Compensation for Termination: Rights Under Chinese Labor Law 2026

Quick answer: Under Chinese Labor Law, if your employer terminates your employment contract without a legally valid reason, or if you resign due to your employer's fault, you are generally entitled to severance pay (also called economic compensation). The standard calculation is one month's salary for each full year of service, with specific rules for high earners and special situations. However, if you are fired for serious misconduct, you get nothing.

Step 1: When Does Termination Trigger Compensation?

Not every termination results in severance pay. The key is who initiated the termination and why. Chinese law divides terminations into three main categories:

1. Employer-initiated termination without employee fault – You are entitled to compensation.
2. Employer-initiated termination for employee fault – No compensation.
3. Employee-initiated resignation – Compensation only if the employer's fault forced you to resign.

Employer-Initiated Termination (No Fault)

Under Article 40 of the Labor Contract Law, the employer can terminate the contract with 30 days' written notice (or one month's salary in lieu of notice) in these situations:

• You are ill or injured from a non-work-related cause and cannot return to your original job or another position after the medical treatment period expires.
• You are incompetent and remain so after training or job adjustment.
• Major objective circumstances change (e.g., company restructuring) making the original contract impossible to perform, and no agreement on modification can be reached.

In these cases, you must receive severance pay under Article 46.

Employer-Initiated Termination (Fault)

Under Article 39, the employer can fire you immediately with no compensation if:

• You are proved to be unqualified during the probation period.
• You seriously violate the employer's internal rules and regulations.
• You cause major damage due to gross negligence or dereliction of duty.
• You have a second labor relationship that materially affects your work, and you refuse to correct it.
• You defrauded the employer to obtain the contract (e.g., fake diploma).
• You are criminally prosecuted.

Employee-Initiated Resignation (Constructive Dismissal)

If you resign because the employer has violated your rights, you can still get severance pay. Under Article 38, you can resign immediately and claim compensation if the employer:

• Fails to provide working conditions or safety protections.
• Fails to pay wages on time and in full.
• Fails to pay social insurance premiums.
• Has internal rules that violate the law and harm your rights.
• Defrauded you into signing the contract (e.g., misrepresented the job).
• Uses violence, threats, or illegal restriction of personal freedom to force you to work.

Step 2: How Is Severance Pay Calculated?

The calculation formula is straightforward under Article 47 of the Labor Contract Law:

Severance Pay = (Average monthly salary of the last 12 months) × (Number of full years of service)

Key details:

• For service periods of 6 months to 1 year, count as 1 year.
• For service periods less than 6 months, pay half a month's salary.
• The average monthly salary includes base salary, bonuses, subsidies, overtime pay, and other monetary income (confirmed by judicial interpretation).
• Cap for high earners: If your average monthly salary exceeds 3 times the local average social wage for the previous year, the calculation uses 3× the local average as the ceiling, and the service years are capped at 12 years (Article 47, paragraph 2).

Example Calculation

Suppose you worked for 4 years and 5 months, and your average monthly salary for the last 12 months was ¥10,000. The local average social wage is ¥6,000 per month.

• Years: 4 years = 4 months' salary
• Partial year (5 months): Since it's more than 6 months? No, 5 months is less than 6 months, so it counts as 0.5 months' salary.
• Total: 4 + 0.5 = 4.5 months' salary = ¥45,000

If your salary were ¥20,000 (above 3× ¥6,000 = ¥18,000), the calculation would use ¥18,000 as the monthly base, and service years capped at 12.

Step 3: What About Wrongful Termination?

If the employer fires you without legal grounds (e.g., they say you are incompetent but cannot prove it), this is wrongful termination. Under Article 87, the penalty is double the standard severance pay. This is often called "2N" compensation (double the normal "N" severance).

For example, if your normal severance (N) is ¥45,000, the penalty for wrongful termination would be ¥90,000.

Step 4: Practical Steps to Claim Your Rights

1. Collect evidence immediately: Keep the termination notice, pay slips, attendance records, social insurance records, and any written communications. If the employer gives you a "voluntary resignation" letter to sign, do not sign it – this waives your right to compensation.
2. Negotiate first: Many employers will pay severance if you present the law clearly. Send a written demand letter quoting the relevant articles.
3. File for labor arbitration: If negotiation fails, you must file a labor dispute arbitration application within one year from the date you knew or should have known your rights were violated (Article 27 of the Labor Dispute Mediation and Arbitration Law). The arbitration is free and usually takes 45-60 days.
4. Appeal to court: If you disagree with the arbitration ruling, you can file a civil lawsuit within 15 days.

Step 5: Important Caveats

• Probation period: If you are fired during probation for being "unqualified," the employer must prove this with objective criteria. Otherwise, it may be wrongful termination.
• Fixed-term contracts: If your fixed-term contract expires and the employer does not renew it (or renews with worse conditions), you are entitled to severance pay under Article 46(5).
• Retirement or death: If the contract ends because you reach retirement age or die, no severance is due.
• Company bankruptcy: If the company goes bankrupt, you still have priority claim for severance pay under the Bankruptcy Law.
• Social insurance: If the employer never paid social insurance, you can resign under Article 38 and claim severance, plus demand repayment of the missing premiums.

Frequently Asked Questions

Q1: Can my employer fire me without severance by claiming "poor performance"?

A: No, not automatically. Under Article 40(2), the employer must first prove you are incompetent through a performance appraisal system that is legally valid (disclosed to you, reasonable criteria). Then they must provide training or adjust your position. Only if you still fail after that can they terminate, and even then, they must pay severance. If they skip these steps, it is wrongful termination (double compensation).

Q2: What if I voluntarily resign but my employer owes me wages?

A: You can resign immediately under Article 38 and claim severance pay. You are not resigning "voluntarily" in the legal sense – it is constructive dismissal. You must send a written notice stating the reason (e.g., "I resign because you have not paid my wages for three months"). Keep proof of delivery.

Q3: Does the "one year" arbitration deadline apply to all claims?

A: Yes, generally. But the clock starts from the day you knew or should have known your rights were violated. For ongoing violations (e.g., unpaid wages), the clock may only start after the employment relationship ends. Always act promptly – do not wait more than 6 months if possible.

Legal Basis Summary

• Labor Contract Law of the People's Republic of China (effective 2008, amended 2013): Articles 38, 39, 40, 46, 47, 87.
• Civil Code of the People's Republic of China (effective 2021): General principles of good faith apply to contract performance (Article 7).
• Labor Dispute Mediation and Arbitration Law (effective 2008): Article 27 on statute of limitations.
• Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (I) (2020): Clarifies calculation of average salary and burden of proof.

Important note: Laws and regulations are subject to change and local interpretation. For authoritative answers, consult a licensed lawyer or call 12348 China Legal Services (free legal hotline).

Next Steps

If you are facing a termination dispute, do not wait. Use our online legal assistant to analyze your specific situation – just enter your employment details, and the tool will calculate your estimated severance and provide a draft demand letter. Start now to protect your rights.