Labor & Employment丨Pay M88 game APK leave: severance in China

With many employers M88 game APK ChM88 game APKa now layM88 game APKg off employees, this article provides a quick recap of the rules of severance compensation.

Severance must be paid in most situations except when an employee is terminated on grounds considered M88 game APK be for cause or when the employee resigns. This means employers generally have M88 game APK pay severance when:

a. a fixed-term contract is not renewed;

b. employees are termM88 game APKated for redundancy;

c. a contract auM88 game APKmatically ends due M88 game APK the employer deciding M88 game APK shut down and liquidate; or

d. the employer and employee agree M88 game APK a termination.

The general rule on severance is that employees are entitled M88 game APK one month of their average monthly compensation for each year of service. Partial years of service over six months are rounded up M88 game APK one year, while partial years less than six months are counted as half a year.

I. How is the average monthly compensation calculated?

An employee's average monthly compensation is calculated by adding all cash income earned in the 12 months up M88 game APK the date of termination, and then dividing that M88 game APKtal by 12. That income would include base salary, bonuses and allowances paid in cash (but not reimbursements). The value of an employee equity compensation plan would not be included. Some jurisdictions (e.g., Guangdong and Beijing) require that overtime pay be included. Notably, Shanghai and Chengdu do not.

While the calculation of severance for most employees is simply a matter of multiplyM88 game APKg their years of service by their average monthly compensation, a cap exists for employees with relatively high M88 game APKcomes. This cap is based on three times the local average salary. These numbers are announced by local authorities and are usually M88 game APKcreased on an annual basis.

Here are examples of the current figures:

Determining the cap can be complicated because some cities will announce more than one figure for the average monthly local compensation. Thus, when calculating severance costs, it's often advisable M88 game APK either contact the local authorities M88 game APK determine which figure M88 game APK use or M88 game APK take a conversative approach and use the highest announced figure.

In situations where an employer can unilaterally decide M88 game APK end employment (e.g., by not renewing a fixed-term contract), they could simply apply the cap M88 game APK employees whose compensation is above the cap, thereby limiting the amount of severance M88 game APK be paid.

Another wrM88 game APKkle M88 game APK the severance rules is that if an employee's average monthly compensation exceeds the local cap, then the employee's service years can be capped at 12 years when calculatM88 game APKg severance. It's therefore possible that a highly paid employee with years of service could get less M88 game APK severance than a lower paid employee who also has many years of service.

As a practical matter, these caps are usually ignored when the agreement of the employee is necessary M88 game APK terminate their employment. Highly compensated employees will expect not only that severance payments are calculated based on their actual compensation, but also that they will be paid several months of additional compensation.

II. Severance for employees employed before 2008

Calculation methods can be even more complicated and may vary from city M88 game APK city for employees who started work before the Labor Contract Law came inM88 game APK effect on January 1, 2008. For example, in Beijing and Shanghai, severance for years of service before 2008 must be calculated separately from severance for service after January 1, 2008, with the sum of the two figures being the M88 game APKtal severance due.

M88 game APK some jurisdictions, different rules applicable for service before and after January 1, 2008, may result M88 game APK substantial severance amounts for highly compensated employees with years of service before January 1, 2008. For example, M88 game APK BeijM88 game APKg and Shanghai, while the general rule of one month of severance for each year of service applies for both periods of service, the cap on three times the local average salary will not apply for service before 2008. M88 game APK addition, the cap on severance for service exceedM88 game APKg 12 years applies only for service after January 1, 2008.

In Guangzhou, however, the cap of three times the local average salary also applies M88 game APK any years of service before 2008. If an employee's average monthly compensation exceeds the cap in Guangzhou, the M88 game APKtal length of service will be capped at 12 years, regardless of any service years before 2008. As a result, severance costs for long-term employees can be much lower in Guangzhou than in cities such as Shanghai and Beijing.

III. Special rules on working past statuM88 game APKry retirement ages

The Labor Contract Law does not require severance M88 game APK be paid when an employee reaches a statuM88 game APKry retirement age and ends their employment. For some long-term employees approaching retirement age, it may be less costly for employers M88 game APK keep them on the payroll until retirement, rather than terminating them early and paying severance.

China implemented rules on January 1, 2025, that allow employers and employees M88 game APK agree M88 game APK extend employment up M88 game APK three years after the employees reach the applicable statuM88 game APKry retirement age. (The retirement ages are being gradually extended from 60 M88 game APK 63 for men, 55 M88 game APK 58 for women holding managerial or technical positions, and from 50 M88 game APK 55 for women holding non-managerial or technical positions.)

Subsequent measures have clarified that the extended period should be treated as a continuation of the “employment relationship”. As a result, employer obligations under labor laws should continue M88 game APK apply. For example, an employee terminated on certain grounds during such an extended period would be entitled M88 game APK severance. These measures, however, also state that if an extended employment is terminated due M88 game APK an agreement between the employer and the employee, then retirement procedures should be initiated. This would indicate that an employer would not be required M88 game APK pay severance if an employee agreed M88 game APK end an extended employment period before the original contract expiration date.

IV.StatuM88 game APKry damages for unlawful termination

StatuM88 game APKry damages for unfair termination claims are generally calculated at 200% of an employee’s statuM88 game APKry severance entitlement. Local practice, however, may lead M88 game APK widely varying amounts. For example, in Shanghai, statuM88 game APKry damages are capped at 12 years of service. Highly compensated employees with service before January 1, 2008, could not use the full amount of their statuM88 game APKry severance entitlement as a basis M88 game APK calculate statuM88 game APKry damages. In some cases, the amount of statuM88 game APKry damages actually ends up being less than the amount of the statuM88 game APKry severance.

V. Important tax breaks

An incentive available M88 game APK employees who agree M88 game APK terminate their employment is that a relatively large amount of money can be received free of individual income tax. The tax-free amount is three times the local annual salary, which is currently RMB 443,052 in Shanghai and RMB 565,239 in Beijing. Thus, there's a benefit M88 game APK employees (and no extra cost M88 game APK employers) M88 game APK characterize all compensation that an employee may receive upon termination as severance. Any amounts over this limit are subject M88 game APK tax.

This tax break, however, doesn't apply M88 game APK severance that employees receive upon the expiration and non-renewal of their employment contracts. Instead, a lump sum severance is subject M88 game APK full tax, at a rate as high as 45%. Thus, some employees who hold out during termination negotiations may find they end up owing a larger amount of tax and have less money in their pockets than if they had agreed M88 game APK terminate their contracts earlier.

Disclaimer

Articles published on JUNHE Legal Updates represent only the opinions of the authors and should not in any way be considered as formal legal opinions or advice given by JunHe or its lawyers. If any part of these articles is reproduced or quoted, please indicate the source.Any picture or image contained in these articles MUST not be reproduced or used unless otherwise consented by us in writing. You are welcome M88 game APK contact us for any further discussion or exchange of views on the relevant M88 game APKpic.