregnancy, maternity leave)
6. Failure to notify the trade union (if the company has one)
7. Termination without a written notice or without proper service of the notice

The Documentation Imperative

Chinese labor arbitration places the burden of proof entirely on the employer. If you cannot produce the documents, you lose.

Essential Documents That Must Exist Before Termination

The Termination Letter

The written termination notice must include:

1. The employee's name and position
2. The effective date of termination
3. The specific legal basis (cite the article of the Labor Contract Law)
4. A detailed factual explanation supporting the legal basis
5. The severance amount and payment timeline

Protected Employees — Who Cannot Be Terminated

Certain categories of employees are protected from no-fault termination (Article 40) and economic layoff (Article 41). They can only be terminated for employee fault (Article 39):

1. Employees undergoing medical treatment for occupational disease or work-related injury
2. Employees during the statutory medical treatment period for non-work-related illness or injury
3. Female employees during pregnancy, maternity leave, and the nursing period (typically one year after childbirth)
4. Employees who have worked for the company continuously for 15+ years and are within 5 years of the statutory retirement age
5. Employees in the statutory medical treatment period

The Arbitration Process

If the employee disputes the termination, the process is:

1. Labor arbitration (mandatory first step) — The employee files with the local labor arbitration commission. The employer must respond with evidence. Timeline: typically 45–60 days from filing to decision.
2. Court appeal — Either party can appeal the arbitration decision to the People's Court within 15 days. The court process adds 3–6 months.
3. Enforcement — If the employer loses and does not pay, the court can freeze bank accounts, seize assets, and impose travel restrictions on the legal representative.

Practical Advice for Foreign Employers

Before Hiring

1. Set clear performance standards in the employment contract, not just a vague job description
2. Ensure the employee handbook is written in both English and Chinese (Chinese version prevails legally) and signed by every employee
3. Define what constitutes a "serious violation" in specific, measurable terms

During Employment

1. Conduct regular performance reviews with written records
2. Issue written warnings for any policy violations, no matter how minor
3. Document every training session provided to underperforming employees
4. Keep copies of all signed acknowledgments

Before Terminating

1. Verify the employee is not in a protected category
2. Confirm you have the documentation to support the chosen legal basis
3. Consider mutual agreement as the first option — it is faster, cheaper, and cleaner
4. Consult with a labor lawyer before issuing the termination notice — the cost of advice is a fraction of the cost of wrongful termination

Frequently Asked Questions (FAQ)

Q1: What is the difference between N, N+1, and 2N severance in China?

N severance equals one month's salary for each full year of service, paid for mutual agreement terminations, economic layoffs, or non-renewal of contract. Severance N+1 China adds one additional month as payment in lieu of notice when the employer terminates without giving 30 days' prior written notice. Wrongful termination 2N is double the statutory compensation, paid only when the termination is found to be unlawful.

Q2: Can I fire an employee in China for poor performance?

Yes, but it requires a documented process. You must first demonstrate that the employee is not competent for the role (based on objective performance standards in the employment contract or employee handbook). Then you must provide training or adjust the position. If performance still does not meet standards after this, you can terminate with N+1 severance. Without this documented process, the dismissal is likely to be ruled wrongful, triggering the 2N penalty.

Q3: What happens if I terminate an employee without legal grounds in China?

Wrongful termination 2N applies. The employee can choose between: (a) reinstatement with back pay for the period between dismissal and reinstatement, or (b) double the statutory severance (2N). Chinese labor arbitration tribunals generally side with employees, and the burden of proof is on the employer to show the termination was lawful.

Q4: Do I need to pay severance if an employee resigns voluntarily?

Generally no — if the employee resigns of their own volition, no severance is owed. However, if the resignation is triggered by the employer's breach (e.g., unpaid wages, unsafe working conditions, failure to pay social insurance), it is treated as a constructive dismissal and the employer must pay N severance.

Q5: How is the severance calculation base determined in China?

The severance base is the employee's average monthly salary over the 12 months preceding termination, including base salary, bonuses, allowances, and subsidies. If this average exceeds three times the local average monthly wage, it is capped at three times. The maximum compensation period is 12 years for high-earning employees. If the average is below the local minimum wage, the minimum wage is used as the base.

Conclusion

Firing an employee in China is expensive — not because of any inherent cost, but because the law strongly favors employees and requires employers to follow strict procedures. The difference between a clean N+1 severance payment and a painful 2N wrongful termination ruling often comes down to paperwork: does the employer have the signed policies, the documented performance reviews, the written warnings?

For foreign WFOE owners, the safest approach is to treat every termination as a potential arbitration case from day one. Document everything. Follow the procedure. And when in doubt, negotiate a mutual agreement — it is almost always cheaper than litigating.

For professional guidance on China labor law termination compliance for your WFOE, contact CNBusinessHub team.

Disclaimer

This article is written by CNBusinessHub team for informational and educational purposes only.

The content does not constitute any form of investment advice, business advice, or legal opinion. Readers should independently assess the applicability of the information and consult professionals before making any business decisions.

Data and information cited in this article are sourced from public channels. We strive for accuracy but do not guarantee completeness or timeliness. Policies and regulations may change at any time.

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*Disclaimer: The information provided in this article is for general reference only and does not constitute legal or tax advice. Specific policy application is subject to the latest regulations of government departments.

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Last Updated: 2026