What severance pay is required when terminating employees in China?

China’s labor law mandates severance pay in roughly 85% of employer-initiated termination scenarios, making it one of the most employee-protective severance regimes in Asia. For foreign-invested enterprises operating in China, miscalculating or mishandling severance obligations is one of the fastest routes to labor arbitration claims, back-pay orders, and reputational damage. The legal framework is primarily set out in the PRC Labor Contract Law (effective 2008, amended 2013) and its implementing regulations. This FAQ breaks down exactly when severance is due, how to calculate it, what counts as salary, and the critical exceptions every foreign employer must understand.

When Severance Is Required (and When It’s Not)

Severance pay—formally called “economic compensation” (————, jingji buchang)—is triggered by specific statutory events under Articles 46 and 47 of the PRC Labor Contract Law. Understanding which scenarios obligate payment is the first line of defense against inadvertent non-compliance.

Severance IS required in these situations:

• Economic dismissal (裁员, cáiyuán): When an employer terminates due to restructuring, technological changes causing displacement, or serious financial difficulty (Article 41). This applies to mass layoffs of 20+ employees or 10%+ of the workforce and requires prior reporting to the labor bureau.
• Mutual agreement termination (协商解除, xiéshāng jiěchú): When both parties agree in writing to end the employment relationship (Article 36). Severance is still owed unless the employee initiated the proposal — a distinction that often trips up foreign managers who assume “mutual” means no payment.
• Non-renewal of a fixed-term contract (劳动合同期满终止, láodòng hétóng qīmǎn zhōngzhǐ): When the employer chooses not to renew a fixed-term contract upon expiry, or when it renews at inferior terms the employee rejects (Article 46(5)). Note: if the employee chooses not to renew at the same or better terms, severance may not be due.
• Employer fault termination: When the employee terminates with cause due to the employer’s violations — unpaid wages, unsafe conditions, failure to pay social insurance (Article 38). The employee effectively “wins” severance by resigning for cause.
• Employer dissolution or bankruptcy: When the employing entity is dissolved, has its license revoked, or is declared bankrupt (Article 44(4)–(5)).

Severance is NOT required when:

• Employee resigns voluntarily without employer fault (Article 37). A straightforward resignation letter triggers zero severance obligation.
• Employee is terminated for serious misconduct (see section on Termination Without Severance below).
• Fixed-term contract expires and the employee refuses renewal at equal or better terms.
• Probation-period termination where the employee is genuinely unqualified — but this must be documented and provable.

Severance Calculation Formula

The severance formula under Article 47 of the Labor Contract Law is mechanical but contains several moving parts. The core rule is straightforward:

Severance = Years of Service × One Month of Salary

The finer rules for calculating years of service:

1. Less than 6 months: Counted as 0.5 years, yielding half a month’s salary.
2. 6 months to less than 1 year: Counted as 1 full year, yielding one month’s salary.
3. 1 year or more: Each full year of service counts as one year. Partial years exceeding 6 months count as an additional full year; partial years under 6 months count as 0.5.
4. Service start date: If employment began before the Labor Contract Law took effect (1 January 2008), service prior to that date is grandfathered under the old calculation rules (typically less generous), while service from 2008 onward uses the current formula. This bifurcated calculation applies to employees hired before 2008 — still relevant for longtime staff at established foreign enterprises.
5. High-income cap: For employees earning more than 3 times the local average monthly salary, the calculation salary is capped at 3× the local average, and the maximum years of service counted is 12 years (see Special Rules section below).

Example: A mid-level manager earning RMB 25,000 per month in Shanghai (2025 local average salary: approximately RMB 13,000) with 7 years and 4 months of service would receive: 7.5 years × RMB 25,000 = RMB 187,500 in severance, assuming the cap does not apply (RMB 25,000 < 3 × RMB 13,000 = RMB 39,000).

What Counts as “Salary” for Severance

The definition of “salary” for severance calculation is broader than many foreign employers assume. Under the Regulations on the Implementation of the Labor Contract Law (Article 27), the relevant figure is the average monthly salary over the 12 months preceding termination, and it includes:

• Base salary (基本工资, jīběn gōngzī)
• Performance bonuses (绩效奖金, jīxiào jiǎngjīn) — including annual bonuses, provided they are paid on a regular basis
• Allowances (津贴, jīntiē) — housing, transportation, meal, communication, and similar regular allowances
• Overtime pay (加班费, jiābānfèi) — regular overtime is included; the law is not entirely settled on whether all overtime or only compulsory/regular overtime is included, but the safest (and most common arbitration practice) is to include it
• Commissions (提成, tíchéng) — regular commission income
• Subsidies (补贴, bǔtiē)

What is NOT included: One-off payments (e.g., discretionary spot bonuses, one-time project completion awards), expense reimbursements for actual costs incurred, and employer social insurance contributions. The distinction between a “regular allowance” and a “reimbursement” is important — if an employee receives a fixed monthly transportation payment, that is salary; if they submit receipts for actual taxi fares, that is not.

The total from the above categories is divided by 12 to arrive at the monthly salary figure used in the severance formula. This inclusive definition means that severance obligations are often 30–50% higher than what a foreign manager might estimate if they consider only base salary.¹

Special Rules for High-Income Employees

For employees earning above a statutory threshold, severance is subject to both a salary cap and a service-year cap. These rules, found in Article 47(2), exist to prevent severance payments from being disproportionately large relative to the local labor market:

• Salary cap: Only the amount up to 3 times the local average monthly salary of the preceding year counts as the salary base. Any amount above that is disregarded for severance calculation.
• Service cap: Regardless of actual years of service, the maximum years counted is 12.

To determine whether the cap applies, you must check the local average salary published annually by each province or directly-administered municipality. For 2025 reference:

Note: These figures are illustrative and based on 2024 published data. Always verify with the most recent local statistical bureau release.

Practical example of the cap in action: A senior director earning RMB 80,000 per month in Shanghai with 15 years of service would have severance calculated as: RMB 39,000 (capped salary) × 12 years (capped service) = RMB 468,000. Without the cap, it would have been RMB 80,000 × 15 = RMB 1,200,000 — a difference of over RMB 730,000.

Foreign employers should be aware that these caps apply to the calculation of statutory severance only. If an employment contract or company policy promises more generous severance (common in expatriate contracts), the contractual terms prevail.²

Wrongful Termination and Double Severance

Article 87 of the Labor Contract Law creates a powerful remedy for employees: when an employer unlawfully terminates an employment relationship, the penalty is double the statutory severance (“赔偿金”, péichángjīn — compensation damages), calculated as 2 × the amount that would have been due under Article 47.

What counts as unlawful termination? Any termination that does not meet the statutory conditions or procedures. Common examples include:

• Terminating an employee during a protected period (e.g., medical treatment period, pregnancy, maternity leave, or while on occupational injury leave)
• Terminating without the required 30-day notice or pay in lieu when no cause for summary dismissal exists
• Failing to notify the trade union or employee representative body when required
• Claiming serious misconduct without sufficient evidence or without following the internal disciplinary procedure
• Terminating based on economic reasons (Article 41) without first completing the legally mandated consultation and reporting process

The double-severance penalty applies both to terminations the employer initiates and to terminations where the employer’s conduct forces the employee to resign for cause (constructive dismissal). If a labor arbitration panel or court finds the termination unlawful, the employee can either:

• Demand reinstatement with back pay for the period between termination and reinstatement; or
• Accept double severance and end the relationship permanently

Most employees choose double severance in practice, as reinstatement orders are relatively rare and the process can be lengthy. For foreign employers, the risk is not just the financial penalty but also the reputational cost and management distraction of a labor arbitration case that can last 6–12 months.³

Termination Without Severance

Article 39 of the Labor Contract Law permits employers to terminate an employee with zero severance in specific circumstances. These are known as “summary dismissals” (————, guòcuò xìng cí tuì) and include:

• Serious violation of internal regulations (严重违反规章制度, yánzhòng wéifǎn guīzhāng zhìdù): The employer must have a written, legally adopted employee handbook that was properly communicated to the employee, and the violation must be objectively serious.
• Gross negligence causing major damage (严重失职,营私舞弊, 给用人单位造成重大损害, yánzhòng shīzhí, yíngsī wǔbì, gěi yòngrén dānwèi zàochéng zhòngdà sǔnhài): Requires proof of both the negligent act and the material damage.
• Criminal liability (被依法追究刑事责任, bèi yīfǎ zhuījiū xíngshì zérèn): When the employee is subject to criminal prosecution and sentencing.
• Dual employment that materially affects job performance (劳动者同时与其他用人单位建立劳动关系, 对完成本单位的工作任务造成严重影响): The employer must first warn the employee to cease the dual employment.
• Fraudulent inducement of contract: If the employee obtained employment through fraud, duress, or by taking unfair advantage.

Critical warning for foreign employers: The bar for “serious violation” is high, and Chinese labor arbitration tribunals scrutinize these dismissals closely. The internal regulations must be (a) legally adopted through the required democratic procedure (职工代表大会 or equivalent), (b) properly published to all employees, and (c) reasonable in content. Without all three elements, an Article 39 dismissal is extremely likely to be overturned, converting a zero-severance termination into a double-severance liability.

Process Requirements for Legal Termination

Even when the substantive grounds for termination are valid, procedural missteps can render a lawful termination unlawful. Foreign employers must follow these procedural requirements:

1. 30-day written notice or pay in lieu: For terminations under Articles 40 (non-fault dismissal: medical incapacity, incompetence after training, objective change in circumstances) and 41 (economic layoff), the employer must give 30 days’ advance written notice or pay one month’s salary in lieu of notice (代通知金, dài tōngzhī jīn). Summary dismissals under Article 39 require no notice period.
2. Trade union notification: Under Article 43, the employer must notify the trade union (or employee representative body if no union exists) of the proposed termination and its reasons. The union has the right to raise objections, though the employer is not legally bound to follow them. However, failure to notify can itself be treated as a procedural defect supporting a finding of unlawful termination. Foreign companies without a union should consult local labor bureau practice — some cities require notification to the labor bureau or the local federation of trade unions instead.
3. Written termination certificate: A formal written termination certificate (解除劳动合同证明书, jiěchú láodòng hétóng zhèngmíngshū) must be issued, stating the date and reason for termination. This document is required for the employee to register as unemployed and access social insurance unemployment benefits.
4. Severance payment deadline: Severance must be paid at the time of termination or within a reasonable period thereafter. In practice, most companies pay on the last working day or within 15 days. Delaying payment can attract late-payment interest and additional penalties.
5. Social insurance and housing fund closure: The employer must process the employee’s social insurance reduction and housing fund封存 (fēngcún, suspension) within the statutory window (typically 15–30 days post-termination, varying by city).

Practical Table: Termination Scenarios and Payouts

The table below summarizes the most common termination scenarios and the corresponding severance outcomes for a typical employee with 5 years of service earning RMB 20,000/month (below the high-income threshold):

Assumptions: 5 years of service, monthly salary RMB 20,000, no high-income cap applies, employee not in a protected period. Actual amounts may vary based on local regulations and contractual terms.

As the table illustrates, the cost differential between a properly handled mutual-separation (RMB 100,000) and a botched summary dismissal that gets overturned as unlawful (RMB 200,000) is substantial — and that is before accounting for legal fees, arbitration costs, and management time. For this reason, many foreign-invested enterprises in China now conduct pre-termination legal audits before any contested dismissal.⁴

Key Takeaways for Foreign Employers

Navigating China’s severance regime requires attention to both the substantive calculation and the procedural framework. The three most common mistakes foreign-invested companies make are: (1) underestimating the salary base by ignoring bonuses, allowances, and overtime when calculating severance; (2) attempting summary dismissals without properly adopted internal regulations; and (3) skipping the trade union notification step. Each of these errors can turn a manageable severance obligation into a double-severance penalty.

Beyond the letter of the law, it is worth noting that Chinese labor arbitration practice tends to favor employees in ambiguous cases. Labor arbitrators in major cities like Shanghai, Beijing, and Shenzhen handle hundreds of thousands of cases annually and have well-developed criteria for what constitutes a “serious violation” or a “reasonable” internal policy. Foreign employers should treat any contested termination as presumptively risky and invest in proper documentation and procedure.⁵

Finally, while this FAQ covers the statutory minimum, employment contracts and company handbooks can — and often do — provide for more generous severance. Expatriate employment agreements in particular frequently include severance multipliers, gross-up provisions, or guaranteed bonuses that exceed the legal minimum. Where a contract or policy grants greater benefits, the greater benefit rule (有利原则, yǒulì yuánzé) under Chinese labor law means the employee is entitled to the higher amount.

Where to Go From Here

Based on what you just read:

• Ready to act? Read [guide: terminating-employees-china-process-checklist]
• Still comparing? See [comparison: labor-law-china-vs-vietnam-vs-thailand]
• Need numbers? Try [tool: severance-pay-calculator-china]

— China Gateway 360 —
Remote China market entry support, built around execution.