Severance Compensation: All You Need to Know!

by Claire Fu

If you work in China, probably you have heard one word called economic compensation or severance payment, as well as a bunch of confusing “N”, “N+1” and “2N”… What on earth are they? Now we will introduce you thoroughly about them.

Definitions

“Economic Compensation” - a monetary payment paid by the employer to the employee in case of earlier termination of labor contract under specific conditions pursuant to PRC laws.

“N”- the number of years that one employee has worked for the employer.

If the working period is more than 6 months N is equal to 1; in case less than year N is equal to 0.5.

Working period ≥ six (6) months, N=1;

Working period < six (6) months, N=0.5.

“Rate” - the basis to calculate Economic Compensation, which is generally the monthly salary of the employee, with some exceptions to be explained in the Section Calculation of Economic Compensation. 

Economic Compensation = 0

Under the following situations, the employer is NOT obliged to pay any Economic Compensation when the labor contract is terminated:

1. The employee notifies the employer three days in advance during the probation period to terminate the labor contract;

2. The employee notifies the employer in writing 30 days in advance to terminate of the labor contract;

3. The employee proposes to terminate the labor contract by consensus with the employer;

4. The employee is proved to have failed meeting the conditions for employment during the probation period, and consequently the employer terminates the labor contract;

5. The employee seriously violates the rules and regulations of the employer and consequently the employer terminates the labor contract;

6. The employee has seriously failed in his/her duty, committed fraud for personal gain, caused great damage to the employer, and the employer terminates the labor contract consequently;

7. The employee has established labor relations with other employers simultaneously which materially affects the completion of his task with the original employer, or he/she refuses to rectify the situation after being cautioned by the employer, and the employer terminates the labor contract accordingly;

8. The employee causes the labor contract to be invalid through fraud, coercion or exploitation of the other party's disadvantageous position, and the employer terminates the labor contract consequently;

9. The employee is subject to criminal liability in accordance with the law, and the employer terminates the labor contract accordingly;

10. When the labor contract expires, the employer maintains or raises the conditions stipulated in the labor contract and renews the labor contract with the employee, and the employee refuses to renew the labor contract;

11. The employee reaches the retirement age, is deceased or being declared dead or missing by the people’s court.

Economic Compensation: N

The employer shall pay N times of the Rate as Economic Compensation at termination under the following situations:

1. The employer proposes to terminate the labor contract by consensus with the employee;

2. The employee resigns due to the employer’s fault;

3. The employer applies for workforce layoff; or

4. The employer cancels the labor contract under any of the following circumstances by giving the employee 30 days’ prior written notice:

	a. Where the employee is unable to resume his/her original work nor engage in other work arranged for him/her by the employer after the expiration of the prescribed medical treatment period for an illness or non-work-related injury;
	b. Where the employee is incompetent and remains incompetent after training or adjustment of his/her position; or
	c. A material change in the objective circumstances relied upon at the time of conclusion of the labor contract renders it impossible for the parties to perform and, after consultation, the employer and the employee are unable to reach an agreement on amending the labor contract.

 

Economic Compensation: N+1

Under and only under the preceding situation marked in blue (n. 4, a, b, c) the employer can also choose to pay additional one month's salary together with the “N” Economic Compensation to avoid the 30 days’ prior notice. Yes, the “1” is actually a payment in lieu of the notice.

Economic Compensation: 2N

If the employer terminates or cancels the labor contract without any legitimate basis, the employee can demand continued performance of such contract or request the employer to pay double of the “N” Economic Compensation for the illegal termination or cancellation, which is the commonly called “2N”.

Where the employee does not demand continued performance of the labor contract which is illegally terminated by the employer, or if continued performance of the labor contract has become impossible, the employer shall pay 2N times of the Rate to the employee.

Calculation of Economic Compensation

Firstly, we need to know how to define the Rate. Normally, the Rate equals the monthly salary which refers to the employee’s average salary for the twelve (12) months prior to cancellation or termination of his/her labor contract.

However, if the monthly salary of an employee is three times higher than the average monthly wage (the “Average Wage”) in the previous year as announced by the government at the municipal level where the employer is located, the Rate for Economic Compensations paid to him/her shall be three times of such announced Average Wage and it shall be for no more than 12 years of work.