China Employment Law: Employment Contracts, Dismissal & Severance for Foreign Employers
China employment law is heavily employee-protective, and foreign-invested enterprises often face costly penalties when they draft HR documents or terminate staff without proper legal grounds.
This page looks at the rules from the employer’s side and is part of our Legal Services for Foreigners in China. If you are a foreign employee, see Living in China.
Employment Contracts and Hiring Models
Every full-time employee must sign a written employment contract within 30 days of starting work. Contracts must contain mandatory statutory clauses covering position, workplace, salary, working hours, social insurance and leave. Fixed-term contracts carry long-term risks; after repeated renewals, employees may request an open-ended employment contract which is much harder to terminate.
If no written contract is signed within one month, the employer generally owes double wages from the second month, for up to 11 months, and after a full year without a written contract the employee is treated as having an open-ended contract.
Fixed-Term Contracts
The most common model. Probation may be used only once, and its maximum length depends on the contract term, up to six months for contracts of three years or more. Probation pay must be at least 80% of the agreed wage and not below the local minimum wage.
Open-Ended Contracts
An employee can generally insist on an open-ended contract after ten years of continuous service, or on renewal after two consecutive fixed-term contracts, unless statutory exceptions apply. The employer can then terminate only on statutory grounds.
Labour Dispatch
Workers employed through a dispatch agency may only fill temporary, auxiliary or substitute positions, and generally may not exceed 10% of the host employer’s total workforce.
Part-Time and Flexible Work
Part-time work is generally limited to an average of four hours a day and 24 hours a week with one employer. Service or freelance arrangements need care, because a de facto employment relationship may be treated as employment.
Employee Handbook and Workplace Rules
A compliant employee handbook is essential for setting workplace rules, performance standards and disciplinary procedures. Rules that affect employees’ direct interests, such as pay, working hours, leave, discipline and performance, should follow the democratic procedure in the Labour Contract Law: discussion with the employee representative congress or all employees, consultation with the union or employee representatives, and then publication or notice to employees.
Rules adopted without this process, or never properly communicated, may not be enforceable when you rely on them to discipline or dismiss someone. Keep signed acknowledgements and consultation records.
Working Hours, Overtime and Social Insurance
Social insurance and housing fund contributions are compulsory for local hires. The main day-to-day compliance points are:
Working Hours
The standard system is eight hours a day and 40 hours a week. Comprehensive or flexible working-hour systems generally require approval from the local labour authority.
Overtime Pay
Overtime is paid at no less than 150% of the wage on working days, 200% on rest days where no time off in lieu is given, and 300% on statutory public holidays. Overtime hours are also capped by law.
Mandatory Social Insurance and Housing Fund (“Five Insurances and One Fund”)
Statutory employer and employee contributions cover pension, medical (incorporating maternity), unemployment, and work-injury insurance, alongside the mandatory Housing Provident Fund. Contribution bases, caps, and rates are adjusted annually by municipal authorities.
Foreign Employees
Foreign employees with work permits are generally required to join the social insurance system too, although bilateral social security agreements may exempt some nationalities from certain schemes. Housing fund rules for foreigners vary by city.
Hiring Foreign Nationals
Foreign nationals working in China also need valid work permits and residence documents before starting employment. The usual sequence is:
- Work permit notice. The employer applies online for the Notice of Foreigner’s Work Permit, supported by documents such as degree, work experience, criminal record and health certificates. Requirements vary by city.
- Z visa. The employee uses the notice to apply for a Z (work) visa at a Chinese embassy or consulate.
- Work permit. After entry, the employer completes the application for the Foreigner’s Work Permit.
- Residence permit. The employee generally applies for a work-type residence permit within 30 days of entry.
Employing a foreigner without a valid work permit, or outside the permitted employer, position or location, can lead to fines for the employer and penalties for the employee.
Dismissal, Redundancy and Severance
Dismissal and severance are the highest-risk area for employers. You cannot simply terminate employees for poor performance without documented evidence, formal warnings and statutory procedures. Unlawful dismissal can oblige the employer to pay double severance compensation.
Statutory Grounds
Termination is only possible on statutory grounds, such as serious misconduct or serious breach of company rules, incompetence that continues after training or a change of position, long-term illness, a major change in circumstances, or economic redundancy. Terminations for incompetence, illness or changed circumstances (Article 40) require 30 days’ written notice or one month’s pay in lieu.
Procedure
Notify the trade union before a unilateral termination, give written notice with reasons, and keep the evidence. Redundancies of 20 or more employees, or of at least 10% of the workforce, require an additional consultation and reporting procedure.
Statutory Severance Calculation (N, N+1, and 2N)
Statutory severance (“N”) is calculated as one month’s average wage per full year of service, with six months or more counted as a full year and less than six months as half a month. Where an employer terminates on an Article 40 no-fault ground (such as incompetence after training, long-term illness or a major change in circumstances) without giving 30 days’ written notice, it pays an extra month’s wage in lieu of notice (“N+1”). Unlawful termination exposes the employer to compensation at double the statutory severance (“2N”), instead of N. For high earners whose monthly wage exceeds three times the local average monthly wage, the wage base is capped at three times that average and the years counted are capped at 12.
Some employees cannot be dismissed for incompetence, illness or redundancy, for example during pregnancy, maternity leave and nursing, during treatment for work injury or occupational disease, or when close to retirement after long service. A properly documented mutual termination agreement is often the lower-risk route.
Non-Compete and Confidentiality
Confidentiality obligations can be agreed with any employee, and trade secrets are also protected by the Anti-Unfair Competition Law. Non-compete restrictions are narrower: they may only apply to senior management, senior technical staff and others with confidentiality obligations, may last no longer than two years after employment ends, and require the employer to pay monthly compensation during the restriction period. If the amount was not agreed, courts generally apply 30% of the employee’s average monthly wage over the last 12 months, but not less than the local minimum wage.
Labour Arbitration and Disputes
Most labour disputes must go to labour arbitration before either side can sue in court. The general limitation period for applying for arbitration is one year from when the party knew or should have known of the infringement, although claims for unpaid wages during employment are treated differently. Some awards on small claims are final for the employer, so the arbitration stage deserves full preparation.
If you use HR outsourcing or an employer-of-record provider, check who is the legal employer and allocate responsibilities clearly in the service agreement.
How We Can Help
We deliver online HR compliance consulting, contract review and handbook drafting services for foreign-run entities. Our service covers employment contract draft/review, performance management and lawful termination planning.
Frequently Asked Questions
Must employers in China provide written employment contracts to full-time staff?
Yes. A written employment contract must be signed within 30 calendar days after an employee commences work. Failing to do so may trigger statutory compensation.
Can I dismiss an employee directly for poor work performance in China?
No. Poor-performance termination requires sufficient written evidence, performance improvement procedures and compliance with statutory formalities. Unlawful dismissal leads to severance penalties.
Are social insurance contributions mandatory for local Chinese employees?
Yes. Employers must make statutory social-insurance and housing-fund contributions for all local full-time employees.
How is statutory severance (N+1 or 2N) calculated in China?
Standard statutory severance (“N”) equals one month’s wage for each full year of service; for high earners, the monthly wage is capped at three times the local average monthly wage and the years counted at 12. Adding one month’s pay in lieu of notice for an Article 40 no-fault termination creates “N+1,” while unlawful dismissal triggers double severance (“2N”).
How long can a non-compete restriction last in China?
No more than two years after employment ends, and the employer must pay monthly compensation during the restriction period.
Do you provide on-site labour arbitration representation for companies outside Guangdong?
We offer remote HR advisory and document-review work. We do not accept on-site labour arbitration representation for cases outside Guangdong Province.
Talk to Us About Your HR Questions
Hiring, restructuring or ending an employment relationship in China? Speak with our legal team before you act.
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