Meaning
Statutory formulas established by Chinese labor law determine the financial compensation owed to employees upon contract termination or non-renewal. Article 47 of the PRC Labor Contract Law governs how working tenure and monthly compensation combine to produce total termination payments. Following severance calculation rules ensures statutory compliance when executing corporate restructurings, redundant role eliminations, or mutual separation agreements.
Tenure Multiplier
Employees receive one month of full salary for each completed year of continuous service with the employer. Working periods between six months and one year count as one full year, while service periods under six months yield half a month’s salary compensation. Continuous tenure incorporates service time transferred across affiliated corporate entities during corporate reorganizations.
High-Earner Cap
Monthly wage inputs for employees earning above three times the local average monthly wage are capped at three times that regional average. Tenure calculations for individuals subject to this salary ceiling cannot exceed twelve years. Employees earning below the regional cap receive severance based on their actual average monthly salary without tenure caps.
Tax Treatment
Statutory severance payments totaling less than three times the local annual average salary enjoy complete exemption from individual income tax. Amounts exceeding this threshold are taxed as separate single-month income using progressive statutory rate schedules.
