Meaning
The primary statutory penalty for an employer who terminates a labor contract in violation of Chinese law is a doubled compensation payment. This punitive legal mechanism, known as article 87 double severance, requires the employer to pay twice the standard severance amount calculated under Article 47. The local Labor Dispute Arbitration Commission administers this penalty to deter companies from executing unlawful or procedural defective dismissals.
The penalty applies to all forms of illegal termination, including dismissals without valid statutory grounds or those that bypass mandatory procedural steps. This obligation is a severe financial risk for enterprises, as there is no administrative limit on the total penalty other than the years of service cap. This boundary ensures that employers must strictly adhere to the legal requirements before ending any employment relationship.
Illegal Termination
The application of article 87 double severance is triggered when an employer cannot prove a valid legal basis for unilateral dismissal. Under the national framework, the burden of proof rests entirely on the employer to demonstrate that the termination complied with statutory rules. If the employer dismisses a worker based on incompetence but cannot show training records, the dismissal is declared illegal.
Similarly, failing to notify the trade union before the dismissal is executed will result in the same outcome. In these cases, the arbitration commission or the court will automatically apply the doubled compensation formula. This formula multiplies the years of service, the average monthly wage, and the factor of two.
For long-serving employees, this penalty can result in substantial financial liabilities for the enterprise. In practice, most labor disputes in China focus on this specific risk because employees routinely seek the double severance remedy.
Arbitration Remedy
The employee has the statutory right to choose between reinstatement and the payment of article 87 double severance when a termination is ruled illegal. If the worker demands reinstatement, the employer must restore them to their original position with back pay, provided that reinstatement is still possible. However, if the position has been eliminated or the relationship has broken down, the arbitration tribunal will order the employer to pay the doubled severance instead.
In practice, reinstatement is often difficult to execute due to operational changes, making the financial penalty the most common resolution. This dynamic gives the employee significant leverage during settlement negotiations. Foreign-invested enterprises must therefore assess the strength of their evidence before proceeding with any disputed termination.
This precaution prevents the company from facing long arbitration battles and expensive statutory penalties.
Risk Mitigation
To avoid the severe consequences of this penalty, enterprises must implement strict compliance protocols for all employment exits. These protocols include conducting pre-termination audits, securing written mutual agreement, and documenting every step of the performance improvement plan. Mutual termination agreements are the most effective way to eliminate the risk of doubled severance, as they are not subject to Article 87.
If a mutual agreement cannot be reached, the enterprise must ensure that its unilateral termination grounds are indisputable. This precaution is particularly important when dealing with high-paid employees, where the double severance cap remains tied to local salary averages. By establishing standard procedures, enterprises can protect themselves from sudden and expensive labor claims.
Thus, careful compliance management is the most effective defense against this legal penalty.
