According to the provisions of the Labor Contract Law of PRC, employers are required to pay compensation to employees under the following situations:

(1) In situations specified in Article 38, Section 1 of the Labor Contract Law, where the employee terminates the labor contract, the employer shall pay compensation: I

1.The employer fails to provide labor protection or working conditions as agreed in the labor contract.

2.The employer fails to pay labor remuneration in a timely and full manner.

3.The employer fails to lawfully contribute to social insurance premiums for the employee.

4.The employer’s rules and regulations violate laws and regulations, causing harm to the rights of the employee.

5.The employer uses deception, coercion, or takes advantage of the employee’s vulnerability to enter into or modify the labor contract against the true intent, rendering the contract invalid.    

6.The employer exempts itself from legal responsibilities or excludes the rights of the employee, rendering the labor contract invalid.

7.The employer enters into a labor contract in violation of mandatory provisions of laws and administrative regulations, rendering the contract invalid.

8.The employer uses violence, threats, or illegal restrictions on personal freedom to force labor.

9.The employer issues illegal commands, forces risky operations, and endangers the personal safety of the employee.

10.Payment of wages to employees below the local minimum wage standards. (Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, Article 15)

(2) When the employer terminates the labor contract, compensation shall be paid to the employee:

1.As stipulated in Article 36 of the Labor Contract Law, the employer proposes and both parties negotiate the termination of the labor contract.    

2.In situations specified in Article 40 of the Labor Contract Law, where the employer terminates the labor contract:

a) The employee is sick or non-work-related injured, unable to engage in the original work after the prescribed medical period, and cannot be reassigned by the employer.

b) The employee is incapable of performing the work, even after training or adjusting the job position.

c) The objective circumstances on which the labor contract was based have undergone significant changes, making it impossible to perform the contract. After negotiation between the employer and the employee, no agreement is reached on changing the content of the labor contract.

3.In situations specified in Article 41, Section 1 of the Labor Contract Law:

a) The employer undergoes reorganization according to the regulations on enterprise bankruptcy, leading to personnel reductions.

b) The employer faces serious difficulties in production and operation, leading to personnel reductions.

c) The enterprise undergoes restructuring, major technological innovation, or business adjustment, requiring personnel reductions.    

d) Other significant changes in objective economic conditions relied upon at the time of concluding the labor contract, making the labor contract impossible to perform.

(3) When terminating the labor contract, compensation shall be paid to the employee (as specified in Article 44 of the Labor Contract Law):

1.The labor contract expires, and the employer terminates the fixed-term labor contract because the employee agrees to renew it but the employer does not.

2.The labor contract is terminated because the employer is legally declared bankrupt.

3.The labor contract is terminated because the employer’s business license is revoked, ordered to close, revoked, or the employer decides to dissolve in advance.

In addition, the determination of the wage in the severance payment  is specified in Article 47 of the Labor Contract Law. After the termination or rescission of the labor contract, the employer should pay compensation to the employee based on the employee’s years of service in the company, one month’s salary for each full year of service.    

For service periods of more than six months but less than one year, it is calculated as one year; and for periods of less than six months, half a month’s salary is paid as economic compensation.

The “wage” in the Labor Contract Law refers to the labor remuneration directly paid to the employee by the employer in monetary form, based on relevant national regulations or the agreement in the labor contract.

This generally includes hourly wages, piece-rate wages, bonuses, allowances, subsidies, and overtime pay, as well as wages paid under special circumstances. In practice, an employee’s wages typically consist of basic wages, payable wages, and actual wages. Basic wages are usually the minimum salary set by the employer for the employee, generally excluding overtime pay, allowances, subsidies, and welfare benefits. Payable wages refer to the total wages that the employee is entitled to according to legal regulations, including basic wages, overtime pay, bonuses, and allowances. Actual wages are the amount the employee actually receives each month, usually reduced by some expenses such as social insurance contributions, income tax, meal fees, and rent. The calculation compensation should be based on the employee’s payable wages, not basic wages or actual wages.    

The Implementation Regulations of the Labor Contract Law, Article 27, stipulate that the monthly wage for economic compensation under Article 47 of the Labor Contract Law is calculated based on the employee’s entitled wages, including monetary income such as hourly wages or piece-rate wages, as well as bonuses, allowances, and subsidies.

If the employee’s average wage in the 12 months before the termination or rescission of the labor contract is lower than the local minimum wage standard, it should be calculated based on the local minimum wage standard. For employees who have worked for less than 12 months, the average wage should be calculated based on the actual number of months worked.   

Some foreign employees complained that their labor contracts stipulate a requirement to provide three months’ advance written notice to the employer before resigning, and that compensation is required for early termination. They inquire about the legality of this provision and seek advice on what actions to take.

According to the labor law, our analysis and recommendations are as follows:

1. Advance Notice to the Employer

Article 37 of the Labor Contract Law of the PRC clearly states that employees have the right to terminate the labor contract by giving the employer written notice thirty days in advance or three days in advance during the probationary period.

Please be noted that, if the labor contract provisions are inconsistent with the law, such provisions are deemed illegal and invalid, having no binding effect on the employee at all. As long as the employee resigns within the legally stipulated period, the employer cannot unreasonably obstruct or demand compensation.

If the employer insists on compensation from the employee, the employer must prove the existence of losses and that they are caused by the employee.

Note: Some employers stipulate in the contract that they provided training, and therefore, the employee must compensate for training costs if leaving early, actually, this is another way for the employer trying to stop the employee from leaving, as they didn’t provide any training at all.

In court hearing, the employer must provide evidence that training was actually provided.

2. Employee Entitled to Economic Compensation if Employer’s Fault Leads to Resignation

According to Article 38 of the Labor Contract Law of the People’s Republic of China, if the employer has any of the following circumstances, the employee may terminate the labor contract:    

 (1) failure to provide labor protection or working conditions as agreed in the labor contract;

(2) failure to pay labor remuneration in full and on time;

(3) failure to contribute social insurance premiums for employees in accordance with the law;

 (4) employer’s rules and regulations violate laws and regulations, damaging the rights and interests of employees;

(5) circumstances specified in Article 26, paragraph one, of this law that render the labor contract invalid;

(6) other circumstances as stipulated by laws and administrative regulations that entitle the employee to terminate the labor contract.

In accordance with Article 46 of the Labor Contract Law of the PRC, when an employee terminates the labor relationship in accordance with the aforementioned Article 38, the employer shall pay economic compensation to the employee. You may check our previous article for more information: What are the Rights of Employee in China?

3. Employee Should Handle Resignation Handover and File Transfer Promptly

According to Article 50 of the Labor Contract Law of the PRC, the employer must issue a certificate of termination or termination of the labor contract when terminating or ending the labor contract, and must complete the transfer of files and social insurance procedures for the employee within fifteen days. Meanwhile, the employee should handle work handover promptly according to the agreement between both parties.

In conclusion, for employees, if they submit their resignation within a reasonable period, perform proper work handover, the employer should cooperate in handling the resignation procedures without demanding any compensation from the employee.