The employer’s obligation to pay severance or economic compensation upon contract termination
PRC Labor Contract Law codifies the requirements under some local regulations (e.g. Shanghai Being ) that require an employer to pay economic compensation upon termination by an employee when his/her employer has failed to provide labor protection or conditions as agreed to in the labor contract, has not paid the full salary amount in a timely manner, or has used force, threat or illegal measures that restrict the personal freedom of the employee to force the employee to work.
The Labor Contract Law also provides that an employer must pay economic compensation upon termination of a labor contract by an employee if the termination is based upon the employer’s failure to pay social insurance on behalf of the employee in accordance with law; or if the employer’s rules and policies have violated laws and damaged the employee’s rights and interests; or if the employer has cheated or threatened the employee into signing the labor contract which renders the contract invalid; or simply if the employee is entitled to terminate the labor contract pursuant to any laws, regulations and administrative rules.
According to article 46 of Labor Contract Law, the employers are required to pay severance under an extremely broad variety of situations. Presumably, employers would be least pleased at being required to pay severance while undergoing bankruptcy. An equally important new requirement is contained in Article 46(5) of Labor Contract Law. Under existing labor law, an employer is not required to pay any economic compensation (or, severance pay) when a labor contract terminates on its own upon expiration of its term. The New Labor Contract Law of PRC, however, provides that this will remain true only if the employer has offered to renew the labor contract with the same or more favorable terms and conditions, but the employee refuses to take up the offer for renewal.
PRC Labor Contract Law codifies a provision under the Shanghai Labor Contract Regulation, which provides that when counting the number of years an employee has provided service to an employer for calculation of economic compensation, if in a given year the employee has worked six months or more, but less than a full year, it will be counted as one full year. It sets up a new requirement, which provides that if in a given year, the employee has worked less than six months, it will be counted as half a year in calculating economic compensation. It also provides a cap on the amount of economic compensation payable to an employee whose salary is higher than three times the average monthly salary of the previous year, as published by the People’s Government, in the place where his/her employer is located, and at an amount that is three times of that locality’s average monthly salary. Thus, if the average monthly salary of the previous year published by a certain locality is 1,000 RMB, whereas an employee’s monthly salary is 4,000 RMB or higher, the economic compensation payable by his/her employer, if any, will be calculated using a monthly salary capped at the amount of 3,000 RMB.
Article 97 of Labor Contract Law provides that in calculating economic compensation payable to labor contracts existing before Labor Contract Law comes into effect, but which are terminated after Labor Contract Law’s effective date, the economic compensation payable by an employer pursuant to the New Law will be calculated based upon the number of years of service, starting from the date Labor Contract Law comes into effect. In the event an employer is obligated to pay an employee economic compensation pursuant to the existing labor law before Labor Contract Law has come into effect, the amount of economic compensation will be calculated pursuant to existing labor law.
¡¶Labor Contract Law of the People’s Republic of China¡·
Article 46 In the case of any of the following circumstances, employers shall make an economic compensation to the workers:
(1) Any worker cancels the labor contract according to Article 38 of this Law;
(2) Any employer intends to cancel the labor contract with the worker according to Article 36 of this Law and reaches consensus with the worker by consultation;
(3) The employer cancels the labor contract pursuant to Article 40 of this Law;
(4) The employer cancels the labor contract subject to the Paragraph 1 of Article 41 of this Law;
(5) The labor contract is a contract with a fixed period, which is terminated in accordance with Paragraph 1 of Article 44 of this Law, except that the worker disagrees to renew the contract even though the conditions offered by the employer are the same as or better than those stipulated in the current contract;
(6) The labor contract is terminated in accordance with Subparagraphs (4) and (5) of Article 44 of this Law; or
(7) Other circumstances as prescribed by laws and administrative regulations.
Article 47 The economic compensation shall be paid to workers according to the number of years he has worked for the employer by the rate of one month'S salary for each full year he worked. Any period of above six months but less than one year shall be deemed as one year. The economic compensations that are paid to a worker for any period of less than six months shall be half of his monthly salary.
If the monthly salary of a worker is more than three times higher than the average monthly salary of workers as announced in the previous year by the people'S government at the municipal level directly under the Central Government or at the level of districted city where the entity is situated, the rate for the economic compensations paid to him shall be three times the average monthly salary of workers and the period subject to compensation may not exceed 12 years.