How a Foreign Owned Company Runs Day to Day in China
Foreign-owned companies in China operate through physical seals registered with the Public Security Bureau, strict local payroll baselines, and tax-cleared bank remittance pathways.
Labour Contract Law Article 87
Meaning
A punitive statutory clause specifies the monetary penalty for employers who terminate a labor contract in violation of the formal legal procedures. Within the structure of Chinese workers’ rights, labour contract law article 87 demands that a firm pay double the amount of the standard severance compensation described elsewhere in the code. This calculation is derived from the service years of the individual and applies whenever a court or arbitration tribunal determines that a dismissal was unlawful.
The penalty serves to discourage entities from bypassing the strict criteria required for firing staff without a defined legal cause. Its coverage applies to cases of arbitrary dismissal, failure to provide notice for project completion or termination without verifiable proof of poor performance. The law limits this double compensation strictly to incidents where the termination itself is declared void and the worker is not reinstated.
If the employee prefers to keep their job, they may request a court order for reinstatement instead of taking the financial penalty under this article.
Liability Trigger
Unlawful behavior typically involves terminating a pregnant worker, an individual on medical leave or a long term veteran close to the retirement age. In the frame of labour contract law article 87, any deviation from the precise protocols for notice or the presentation of evidence leads to the penalty. Even if the underlying reason for termination is reasonable, a failure in procedural documentation triggers the double payout.
For example, if a firm lacks clear written rules for employee behavior, it cannot fire someone for violating those undocumented rules without hitting article 87 risk. Managers find that maintaining an objective evidence trail is the only way to avoid these elevated financial consequences. Local labor bureaus use these cases as examples to instruct entire industry sectors on the importance of adhering to procedural norms during downsizing.
Once the tribunal confirms the breach, the bank accounts of the company are often targeted directly for automatic collection of the double severance amount.
Penalty Assessment
Financial officers calculate the exposure by looking at the average monthly wage and the total months of service plus the article 87 multiplier. If an employee with five years of tenure is unlawfully fired, they receive ten months of salary instead of the normal five months mandated for regular redundancy. This amount includes all forms of normal recurring compensation and is capped at the standard thresholds for high income earners in that specific region.
Because the cost is potentially high, many enterprises prefer to reach a settlement through meditation before the arbitration reaches a final ruling on article 87. The legal risk resides solely with the employer, who bears the burden of proving that their firing was conducted on solid statutory grounds. Any ambiguity in the language of the labor handbook is interpreted by the arbitrators in favor of the employee during these contested assessments.
Systematic use of this penalty has significantly reduced the rate of groundless mass layoffs in the major export processing zones.
Compliance Outlook
Management of overseas operations must implement rigorous internal reviews before any executive move is made to cancel an employment contract. Through the application of labour contract law article 87, the cost of HR errors becomes a specific line item in the overall risk budget of the subsidiary. Avoiding this penalty requires training supervisors in the correct implementation of negative performance reviews and conflict documentation.
The presence of this provision acts as a powerful deterrent against impulsive management decisions that could lead to labor instability or public protests. HR files must contain multiple warnings and improvement plans for any worker targeted for non-renewals or terminations based on individual quality. This discipline improves the professional standard of workforce relations and forces companies to adopt higher standards of managerial accountability.
Successful compliance with article 87 ensures that an enterprise maintains its operational reputation and preserves its relationships with local governmental agencies.