Statutory provision establishing the mandatory calculation method for economic compensation upon the termination of employment relationships remains a central component of Chinese labor regulations. This article defines the monetary obligation of an employer when a labor contract is ended under specific conditions. The article 47 labour contract law applies to all employees working within the mainland territory regardless of their nationality.
It governs the amount of severance pay based on the length of service and the monthly salary of the worker. The mandate stops applying when an employee is dismissed for serious misconduct or when the employee resigns voluntarily without cause. It ensures a baseline of financial security for workers during career transitions.
This provision is strictly enforced by labor arbitration commissions.
Payment is calculated based on the number of full years the employee has served with the current employer. Under the article 47 labour contract law, a worker receives one month of salary for each year of service provided to the company. Any period between six months and one year is counted as a full year for the purpose of this calculation.
For service periods of less than six months, the employer must pay half a month of salary as compensation. The salary used in this formula is the average monthly wage of the employee over the twelve months preceding the termination. This average includes bonuses and subsidies.
Employers must document the service history and payroll records to ensure the accuracy of the final payment.
Monthly salary used for the calculation is subject to a statutory ceiling based on local economic conditions. The article 47 labour contract law stipulates that if the monthly wage of an employee exceeds three times the local average wage, the compensation rate is capped. This cap is determined by the municipal government where the employer is located.
In such cases, the years of service used to calculate the compensation are also limited to a maximum of twelve years. This restriction prevents excessively high severance payments for senior executives and high earners. The average wage figure is updated annually by the local bureau of statistics.
Companies must check the current local ceiling before finalizing any severance package.
Disputes regarding the amount of economic compensation are first handled by the labor dispute arbitration committee. The article 47 labour contract law requires the employer to provide a written notice of termination and the calculation of the severance pay. If the employer fails to pay the required amount, the employee can file a claim for the outstanding balance plus additional damages.
The burden of proof rests on the company to show that the calculation follows the statutory formula and the correct salary figures. Arbitration awards are binding but can be appealed to the local court if either party is dissatisfied with the result. The court examines the employment contract and the social security contributions to verify the length of service.
In cases where the termination is found to be illegal, the compensation may be doubled under separate provisions of the law. Timely payment is required on the day the labor contract is officially terminated and the handover is completed. Failure to comply with these timelines can lead to penalties and administrative fines from the labor bureau.
This ensures that the rights of the worker are protected during the winding down of the employment relationship. Employers often seek legal advice to ensure their termination procedures and severance calculations are fully compliant with the national standards. Records of the payment must be kept for at least two years after the termination.
Social security bureaus may audit these records during routine inspections. Accurate reporting is required for the tax clearance process.
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