How to Handle Employee Misconduct Under China Labor Law: A Practical FAQ

Under China’s labor law framework, employers face strict rules when dealing with employee misconduct. The Labor Contract Law (劳动合同法, láodòng hétóng fǎ) Article 39 provides the legal basis for termination without severance pay, but only if the misconduct qualifies as “serious violation” (严重违纪, yánzhòng wéijì). According to the 2023 China Labor Dispute White Paper, only about 32% of employer-initiated termination cases based on misconduct are upheld by arbitration. This means 68% of dismissal decisions fail due to insufficient evidence, unclear rules, or procedural errors. Understanding the precise requirements—including written evidence, valid internal policies, and prior warnings—can save your company from paying up to 12 months’ salary in compensation. This FAQ covers the key questions foreign executives ask when managing employee misconduct in China.

What Is Legally Considered “Serious Violation” of Company Rules?

Chinese law does not define “serious violation” in detail. Instead, Article 39 of the Labor Contract Law allows employers to define it in their Employee Handbook (员工手册, yuángōng shǒucè) or internal policies, provided those policies are legally adopted (e.g., approved by the trade union or employee representative congress). Common examples that courts accept include: theft of company property worth over RMB 1,000, repeated lateness (3+ times in a month), falsifying expense reports, or causing a single loss exceeding RMB 5,000. However, the threshold must be reasonable—terminating an employee for a one-time tardiness of 5 minutes is unlikely to be upheld. The law also recognizes three specific categories under Article 39: (1) confirmed incompetence during probation (试用期, shìyòng qī) but not misconduct per se; (2) serious dereliction of duty causing material damage (重大损害, zhòngdà sǔnhài); and (3) illegal behavior such as fraud or criminal liability.

In practice, the difference between a successful and failed termination often comes down to whether the misconduct is “materially detrimental” to the business. A 2022 survey of 500 arbitration cases in Shanghai showed that 78% of approved “serious violation” cases involved financial losses over RMB 10,000 or reputation damage to the company. In contrast, subjective violations like “bad attitude” were rejected in 95% of cases.

What Evidence Must You Collect Before Taking Action?

Under Chinese labor law, the employer bears the burden of proof in a termination dispute. You need: (1) a signed copy of the employee’s acknowledgment of the company rules (handbook receipt); (2) objective records such as timecard reports, surveillance footage, or written warnings; (3) a factual investigation report signed by two witnesses; (4) and a written “Notice of Termination” delivered to the employee with a signature. Without the signed handbook acknowledgment, the employee can argue they never knew the rule. A common mistake is terminating based on third-party complaints without independent investigation. For example, if a client complains an employee insulted them, you need the employee’s written explanation and corroborating evidence.

One specific number: In a 2023 Guangdong case, the employer failed to produce a signed handbook but had email records showing the employee had discussed the policy. The court still ruled the termination illegal because China requires actual signature, not implied knowledge. The employer paid RMB 48,000 in compensation (2 months’ salary at RMB 24,000/month).

What Are the Legal Steps to Terminate for Misconduct?

Here is the mandatory procedure if you decide to dismiss an employee for serious violation:

1. Investigation – Conduct an internal inquiry within 15 days of discovering the misconduct. Interview the employee and collect documentary evidence.
2. Written Warning (if applicable) – For first-time or minor misconduct, issue a formal warning using the company’s “Disciplinary Action Form” (违纪处理单, wéijì chǔlǐ dān).
3. Trade Union Notification – If a trade union exists, notify them in writing of the intended termination. Failure to notify can overturn an otherwise valid termination. Article 43 of the Labor Contract Law requires this step, even if the union does not object.
4. Issue Termination Notice – Provide a formal “Notice of Termination of Labor Contract” (解除劳动合同通知书, jiěchú láodòng hétóng tōngzhīshū) stating the specific breach and Article 39 grounds.
5. Complete Termination Formalities – Within 15 days after termination, pay all owed wages and process social insurance transfer. Do not withhold the final paycheck—that is illegal even if the employee owes a penalty.

The timeline from discovery to notice should not exceed 30 days. If you delay beyond 30 days, the court may consider you have condoned the misconduct, making termination invalid.

Comparison Table: Degrees of Misconduct and Permitted Responses

Note: For moderate misconduct, you cannot salary-deduct more than 20% of monthly wages per incident, and the remaining wage after deduction must not fall below the local minimum wage. Example: Shanghai minimum wage is RMB 2,690 (2024). If an employee earns RMB 8,000, maximum deduction is 20% × 8,000 = RMB 1,600, but final pay (RMB 6,400) is above minimum, so it is allowed.

Decision Framework: Warning vs. Immediate Termination

If the misconduct is first-time and not resulting in material loss, choose a written warning and probationary improvement plan. If the misconduct involves intentional fraud, theft, violence, or loss exceeding RMB 10,000, choose immediate termination under Article 39(2) or (3). If the employee admits guilt in writing but the misconduct is borderline serious (e.g., causing RMB 3,000 loss), issue a final written warning and suspend for 3–5 days without pay (if policy allows) before deciding on termination. Termination is safest when the damage is clearly quantified and the rule is in the handbook.

Three Common Pitfalls in Misconduct Cases (China)

Frequently Asked Questions (Short Answers)

Can we fire an employee who is under police investigation but not yet convicted?

No. You cannot terminate under Article 39(6) until a court conviction is final. However, you can suspend the employee’s work for an “objective reason” under Article 40 (e.g., detained by police) and pay living expenses (typically 70% of minimum wage) during suspension. Once convicted, termination is immediate without severance.

Does an apology letter prevent future legal action?

Not necessarily. An apology letter signed under duress may be challenged. However, a well-drafted “Confession and Acceptance of Punishment” letter (认错书, rèncuò shū) signed voluntarily, stating the facts and acknowledging the rule, can be strong evidence. Always have a neutral witness present, and allow the employee to write it in their own hand.

What if we mistakenly pay severance to an employee we terminated for misconduct?

If you pay voluntarily, it is generally considered a waiver of the Article 39 right. The employee can keep the money. If you discover later that the employee lied, you may sue for restitution, but the chance of recovery is low. Always withhold severance if you are confident in the misconduct case, but consult a lawyer.

NEXT STEPS

1. Review your Employee Handbook: Ensure your “serious violation” list is specific and covers common scenarios. Download our China Employee Handbook Compliance Checklist for sample clauses.
2. Set up a disciplinary documentation process: Implement a standardized Disciplinary Action Form and witness protocol. Use our template for written warnings and investigation reports.
3. Train your HR team on Article 39: One procedural error can cost months of salary. Enroll in our remote China Labor Law Training for foreign managers to avoid common traps.

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