During our investigations in China, once we substantiate an allegation, we are regularly asked, “So can we terminate or discipline the employee?”
Three main avenues exist in China for separating an employee when the evidence has substantiated a violation: (1) unilateral termination, (2) mutual termination, and (3) voluntary resignation by an employee. This post lists the pros and cons of each option and provides a brief overview of wrongful termination lawsuits in China. We have drafted a longer article here detailing how companies can structure and execute investigations in China to be better positioned to make personnel decisions in line with their compliance policies and to minimize the risk of wrongful termination suits.
1. Unilateral termination (i.e., termination for cause)
The statutory grounds for termination for cause in China are somewhat vague, so a company typically needs to rely on a clear basis in an enforceable policy to terminate an employee for cause. Typically, the company drafts a short termination letter in Chinese outlining the conduct that led to the termination, citing the provisions in the employment contract, employee handbook, and/or policies, and the employee acknowledges receipt of the termination letter. If the company cannot deliver the termination letter to the employee in person, a best practice is to use certified mail and to request a response via email to prevent the employee from later arguing that the employee did not receive the termination letter.
The main benefits of unilateral termination are: (1) the company does not need to provide a severance package to the terminated employee; and (2) terminating a non-compliant employee for cause creates a stronger compliance culture to both internal and external audiences. The main downside, however, is that the employee is free to sue for wrongful termination, which the company would need to address in front of a PRC labor arbitration tribunal.
2. Mutual termination (also known as mutual separation)
Mutual termination is equivalent to a severance—both the employer and employee agree to end the employment relationship. Typically this involves a written agreement and payment of the statutory severance. (The calculation of the statutory severance is complicated but typically involves a payment equivalent to one month of salary for every year of service, with certain rounding and caps.)
The main benefits of a mutual termination are: (1) it greatly reduces the risk of a wrongful termination suit, and (2) the company can include provisions in the severance agreement that provide extra protection to the company, such as a release, non-disclosure agreement, non-disparagement clause, and future cooperation provision. However, the departing employee has additional leverage and thus frequently requests more money than the statutory severance. As a result, others in the company (or outside of the company, such as a government regulator) might view the arrangement as an unjust payout to a wrongdoer.
3. Voluntary resignation by the employee
Sometimes the company can suggest to the employee that it would be in everyone’s interest for the employee to resign and move on, and the employee agrees to resign voluntarily.
The main benefits here are no risk of a wrongful termination suit, reducing the risk of negative publicity, and no money paid to a wrongdoer. However, companies may find it difficult to find a tactful way to convince the employee to agree to resign. In addition, without a severance agreement, the company is typically unable to set up additional protections discussed above, such as a non-disclosure agreement.
Wrongful Termination Cases in China
The statute of limitations for labor disputes is one year, starting from the date the employee knows or should have known that the employee’s rights have been infringed, which is typically the day the company informs the employee about the termination.
PRC labor arbitration tribunals, which hear all wrongful termination suits in the first instance, are widely perceived to be employee-friendly. PRC courts and tribunals typically use a “highly probable” standard for evaluating evidence, and in a wrongful termination suit, the employer has the burden of showing that the termination was justified. PRC courts and tribunals rely heavily on written evidence above oral testimony. As a result, typically the evidence a company presents needs to be relatively strong to convince a labor arbitration tribunal to uphold the termination.
An employee does not need to have a lawyer to file a wrongful termination suit, but numerous lawyers in China take these cases, typically on contingency, because companies may choose to avoid litigation and settle for an amount more than the statutory severance.
The likelihood that the facts underlying a termination decision could become public can help inform the decision of how to separate an employee with minimal risk to the company. Hearings in labor arbitration cases are typically open to the public, but in our experience, are rarely well attended. The decisions in labor arbitrations typically are not public, although the Chinese court system has made a significant push in recent years to publish more decisions online.
If the company loses at the labor arbitration tribunal, the company can appeal to a local court, and can then appeal the local court’s decision if needed. If the company loses this second appeal, it will need to either pay double the statutory severance or reinstate the employee if so requested by employee. In our experience, reinstatement is a very unusual outcome, as typically the company has filled the position already, or a court or tribunal is less enthusiastic about ordering a company to take back an employee who has been terminated.
* * *
This post is meant to provide practical advice culled from our experience with many dozens of investigations in China rather than to provide an exhaustive treatment of the subject or legal advice on specific situations. Our longer article on employment considerations related to investigations in China is available here.
Eric Carlson and Helen Hwang co-lead Covington & Burling’s Asia compliance and investigations practice. Both are fluent in Mandarin and specialize in investigations and anti-corruption compliance, with a particular focus on China. Ning Lu, of counsel in Covington’s Beijing office who handles a range of matters related to foreign direct investment, including employment advice, provided valuable input.