Severance Payment for Labor Termination
The severance payment is the compensation given to an employee who is laid off or terminated his job. In China, the severance compensation is regulated by the People’s Republic of China Labor Contract Law.
The criteria to calculate the severance payment are explained in the Article 47 of the PRC Labor Contract Law as follow:
Article 47) Financial compensation shall be paid on the basis of the number of years a person works in a unit, the rate being one month’s salary for the work of one full year. If he has worked for six months or more but less than one year, the time shall be calculated as one year; and if he has worked for less than six months, he shall be paid half of his monthly salary as financial compensation.
If the monthly salary of a worker is three times the average monthly salary of the workers of the region for the previous year, which is published by the people’s government of the municipality directly under the Central Government or by that of the city divided into districts where the employing unit is located, the rate for his financial compensation payable shall be three times the average monthly salary of the workers, and the number of years involved shall not exceed 12 years.
For the purposes of this Article, the monthly salary means the average of a given worker’s monthly salary for the 12 months prior to the revocation or termination of the labor contract.
This means that the calculation formula is:
Average Monthly Salary * Years of Service
where the average monthly salary is calculated as the employee’s average monthly salary during the last 12 months preceding the termination, but if the employee’s average monthly salary is more than three times the average monthly salary of the employment’s location, the worker’s severance payable will be calculated according to the average local monthly salary, to a maximum of 12 months’ salary even if the employee worked in the same company for over 12 years.
When counting the years of service, a working period of less than six months is counted as half a year, and half a month’s salary must be paid as severance payment; a working period of more than six months but less than one year is counted as one year so the severance payment shall be one month’s salary.