How to Terminate an Employee in China: 2026 Step-by-Step Compliance Guide

Terminating an employee in China requires navigating at least **six mandatory compliance steps** under the PRC Labor Contract Law, and missteps affect **over 40%** of foreign-invested enterprises (FIEs) during their first dismissal attempt. Unlike at-will employment in the U.S. or ease of termination in Singapore, China demands statutory causes, prescribed notice periods, and compensation formulas that change yearly. This guide walks foreign executives through the exact sequence—from valid grounds to final settlement—with 2026-specific updates on social insurance base adjustments and the latest Shanghai court interpretations.

1. Valid Termination Grounds Under PRC Law

Chinese law recognizes only three legal paths for unilateral employer-initiated termination: **immediate dismissal for cause** (过失性辞退, guòshīxìng cítuì), **non-fault dismissal with notice** (非过失性辞退, fēi guòshīxìng cítuì), and **mutual agreement** (协商解除, xiéshāng jiěchú). In 2025, Beijing courts rejected **27%** of employer-termination cases because the stated ground did not match the statutory language—often citing “poor performance” when the law only allows “incompetence after training or position adjustment.”

The three immediate-dismissal grounds are: (a) employee proves unqualified during probation (试用期, shìyòng qī, shìyòng qī) with written criteria, (b) material breach of internal rules, and (c) serious dereliction of duty causing substantial harm. For non-fault dismissal, the employer must prove either (a) illness or non-work injury leaving the employee unable to return after medical treatment, (b) incompetence that persists after training or role change, or (c) fundamental economic change (e.g., business relocation, restructuring). Each ground has a distinct notice period—**30 days** written advance notice or **one month’s salary in lieu** for non-fault, zero for cause.

A 2026 update: the Beijing High People’s Court clarified that “economic restructuring” (经济 restructuring, jīngjì zhòngzǔ) does not include a simple shift to AI-driven workflows unless the employer eliminates at least one full department. FIEs using automation to reduce headcount must switch to the redundancy ground under Article 41, which involves a mandatory **30-day consultation** with either the trade union or all employees.

2. Severance Calculation & the 2026 Caps

Severance (经济补偿金, jīngjì bǔcháng jīn, jīngjì bǔchángjīn) equals **one month’s average salary** for each full year of service, plus pro-rata for partial years exceeding six months. The critical cap: if the employee’s monthly salary exceeds **three times** the local average social wage (社会平均工资, shèhuì píngjūn gōngzī, shèhuì píngjūn gōngzī), severance is capped at 3× the local average × years of service, subject to a **12-year maximum** for certain 2008-pre-service periods.

In 2026, Shanghai’s three-times cap is **RMB 44,190/month** (local average wage of RMB 14,730 × 3), up from RMB 41,256 in 2025. An employee earning RMB 60,000/month with 15 years of service in Shanghai would receive: RMB 44,190 × 12 = **RMB 530,280** maximum severance, not RMB 900,000 as a straight calculation would imply. Beijing’s 2026 cap is RMB 48,618/month (based on RMB 16,206 × 3), while Shenzhen sits at RMB 36,594/month.

Tip: always calculate severance using the employee’s **average monthly pay in the 12 months preceding termination**, including bonuses, commissions, and housing allowances. Excluding bonuses is the **#1 compliance error** in FIE terminations—arbitration in Nanjing in 2024 ordered RMB 87,000 in back-pay for one such exclusion.

3. The Step-by-Step Termination Procedure

Step 1: Document the Ground and Gather Evidence

Before any oral notice, assemble written proof: signed performance reviews, training records with attendance signatures, disciplinary warnings, or medical certificates. Incompetence termination requires **two rounds of performance improvement plans (PIPs)** of at least 30 days each—a 2025 Shanghai court ruling held a single PIP insufficient. If the ground is “material breach,” the internal rules must have been legally adopted (published, signed-off by employees, filed with the local labor bureau).

Step 2: Notify the Trade Union or Employee Representative (劳动监督)

Under Article 43 of the Labor Contract Law, the employer must notify the trade union (工会, gōnghuì, gōnghuì) of the intended termination **before** making it effective. If the union objects within **5 working days**, the employer must respond in writing explaining its position. Failure to notify voids the termination automatically—even if the ground is valid. In 2024, a WFOE in Suzhou lost a RMB 340,000 lawsuit because the HR manager emailed the union notice 12 minutes after issuing the termination letter.

Step 3: Issue the Written Termination Notice (解除通知书)

The notice must state the exact legal article, the factual basis, and the effective date. It must be delivered via methods that can be proven: signed receipt, registered mail (EMS), or in-person handover with two witness signatures. Emailing alone is not considered valid service in most Chinese courts. The notice must also inform the employee of their right to apply for labor arbitration within one year.

Step 4: Settle All Payments on the Actual Departure Date

On the last working day, the employer must pay: (a) all unpaid salary for days worked, (b) severance if applicable, (c) unused annual leave compensation (300% of daily salary for unused days, pro-rated), and (d) any outstanding overtime. The settlement must be made in full on or before the departure date—delaying even one bank day can trigger a 50% penalty. The employee signs a Settlement Agreement (离职协议, lízhí xiéyì, lízhí xiéyì) confirming satisfaction.

Step 5: Handle Social Insurance & Housing Fund Withdrawal

The employer must stop social insurance contributions on the termination date and issue a red-sealed Termination Certificate (终止证明, zhōngzhǐ zhèngmíng, zhōngzhǐ zhèngmíng) within **15 calendar days**. The certificate is required for the employee to transfer insurance accounts to a new employer or to a personal account for unemployment benefits. Failing to issue the certificate exposes the employer to fines of RMB 1,000–5,000 payable to the employee.

Step 6: Update the Labor Contract Filing

Within **30 days** of termination, the employer must update the employee’s record in the local labor bureau’s online system (usually 12333.cn or the city-specific portal). Many FIEs fail this step, leaving the employee’s “employment status” active and making the employer vulnerable to claims of constructive dismissal or continued liability.

Decision Framework

If the employee is still within their **probation period** (maximum 6 months, linked to contract term), and you have written performance criteria that they clearly failed, choose **immediate dismissal for cause** (zero severance, shorter process). If the employee has **more than 3 years of service** and performance issues are subjective, choose **mutual agreement** with a negotiated severance (often 1–2 extra months beyond the legal minimum)—this reduces litigation risk. If you are facing a **mass layoff** (≥20 employees or ≥10% of workforce), you must follow the **Article 41 redundancy procedure** (30-day consultation + labor bureau filing + Severance Plan submission).

3 Pitfalls That Cost FIEs RMB 200,000+ Each

NEXT STEPS

1. Audit your existing Employment Contracts: Review all labor contracts (劳务合同, láowù hétóng) for termination clauses, probation periods, and rule-adoption clauses. Download our Labor Contract Compliance Checklist (2026 Edition) to catch gaps before a termination arises.
2. Set up a Trade Union Notification Protocol: Every FIE should have a pre-approved trade union notification template ready. Use the Trade Union Setup Guide for WFOEs to formalize your labor-management communication channel.
3. Create a Termination Procedure Playbook: Build a step-by-step internal policy covering Step 1–6 above, with who signs off, what documents are retained, and how to calculate severance for each city. See our 2026 Employer Termination Procedure Template for a ready-to-use version.

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