Termination and Severance via EOR China: Avoiding Costly Missteps

China has no "at-will" employment. Ending an employee's contract without their consent is lawful only on specific statutory grounds—serious rule breach, proven incompetence after training or transfer, medical incapacity, or redundancy meeting defined thresholds—each requiring its own documentation trail. Get it wrong and the employer owes 2N: double the standard severance. Standard severance follows the "N+1" formula: one month's average wage per year of service (capped for high earners), plus one month's pay in lieu of notice in qualifying scenarios. Pregnant, medically incapacitated, and pre-retirement employees carry special protections that block termination even on otherwise-valid grounds. This article breaks down the mechanics, the common foreign-employer missteps, and how an EOR absorbs this risk.

Table of Contents

1. Why "At-Will" Termination Does Not Exist in China
2. The Statutory Grounds for Lawful Unilateral Termination
3. The N+1 Severance Formula, In Full
4. The Wage Cap: When Severance Is Limited
5. 2N: The Cost of Getting It Wrong
6. Documentation Discipline: What Arbitrators Actually Want to See
7. Termination-Protected Employees: The Windows Foreign Employers Miss
8. Mutual Termination Agreements: The Pragmatic Middle Path
9. Labor Arbitration: China's Mandatory First-Stage Dispute Process
10. Termination Scenario Comparison Table
11. How Knit's EOR Service Manages Termination Risk
12. Knit Client Snapshot: A Near-Miss, Corrected
13. Building a Termination Playbook Before You Need One
14. Frequently Asked Questions
15. Glossary of Key Terms
16. Related Reading

1. Why "At-Will" Termination Does Not Exist in China

Foreign HR and legal teams—particularly from the United States, where at-will employment is the default—routinely walk into their first China termination assuming the same latitude applies: give notice, pay out what's owed, and move on. It does not work that way, and this single misunderstanding is responsible for more compliance exposure than almost any other HR decision a foreign employer makes in China.

Under the PRC Labor Contract Law, an employer cannot unilaterally end an employment relationship simply because performance is underwhelming, the role is no longer needed on a whim, or the working relationship has soured. Termination without the employee's consent is lawful only when it fits one of a closed list of statutory grounds, and each ground carries its own evidentiary and procedural requirements that must be satisfied before the termination decision is executed—not reconstructed afterward to justify a decision already made.

This matters enormously for foreign-invested enterprises and for companies using an Employer of Record to hire in China without a local entity. A termination decided in a headquarters video call, communicated the same week, and executed without a documented basis is—more often than not—an unlawful termination in the eyes of a Chinese labor arbitration committee, regardless of how obviously justified it may have felt to the manager who made the call. The legal system does not ask whether the employer's business judgment was reasonable; it asks whether the employer can prove one of the specific statutory grounds applied, using specific categories of evidence, following a specific process.

The practical consequence is that termination in China is a compliance workflow, not a personnel decision executed at will. Employers who treat it as the latter are the ones who end up paying double.

2. The Statutory Grounds for Lawful Unilateral Termination

China's Labor Contract Law recognizes several categories under which an employer may terminate a labor contract without the employee's agreement. Each has its own trigger conditions and its own procedural gate:

• Serious breach of company rules and regulations. The employee must have seriously violated a rule that was (a) validly adopted through a documented internal process—typically including employee consultation or publication—and (b) actually communicated to the employee, commonly through a signed employee handbook acknowledgment or onboarding record. A rule the employee was never shown, or one adopted unilaterally without the required internal process, generally will not support a termination, however serious the underlying conduct.
• Incompetence, after training or a role transfer. An employee found "incompetent" for their role cannot be terminated on that basis alone. The employer must first either provide additional training or transfer the employee to another suitable position, and only if performance remains inadequate after that intervention does a termination right arise. Skipping straight from a bad review to a termination letter is one of the most common foreign-employer missteps in this category.
• Material change of circumstances. Where the objective circumstances relied upon when the contract was signed have materially changed (e.g., the original business function is discontinued) such that the contract can no longer be performed, and the parties cannot agree on modifying the contract, the employer may terminate—again with severance owed.
• Economic redundancy / layoffs. When workforce reductions of 20 or more employees, or fewer than 20 but constituting 10% or more of the total workforce, are needed for defined economic reasons (restructuring, major technological upgrades, a genuine change in the objective economic circumstances underlying the contracts, or similar), the employer must follow a special collective procedure: explaining the situation to the labor union or all staff, soliciting opinions, and in some jurisdictions reporting the redundancy plan to the local labor authority before implementation. This is a materially heavier procedural bar than an individual termination and is frequently underestimated by foreign employers running a "quiet" regional headcount reduction.
• Medical incapacity after the statutory medical treatment period. An employee who is unable to return to their original role, or a suitable alternative, after exhausting the legally mandated medical treatment period for illness or non-work-related injury may be terminated—but only after that statutory period (which scales with years of service and can run from a few months to two years) has actually elapsed, and typically only after a medical capacity assessment.
• Mutual agreement. Discussed in depth in Section 8, this is a negotiated route rather than a unilateral ground, and in practice it is the path many EOR providers steer clients toward precisely because it sidesteps the evidentiary risk of the categories above.

None of these grounds is self-executing. Each requires the employer to build a documented case before termination, not to assert the ground after the fact and hope an arbitrator accepts it.

Knit practical tip #1: If your instinct is "this person just isn't working out," stop before drafting a termination letter and ask which of the statutory grounds above actually applies, and whether the required precondition (training, transfer, medical period expiry, collective procedure) has been satisfied. If the honest answer is "none, really," a mutual termination agreement is almost always the safer route.

3. The N+1 Severance Formula, In Full

For the termination scenarios where severance is owed, China uses a formula commonly shorthanded as "N+1." Understanding what N and the "+1" actually mean—and when the "+1" applies at all—is where a surprising number of foreign employers get the math wrong.

N represents statutory severance: one month's wage for each full year of service with the employer, calculated using the employee's average monthly wage over the 12 months immediately preceding termination (including base salary, bonuses, allowances, and other regular components of compensation, not just base pay). Partial years are prorated using a specific rule that trips up many first-time calculations:

• A period of service of six months or more, but less than one full year, counts as a full year for severance purposes.
• A period of service of less than six months entitles the employee to half a month's wage.

So an employee with 3 years and 7 months of service is treated as having 4 years of service for severance purposes (N = 4), while an employee with 3 years and 4 months is treated as 3.5 years (N = 3.5).

The "+1" is a separate entitlement: one additional month's wage in lieu of the statutory 30-day advance written notice the employer must otherwise give before termination. It is not a universal add-on to every severance payment. It applies specifically in scenarios where the employer is entitled to terminate but chooses to do so immediately rather than serving the 30-day notice period—most commonly in incapacity-based terminations (Section 2) and in some redundancy scenarios. It generally does not apply, for example, to a standard non-renewal of a fixed-term contract at expiry, where only N is owed. This distinction—whether a given termination scenario legally carries the "+1" at all—is one of the more common calculation errors we see in incoming EOR transitions, where a prior in-house process applied "N+1" as a blanket formula to every termination type.

Knit practical tip #2: Before communicating any severance number to an employee, confirm which statutory ground applies and whether that specific ground carries the notice-in-lieu "+1" component. Quoting N+1 on a termination type that only entitles the employee to N creates a self-inflicted overpayment; quoting N on a type that requires N+1 creates an underpayment that can itself become grounds for an unlawful-termination claim.

4. The Wage Cap: When Severance Is Limited

For higher earners, the severance formula includes a cap that foreign employers—especially those setting compensation for expatriate managers or senior local hires—frequently overlook until the termination is already underway.

Where the employee's monthly wage exceeds three times the local average monthly wage (as published annually by the municipal or provincial statistics/human resources authority for the city where the employment is based), two separate caps apply simultaneously:

1. The wage figure used in the calculation is capped at three times that local average wage, rather than the employee's actual (higher) salary.
2. The number of years counted is capped, commonly at 12 years, regardless of actual tenure.

This means a senior employee earning well above the local average, with 15+ years of service, may receive materially less severance than the uncapped N formula would suggest—but only if the cap is applied correctly using the current, city-specific average wage figure at the time of termination, which changes annually and differs significantly between cities (Shanghai and Shenzhen figures, for example, are considerably higher than second- and third-tier cities). Using a stale figure, or applying a national average instead of the correct municipal figure, is a documented source of severance miscalculation in cross-border HR transitions.

Knit practical tip #3: If you employ senior staff in China—especially expatriates or country managers on above-market compensation—confirm the current-year local average wage figure for their specific city before any termination discussion begins. This single number materially changes the severance exposure calculation and is one of the first things Knit's China operations team verifies when advising a client on a termination involving a senior hire.

5. 2N: The Cost of Getting It Wrong

This is the number that should anchor every foreign employer's thinking about China termination risk. If an employer terminates an employee without a valid statutory ground, or fails to follow the required process for the ground it claims to rely on, and a labor arbitration committee or court finds the termination unlawful, the employer owes 2N—double the standard severance calculation described in Section 3, with no "+1" on top, but calculated against the full uncapped or capped wage and tenure figures as applicable.

To be direct about why this matters so much for foreign employers specifically: many of the termination instincts imported from other markets—"performance wasn't there, so we let them go," "we're restructuring the regional team and this role is redundant," "there's been a breakdown of trust with the manager"—describe situations that would support an at-will or reasonable-cause termination in many Western jurisdictions, but do not, on their own, satisfy any of China's statutory grounds. A manager who executes that kind of termination in good faith, believing it to be defensible, can still expose the employer to a 2N liability, because Chinese labor law does not recognize a general "reasonable business justification" category—only the specific enumerated grounds in Section 2, each with its documentation precondition.

The other trap is process failure on an otherwise valid ground: an employer may have genuine, well-documented evidence of serious misconduct, but if the internal disciplinary rule that classifies the conduct as a terminable offense was never properly adopted or communicated to staff, the termination can still be found unlawful on procedural grounds alone—triggering the same 2N exposure as having no ground at all.

Knit practical tip #4: Treat 2N as the default risk-weighted cost of any termination you cannot cleanly map to a statutory ground with supporting documentation already in hand. If that mapping is unclear, the cost-benefit almost always favors a negotiated mutual termination (Section 8) over a unilateral termination that might later be reclassified as unlawful.

6. Documentation Discipline: What Arbitrators Actually Want to See

Labor arbitration committees in China place significant weight on documentary evidence, and the standard is considerably higher than most foreign employers expect. A manager's verbal warning, an informal conversation about performance, or an email thread referencing "ongoing concerns" is, on its own, rarely sufficient to support an incompetence-based or serious-breach termination.

For an incompetence-based termination, arbitrators typically expect to see:

• A documented, employee-acknowledged performance standard or job description against which "incompetence" is being measured.
• Formal, dated performance evaluation records showing the employee fell short of that standard.
• Evidence of the required remedial step—either a documented training program the employee actually attended, or a genuine transfer to another position—that preceded the termination.
• A second, post-remediation evaluation showing performance remained inadequate.

For a serious-breach termination, the file typically needs:

• The specific rule or policy allegedly violated, with evidence it was validly adopted (union/staff consultation record, or equivalent) and that the employee acknowledged receiving it (a signed handbook receipt is standard practice).
• Contemporaneous evidence of the violation itself—not a reconstruction written after the decision to terminate was made.
• Any prior disciplinary notices, if the policy's escalation structure requires a pattern of violations rather than a single incident.

The common thread is timing and specificity: the documentation needs to exist before the termination decision, tied to specific dates and named policies, not assembled retroactively as a narrative explanation. Arbitration committees have seen the retroactive-narrative pattern many times, and it is treated with considerable skepticism.

Knit practical tip #3 (continued from Section 4, applies here too): If your organization has never had a China-specific employee handbook validly adopted and acknowledged, resolve that gap before you need it for a termination—not during one. This is one of the most common documentation deficiencies Knit identifies during EOR onboarding and periodic compliance management reviews.

7. Termination-Protected Employees: The Windows Foreign Employers Miss

Even where a statutory ground for termination would otherwise apply, Chinese labor law blocks termination outright during certain protected periods. These protections do not eliminate the underlying ground—they suspend the employer's right to act on it until the protected period ends (with limited exceptions for serious misconduct-based terminations, which are more narrowly restricted). Foreign employers frequently miss these because they are procedural blocks layered on top of an otherwise valid termination case, not separate rules that show up in a general policy scan.

The most commonly overlooked protected categories include:

• Pregnancy, maternity leave, and the breastfeeding/nursing period. An employee who is pregnant, on statutory maternity leave, or within the statutory nursing period for a child under one year of age generally cannot be terminated without cause during that window, even if a redundancy or incompetence case would otherwise apply.
• Medical treatment period for illness or non-work-related injury. As discussed in Section 2, termination on medical-incapacity grounds is only available after this statutory period has run its course—attempting to terminate during it is generally unlawful regardless of how the role is being managed operationally in the meantime.
• Work-injury or occupational disease status. An employee confirmed to have lost or partially lost their capacity to work due to a work-related injury or occupational disease carries specific protections against termination that are generally stronger than those for non-work-related medical conditions.
• Proximity to statutory retirement with sufficient service. Employees within a defined window of reaching statutory retirement age, particularly those with long continuous service at the employer, may carry additional protection depending on local implementation rules—this is one of the more jurisdiction-specific protections nationally and warrants a local check rather than a blanket assumption either way.

The operational risk for foreign employers is that these statuses are not always visible in a standard HR system at the moment a termination decision is being planned. A regional manager deciding to include an employee in a redundancy round frequently does not know—or does not think to check—whether that employee disclosed a pregnancy to HR three weeks earlier, or is currently within a statutory nursing period. Building a termination shortlist without a protected-status check against each named individual is one of the most preventable missteps in this entire area.

Knit practical tip #4 (expanded): Before finalizing any termination or redundancy list—individual or collective—cross-check every named employee against current protected-status categories (pregnancy/maternity/nursing, active medical treatment period, work-injury status, retirement proximity) as of the planned execution date, not the date the list was drafted. Status can change in the intervening weeks, and Knit's EOR process rebuilds this check immediately before execution for exactly this reason.

8. Mutual Termination Agreements: The Pragmatic Middle Path

Given the evidentiary bar for unilateral termination and the 2N exposure for getting it wrong, many experienced China employers—and most EOR providers, including Knit—default to proposing a mutual termination agreement whenever the underlying facts supporting a unilateral for-cause termination are anything less than airtight.

A mutual termination is exactly what it sounds like: rather than the employer asserting a statutory ground and unilaterally ending the contract, the employer and employee negotiate an agreed exit, typically documented in a signed termination agreement that specifies the departure date, the compensation being paid (often calibrated around, at, or somewhat above the statutory N severance figure as an incentive to reach agreement), confidentiality and non-disparagement terms, and a mutual release of further claims.

The appeal of this route for foreign employers is straightforward:

• It removes the evidentiary burden. The employer does not need to prove serious breach, incompetence-after-remediation, or a qualifying economic redundancy to a labor arbitration standard—both parties simply agree to end the relationship.
• It avoids protected-period conflicts in many cases, since the employee is consenting to the exit rather than being terminated against their will (though special care is still warranted around any status that could call the voluntariness of consent into question).
• It closes out the relationship with a signed release, meaningfully reducing (though never entirely eliminating) the risk of a subsequent labor arbitration claim over the same termination.

The trade-off is cost and negotiation time: a mutual agreement often requires offering compensation modestly above the bare statutory N figure to secure the employee's genuine agreement and signature, and it requires a negotiation the employer does not fully control the outcome or timeline of. In practice, this trade-off is almost always cheaper and lower-risk than a unilateral termination that has a meaningful chance of being reclassified as unlawful and triggering 2N plus arbitration costs, management time, and reputational exposure with the remaining local team.

Knit practical tip #1 (revisited): When a client's underlying facts for a for-cause termination are ambiguous—common in cases like "chronic underperformance without a clean documentation trail" or "personality conflict escalating into a workplace complaint"—Knit's standard advice is to structure a mutual termination agreement rather than risk a unilateral claim that a labor arbitration committee may not uphold.

9. Labor Arbitration: China's Mandatory First-Stage Dispute Process

When a termination goes wrong—or when an employee simply disagrees with how their exit was handled—the dispute does not go straight to court. China's labor dispute system requires labor arbitration as a mandatory first stage for the vast majority of employment disputes, including termination and severance disputes, before either party can generally proceed to litigation in the People's Court.

The practical mechanics that matter for foreign employers:

• The employee-friendly filing threshold is low. An employee can typically file an arbitration claim without significant cost, and the statutory limitation period for a labor dispute claim is generally one year from when the employee knew or should have known their rights were infringed—meaning a termination executed today can still surface as a claim many months later.
• The employer bears a heavy evidentiary burden. In termination disputes specifically, Chinese procedural rules generally place the burden on the employer to prove the termination was lawful, not on the employee to prove it was not. This is the inverse of what many foreign employers instinctively expect, and it is precisely why the documentation discipline described in Section 6 has to exist before the dispute, not be assembled in response to it.
• An adverse arbitration award frequently becomes the enforceable outcome. While either party can generally escalate certain arbitration outcomes to court, many termination and severance awards are treated by arbitration commissions as final for one side or effectively final in practice, meaning the arbitration hearing itself—not a later court trial—is often where the real exposure crystallizes.
• A mishandled termination is the single most common route into arbitration that Knit's China operations team sees among incoming EOR clients migrating from a self-managed entity or a less experienced local HR provider. Wage disputes and unpaid overtime claims are common too, but termination disputes tend to carry the largest individual payout exposure per case because of the 2N multiplier.

Knit practical tip #2 (revisited): Assume that any termination without a clean, contemporaneous documentation file could end up in front of a labor arbitration committee, and build the file accordingly from the outset—not as a defensive reconstruction after a claim is filed.

10. Termination Scenario Comparison Table

The table below summarizes the core termination scenarios foreign employers most commonly encounter, the statutory basis each requires, and the severance treatment that follows. It is illustrative and simplified for comparison purposes—actual entitlements depend on the specific facts, the applicable local regulations, and the employee's individual wage and tenure figures.

Knit practical tip #3 (final): Note that only the unlawful-termination row carries the 2N multiplier—every other lawful pathway in this table caps out at N (plus, in specific scenarios, one additional month). The financial gap between "handled correctly" and "handled incorrectly" is not incremental; it is a full doubling of the severance line, which is precisely why the process discipline in Sections 2, 6, and 7 pays for itself.

11. How Knit's EOR Service Manages Termination Risk

Foreign companies hiring in China through an Employer of Record are not exempt from any of the rules described above—the EOR, as the legal employer of record, is the party that bears the direct compliance obligation and the direct liability for a mishandled termination. That is precisely why the quality of the EOR's termination-management process is one of the most consequential (and least visible, until something goes wrong) differences between providers.

Knit's approach to managing termination risk on a client's behalf includes:

• Pre-decision consultation before any termination is executed. Before a client-initiated termination decision is finalized, Knit's China team reviews the underlying facts against the statutory grounds in Section 2 and advises whether the documentation already on file would likely support the intended ground—or whether a mutual termination agreement is the lower-risk path instead.
• City-specific severance calculation. Severance figures are calculated against the correct, current local average monthly wage for the employee's specific city of employment, correctly applying the 3x wage cap and years-of-service cap described in Section 4 where applicable—avoiding both the overpayment and underpayment errors common in manually managed calculations.
• Employment file maintenance built for arbitration standards, from day one. Rather than assembling documentation reactively when a termination is contemplated, Knit maintains the underlying employment file—contract, handbook acknowledgment, performance records, disciplinary notices where relevant—on an ongoing basis, consistent with what a labor arbitration committee expects to see (Section 6).
• Protected-status screening before execution. Every termination and redundancy list is checked against current protected-status categories (Section 7) immediately before execution, not only when the list is first drafted.
• Bilingual documentation and communication. Termination notices, mutual agreements, and severance calculations are prepared and communicated in both English and Chinese, reducing the miscommunication risk that can itself become a point of dispute—an extension of the bilingual HR support model Knit applies across the employment lifecycle, not only at termination.

For clients weighing the total cost of ownership of an EOR relationship against a self-managed entity, termination risk management is frequently the line item that is hardest to price upfront and most expensive to get wrong in-house—a single unlawful-termination finding can wipe out several years of EOR service fee savings in one arbitration award.

12. Knit Client Snapshot: A Near-Miss, Corrected

The following is an anonymized composite illustration based on patterns Knit commonly observes among incoming EOR clients; no identifying client, employee, or company details are included.

A mid-sized European industrial equipment company had been employing a small China sales team directly through a local entity for several years before transitioning to Knit's EOR service. Shortly after onboarding, the client's regional sales director informed Knit's China HR team that they intended to terminate a sales manager—citing "consistent underperformance against quota" over the prior two quarters—and asked for the termination to be processed the same week, with severance calculated at the standard N figure.

During the pre-decision review, Knit's China team identified two material issues. First, the employment file contained no documented performance improvement plan, no formal written evaluation tied to specific, employee-acknowledged targets, and no evidence of any remedial training or role adjustment—meaning the "incompetence" ground under Section 2 was not currently supportable to an arbitration standard, regardless of how real the underperformance may have been operationally. Second, a review of recent HR records showed the employee had informed her direct manager of a pregnancy approximately five weeks earlier, placing her within a termination-protected window that would have barred a for-cause termination even if the documentation gap had not existed.

Had the client proceeded with its original plan, the termination would have carried a materially elevated risk of being found unlawful on both documentation and protected-status grounds—exposing the client to 2N severance, plus the reputational and management-time cost of a labor arbitration proceeding, on top of the original N severance that would still ultimately have been owed if a mutual agreement had been reached instead.

Knit advised the client to pause the unilateral termination entirely. Instead, given the protected status and the documentation gap, Knit recommended maintaining the employment relationship through the protected nursing period once it began, while separately opening a structured, properly documented performance-improvement process for use if performance concerns persisted afterward. The client accepted this guidance, avoided initiating what would likely have been an unlawful termination, and retained the option to pursue a properly documented process—or a negotiated mutual exit—once the protected period concluded.

The lesson generalizes well beyond this one case: the instinct to move fast on an underperformance termination is exactly where foreign employers most often collide with China's documentation and protected-status requirements simultaneously, and a pre-decision compliance check is frequently the difference between a clean exit and a six-figure arbitration exposure.

13. Building a Termination Playbook Before You Need One

Because termination decisions in China are frequently made under time pressure—an escalating performance issue, a sudden restructuring mandate from headquarters, a workplace complaint—the employers who fare best are the ones who have already built the underlying compliance infrastructure well before any specific termination is on the table. Waiting until a termination is imminent to discover that no valid employee handbook exists, or that performance review records were never formally documented, is a recurring and entirely avoidable pattern.

A practical playbook foreign employers should have in place includes:

• A validly adopted and employee-acknowledged employee handbook covering the categories of conduct that would constitute a "serious breach" under Section 2, refreshed periodically as headcount and roles evolve.
• A standard performance management cycle that produces dated, employee-acknowledged records automatically—not only when a termination is already being contemplated.
• A clear internal escalation path requiring China-specific legal or HR compliance review before any termination decision (unilateral or otherwise) is communicated to an employee.
• Up-to-date awareness of the current local average monthly wage figure for each city where the company employs staff, refreshed at least annually.
• A default preference for mutual termination agreements whenever the underlying documentation for a for-cause termination is anything less than complete.
• A designated compliance partner—whether in-house counsel, external labor counsel, or an EOR provider such as Knit—who is consulted before a termination decision is finalized, not after an employee has already been notified.

This is also where the broader case for using an EOR rather than a self-managed entity becomes concrete rather than abstract: much of this playbook is exactly the operational infrastructure an experienced EOR provider maintains as a matter of course across its entire China client base, rather than something each individual foreign employer needs to build and maintain from scratch for a China headcount that may only run to a handful of employees.

14. Frequently Asked Questions

Q1: Can we terminate a China-based employee simply because we've decided the role is no longer needed, without a formal redundancy process?

‍Not safely, if it involves more than a small number of employees or lacks a documented economic basis. A genuine, isolated role elimination may sometimes be structured as a mutual termination agreement, but a broader reduction should be assessed against the collective redundancy thresholds and procedure in Section 2 before proceeding.

Q2: Is a signed offer letter or employment contract enough documentation to support a serious-breach termination later?

‍No. The contract establishes the employment relationship, but a serious-breach termination requires a separately, validly adopted set of company rules that the specific conduct violated, evidence the employee was made aware of those rules, and contemporaneous evidence of the violation itself.

Q3: How is the "average monthly wage" for severance calculated if the employee received a large one-time bonus in the past year?

‍Generally, the calculation uses the employee's total regular compensation (including recurring bonuses and allowances) averaged over the 12 months before termination, but the treatment of one-time, non-recurring payments can be fact-specific. This is an area worth confirming with Knit or local counsel on the specific facts before finalizing a figure.

Q4: If an employee resigns voluntarily, do we owe severance?

‍Generally no. Standard statutory severance is owed in employer-initiated termination scenarios (redundancy, incapacity, non-renewal at expiry, mutual agreement, and similar), not in a straightforward voluntary employee resignation, though the specific circumstances of a resignation can sometimes matter.

Q5: Can we terminate an employee who is currently on medical leave if their performance was already an issue before they went on leave?

‍Not during the statutory medical treatment period itself. Any pre-existing performance concerns would need to be addressed through the proper incompetence-based process only after that protected period has run its course.

Q6: What happens if an employee refuses to sign a mutual termination agreement?

‍There is no obligation for the employee to sign, and the employer cannot compel agreement. If negotiation fails, the employer is left choosing between maintaining the employment relationship, pursuing a properly documented statutory ground if one genuinely applies, or accepting the risk of an unlawful-termination claim if it proceeds unilaterally without one.

Q7: Does using an EOR shift 2N liability away from our company entirely?

‍The EOR, as the legal employer of record, holds the direct compliance obligation and bears the direct exposure to a labor arbitration award. In practice, this is precisely why the quality of the EOR's termination-management process (Section 11) matters so much to the client relationship—it is functioning as the client's frontline compliance control, not merely as a payroll pass-through.

Q8: How long does a typical labor arbitration case take from filing to award?

‍Timelines vary by jurisdiction and case complexity, and can range from roughly one to several months for the arbitration stage alone, with further time added if either party escalates to court. Because of this uncertainty, avoiding the dispute in the first place through proper process is far more time- and cost-efficient than managing one after the fact.

15. Glossary of Key Terms

N+1 Severance — The commonly used shorthand for China's statutory severance formula: N (one month's average wage per year of service, prorated for partial years) plus, in specific scenarios such as incapacity-based or certain redundancy terminations, one additional month's pay in lieu of the 30-day advance notice period.

2N (Unlawful Termination Penalty) — The statutory penalty owed when an employer terminates an employee without a valid statutory ground or without following the required process for the ground claimed: double the standard N severance calculation, generally without any additional "+1" notice-in-lieu component.

Mutual Termination Agreement — A negotiated exit agreement in which employer and employee mutually consent to end the employment relationship on agreed terms, avoiding the evidentiary burden of a unilateral for-cause termination.

Labor Arbitration — The mandatory first-stage dispute resolution process for the large majority of Chinese employment disputes, generally required to be exhausted before either party can proceed to litigation in court.

Company Rules and Regulations— The internal policies and code of conduct that, when validly adopted through the required internal process and properly communicated to employees, can form the basis for a serious-breach termination.

Statutory Medical Treatment Period — A legally mandated period, scaled to years of service, during which an employee recovering from illness or non-work-related injury is protected from termination on incapacity grounds; termination on that basis becomes available only after this period has run its course.

Economic Redundancy — The statutory collective-layoff category triggered when a workforce reduction affects 20 or more employees, or fewer than 20 but at least 10% of total headcount, requiring a special consultation procedure beyond what an individual termination requires.

About Knit

Knit is a Canada-founded global HR and payroll company with 11 years of experience serving more than 4,000 clients across 172 countries and regions, processing over USD 600 million in annual payroll through a network of 60+ owned entities, including a dedicated China operations hub in Shenzhen. Knit holds MSB license No. M23187879. If you're navigating a termination decision in China or want to build a compliant termination process before you need one, talk to Knit's China team or explore Knit's Employer of Record services.

16. Related Reading

• EOR China Compliance in Guangzhou: Five Insurances, Housing Fund, and Termination Rules for Trade and Consumer Goods Teams
• Employer of Record China: Ensuring Bilingual HR Support for Your Team
• Hiring in China: What to Know and Why Use an EOR?
• Global Employer of Record (EOR) Executive Guide: TCO & Compliance

Termination and severance outcomes in China are highly fact-specific and carry significant financial and legal exposure when handled incorrectly. The scenarios, formulas, and figures in this article are illustrative and simplified for general educational purposes, and statutory details such as local average wage figures, medical treatment period lengths, and procedural requirements vary by city and change over time. Before making or communicating any specific termination decision involving an employee in China, we strongly recommend confirming the applicable facts and requirements with Knit's China team or with licensed local labor counsel.